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By Stuart McPhee

Australia 200 for Tuesday, August 26, 2014

The Australian 200 Index has finally been able to surge higher to a new six year high around 5650 late last week before easing off to finish out the week. It has continued that form into this week as it has settled and consolidated around 5620 to start this week. In moving up to the multi-year high it enjoyed a solid move higher bouncing strongly off the support level at 5400. Just prior to the surge it fell sharply over a couple of weeks returning back to more familiar territory between the 5400 and 5500 levels, before the recent strong rally. In its recent fall it moved down to a three week low around 5375, however it received solid support at the 5400 level which has allowed to consolidate and rally higher. The solid move higher throughout July 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.

The 5400 and 5500 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.

A former RBA official has claimed Australian houses are overvalued by up to 30%. Former Reserve Bank senior economist Jeremy Lawson has told The Australian Financial Review that Australia's housing market has left it vulnerable to major international economic shocks. Lawson, who is currently global chief economist of British fund manager Standard Life, told The AFR that Australia's property market is 20-30% overvalued. "[It is] reasonable to assume that future house prices will grow in line with real household ­disposable income as the commodity boom unwinds," Lawson told The AFR. But house prices have risen faster than disposable incomes, and Lawson argued that this meant housing was overvalued. "That would imply overvaluation of between 20% and 30%," Lawson said. Lawson was critical of the RBA, and said easy monetary policy and the reluctance to use macro-prudential tools had seen prices grow too fast.

(Daily chart below)

Australia 200 August 25 at 23:50 GMT 5616 H: 5616 L: 5616

Australia 200 Technical

S3S2S1R1R2R3
5400530050005650--

During the hours of the Asian trading session on Tuesday, the Australia 200 Index will be looking to see if it can maintain its recent surge and continue to push higher from its recent six year high around 5650. 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: 5650.

Economic Releases

  • 12:30 US Durable goods orders (Jul)
  • 13:00 US FHFA House Price Index (Jun)
  • 13:00 US S&P Case-Shiller Home Price (Jun)
  • 14:00 US Consumer Confidence (Aug)

*All release times are GMT

Source: Australia 200: Consolidates Under 6-Year High Around 5620