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By Stuart McPhee

Australia 200 for Monday, August 11, 2014

After being on quite a roll for several weeks throughout July, the Australian 200 Index has fallen sharply over the last couple of weeks returning back to more familiar territory between the 5400 and 5500 levels, and trading at a three week low in the process around 5375. The solid move higher a few weeks ago saw it move strongly up through both the 5500 and 5550 levels to reach a new six year high around 5620. In recent weeks it has discovered a new key level to deal with after running into a short term resistance level at 5550, which earlier last week provided some solid support. It reversed strongly several weeks ago bringing it back down to almost touch the 5400 level before rallying back higher again. At the beginning of June the Australian 200 Index fell and broke back down through the key 5500 level towards a four week low around 5400 before consolidating and resting on support there for an extended period. These two levels have firmly established themselves as significant and any substantial break to either side will most likely be a significant move and be closely monitored. It is quite likely many are sitting on the sidelines waiting for the break before committing as they continue to watch the index move between these two levels.

Back at the end of May, it moved back and forth between the two key levels of 5500 and 5550 before the recent fall. Over the last couple of months the Australia 200 Index has formed an amazing attraction to the key 5500 level as it spent a considerable amount of time trading around it. A couple of weeks ago, the index fell away heavily back down to support around 5400 before returning to the key 5500 level just as quickly, as if gravity had pulled it back. Throughout the last couple of months it has been placing ongoing pressure on the resistance level at 5500 and a few weeks ago it was finally able to move through to a three week high before easing back again to this key level. Several weeks ago it slowly but surely eased away from its multi-year high achieved near 5560 however the following week it fell reasonably sharply and started looking towards the 5400 level which is near where it currently sits. In doing so it returned to back under the key 5500 level which has provided some reasonable resistance over the last few months.

For the bulk of the last few months, the Australia 200 Index has traded roughly between 5300 and 5500 therefore its return to back under 5500 was not surprising. The index has done well over the last couple of months to move steadily higher from support around 5300 up to beyond 5500, forming higher peaks and higher troughs along the way. The support level at 5300 may also be called upon should the index fall lower and will also likely play a role in providing some buffer from any decline. Since February, most of the trading activity has occurred between 5400 and 5500 therefore the former level may also be called upon to prop up prices. The index has done very well over the last couple of years moving from below 4000 to its present trading levels around 5500.

The battle between the inflationary effect of a lower Australian dollar and the opposite effect of slow wages growth over the coming few years is likely to end in a draw. Updated inflation forecasts from the RBA on Friday show the inflation rate staying inside the two to three per cent target band out to the end of 2016, as far out as the RBA's forecasts go. In its quarterly statement on monetary policy, the RBA tweaked its outlook due to the abolition of the carbon tax. But the underlying forces at work, and the end result, are much the same, leaving the RBA again predicting a "period of stability in interest rates". The RBA said the effects of the earlier depreciation of the Australian dollar, pushing up import prices, had boosted inflation over the past year. Those effects are still coming through. "By late 2016, three and half years on from the initial depreciation, these effects are likely to have largely run their course," the RBA said. In the meantime, inflationary pressures from within the Australian economy should be contained, thanks to "spare capacity in labour and product markets".

(Daily chart below)

Australia 200 August 11 at 00:15 GMT 5436 H: 5436 L: 5436

Australia 200 Technical

S3S2S1R1R2R3
54005300500055005550-

During the hours of the Asian trading session on Monday, the Australia 200 Index will be looking to see if it can regain some of the lost ground from the last week and push off the solid support it has received from the 5400 level. It is presently trading back between the key levels of 5400 and 5500. For most of this year the Australia 200 Index has moved well from the lower support level at 5000 up to the multi-year highs above 5500 in the last month or so.

Further levels in both directions:

• Below: 5400, 5300 and 5000.

• Above: 5500 and 5550.

Economic Releases

  • 23:50 (Sun) JP CGPI (Jul)
  • 05:00 JP Consumer Confidence (Jul)
  • 12:15 CA Housing starts (Jul)
  • JP BoJ Publication of Monthly Report

*All release times are GMT

Source: Australia 200 - Receives Solid Support From 5400 Level