Australia 200: Desperately Clinging To Support At 5400

Australia 200 for Thursday, September 18, 2014

For the last couple of weeks the Australia 200 Index has declined from its multi-year high after running into resistance around 5650 back to enter its previously established trading range between 5400 and 5500.  However in the last day or so the 5400 level has come under threat and is currently been called upon to offer support as the index desperately tries to stay in touch.  For most of this year when the index has fallen to the 5400 level, it has bottomed out at around 5370 so it will be interesting to see whether this happens again now.   All of this was preceded by 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 at the beginning of August 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 then 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.

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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.

Australia's economy is expected to pick up pace in early 2015 as consumers become more confident and start spending again.  The Westpac/Melbourne Institute Leading Index, which indicates the likely pace of economic activity three to nine months into the future, fell by 0.15 points in August.  That would indicate that economic growth will stay at a below average pace for the rest of the year, but Westpac chief economist Bill Evans is more optimistic about the new year.  He expects consumer spending in the second half of 2014 to improve and rise further in the new year.  "That more positive consumer outlook is expected to strengthen further in the first half of 2015, reaching a 3.5 per cent annualised pace," Mr Evan said.  "That is consistent with our slightly more upbeat view on the first half of 2015 than is implied by the index."  Westpac's forecast for annualised economic growth for the first half of 2015 is 3.25 per cent, which is more optimistic than the Reserve Bank's most recent forecast of two to three per cent.  "Over the last six months the index's growth rate has remained at a below trend growth pace," Mr Evans said.  "However, the components of the index which have been driving this below trend pace have evolved."