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The Big Picture - Australia 200

CMC Markets

Share market indices around the globe are breaking down.  While analysts cast around for reasons, it's clear that a time factor is in play.  Simply put, many investors "feel" a correction is overdue. In the US, the US SPX 500 Index has not corrected (a fall of 10%+) since July 2011. This is one of the longest correction free periods in US history. The recent 3% fall from all-time highs has many looking for a long awaited pull-back.

In Australia, there was a 10% correction in the index between April and June last year. While this removes the time pressure felt in the US, any further significant falls in American markets are likely to have a local impact. And on the longer term weekly chart, there is a clear break of the up trend:



How low could it go?


It's fascinating to hear the explanations for the recent falls.  As my London colleague Jasper Lawler put it, markets overnight were hit by the three "E"s - Europe, Ebola and Earnings. Jasper talks daily with traders about market drivers in what is still the centre of the financial world, so there is no reason to doubt these are important current market themes.

If we step back, the fact that these are cited as key concerns tells us more about market thinking than the state of the world's economy. After all, sluggish prospects in Europe are hardly a surprise. Similarly while Ebola is a human crisis, the potential for global economic disruption is very low. And earnings season is yet to begin. In other words, these are "after the fact" explanations for the falls, rather than than likely drivers. These explanations also ignore obvious positives for global markets - particularly clear evidence of an accelerating recovery in the US and confounding stable growth rates in China.

It appears investors believe a correction is "due" - and if enough investors believe that is the case, it will become a self-fulfilling prediction.

If further selling hits share markets, where are the potential turning points for the Australia 200 index?

First, the RSI cannot be ignored. Currently under the 30% mark, it is in oversold territory, and at three year lows. The potential for a bounce at any time must be factored in to market thinking.

However, if the market continues to slide there is a chart point where a number of positives come together. Note that the 38.2% retracement level at 5033 roughly coincides with significant support around 5040-50. Additionally, at levels around 5050 the dividend yield argument kicks in - with the index yield greater than 6% once franking credits are factored. In the absence of a global or local economic catastraphe, this could be the level where the market "safety net" catches any further falls.

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