weekly outlook for asx 200 medium term uptrend remains intact but a minor pull back cannot be ruled

The recent “summer lull” sell-off seen in global equities was triggered by the latest European Central Bank (ECB)’s less “dovish” monetary policy on 08 September 2016 as ECB was reluctant to introduce more easing monetary measures. Its “inaction” sparked a global sell-off in sovereign bonds which caused bonds yields across the board to spike up. An increase in bond yields will translate into a liquidity tightening condition in the financial markets which will not bode well for equites. The current up move seen in global equities are being more supported by a “loose” liquidity condition from existing “ultra- accommodative” monetary policies from major central banks rather than a pick-up in earnings growth as global aggregate demand remains lacklustre.

In the past week, risk appetite behaviour has resurfaced reinforced by the Fed and Bank of Japan’s still “accommodative” monetary policies. Global equites have started to recover and the “growth oriented/high beta” U.S. benchmark Nasdaq 100 has even recorded a new all-time closing high of 4891 printed on Thursday, 22 September 2016.

Therefore, how will Australian equities perform in the coming week? Let’s us take a deep dive into the ASX 200 from a technical analysis perspective.

ASX 200

(Click to enlarge charts)

Key elements

• Since the “bear trap” low of 4706 printed in early February 2016 (triggered by the 2^nd Chinese Yuan “shock” devaluation), the Index has recorded a rally of 19.4% to print a high of 5611 August 2016.
• The most important aspect of this upward price movement is that it has taken place within bullish ascending channel (depicted in dark blue) in place since the February 2016 low of 4709. The ASX 200 was not spared from the recent “summer lull” sell-off seen in global equities on 08/09 September 2016 but Australian equities has managed to find a firm footing as the sell-off found support right at the lower boundary of the aforementioned ascending channel and formed a bullish weekly “Hammer” candlestick and current price action of the Index has already surpassed the high of the “Hammer” at 5339. These observations suggest that bullish sentiment has resurfaced and it is supportive of the Index for a further potential up move at least in the medium-term (1 to 3 weeks) (see weekly chart).
• In conjunction, the daily (medium-term) RSI oscillator has also surpassed the 50% level and still has room to manoeuvre to the upside before reaching an extreme overbought level. These observations indicate a revival of upside momentum which is supportive of a further appreciation of price action (see daily chart).
• As seen from the 4 hour chart, the Index has started to evolve within a shorter-term ascending channel (depicted in green) with its lower boundary now acting as a support at 5390 and its upper boundary (resistance) now at 5455.
• The next medium-term resistance stands at 5500/5520 which is defined by a descending trendline from the medium-term swing high area of 01 August 2016 and a Fibonacci cluster (see 4 hour chart).
• The key medium-term support rests at 5360.
• The recent up move from the minor swing low of 5262 seen on 19 September 2016 has started to become “overextended” and the 4 hour Stochastic oscillator is now fast approaching an extreme overbought level. These observations suggest the Index may see a minor pull-back soon below the intermediate resistance of 5455 (see 4 hour chart).

Key Levels (1 to 3 weeks)

Intermediate support: 5390

Pivot (key support): 5360

Resistances: 5455 & 5500/5520

Next supports: 5300 & 5220

Conclusion

Medium-term uptrend remains intact. In the short-term (1 to 3 days), we cannot rule a minor pull-back first below the 5455 intermediate resistance towards the intermediate support at 5390 with a maximum limit set at the 5360 medium-term pivotal support. Thereafter, another potential upleg is likely to materialise to target the next resistance at 5500/5520.

On the other hand, failure to hold above the 5360 medium-term pivotal support is likely to put the bulls on hold for a deeper decline to test the next support at 5300.

Charts are from City Index AdvantageTrader Pro & eSignal

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