ASX 200 Market Outlook: Materials Surge, CBA Support Defies Bears

It has been a decent start to the year of the ASX 20 so far, pressing toward the 8900 handle as sector leadership remains firmly with materials. Strength in base metals, iron ore and gold is doing the heavy lifting, allowing the index to advance even as correlations with financials weaken.

At the stock level, Commonwealth Bank stands out for a different reason. Despite growing expectations that higher interest rates will pressure the financial sector later this year, CBA continues to hold key support. That divergence sets up an interesting near-term dynamic for both the index and its largest constituent.

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ASX 200 Market Snapshot

The ASX 200 rose for a fourth consecutive session on Thursday, closing at an eight-week high, with 8900 now in focus for bulls
Options activity is skewed to the upside, with a one-week call cluster at 8900, 8950 and 9000 (8950 dominant)
Six of the 11 ASX 200 sectors advanced, led by Materials (XMJ), Healthcare (XHJ) and Financials (XFJ)
Five of the 11 ASX 200 sectors declined, led by Information Technology (XIJ), Utilities (XUJ) and Telecoms (XTJ)
Materials (XMJ) hit a fresh record high, supported by a strong rally in base metals and record iron ore imports from China; BHP rose 2.3% to a two-year high
Energy (XEJ) remains the strongest-performing sector this year, underpinned by the rebound in crude oil prices

Chart analysis by Matt Simpson - source: ASX, LSEG

ASX 200 Correlations

Notice how the industry-standard 20-day correlation between the ASX 200 and the financials sector has effectively broken down, signalling a decoupling in their relationship. But with CBA defiantly holding support, it may at least see a bounce before anticipated losses resume. Moreover, the correlation between XFJ and the ASX 200 is now a strong 0.86, which could help pull the 20-day measure back into positive territory.

The materials sector — the second-largest ASX sector by market capitalisation — remains especially strong over the 10-day window and relatively firm over the 20-day. This suggests the ASX 200 is taking its lead from rising base metal prices and improved iron ore sentiment. The strong correlation with gold is also notable, and unlikely to be coincidental.

Chart analysis by Matt Simpson - source: ASX, LSEG

Commonwealth Bank (CBA) Technical Analysis

While I maintain my view that the financial sector will face further pressure this year as the threat of Reserve Bank of Australia (RBA) hikes builds, that doesn’t mean banking stocks will fall in a straight line. In fact, CBA is doing a fine job of stifling bearish hopes by stubbornly refusing to test — let alone break below — 150.

Given the ASX 200 is rising without its largest stock by market capitalisation, CBA may be building towards a near-term bounce.

The weekly chart shows CBA on track to form a spinning top doji at current levels. The overlay also highlights the ASX 200 advancing without CBA while the stock continues to hug support.

On the daily chart, prices are holding above the April VPOC (volume point of control), while a bullish divergence has formed on the RSI (2). Despite heavy volume on Wednesday, support has held, and a small bullish pin bar on Thursday hints at early demand returning.

The near-term bias favours a bounce while price holds above recent swing lows. A break above 156.10 opens a run towards 160, although this would be counter-trend, so bulls may want to stay nimble. Alternatively, bears can remain patient and look for bearish reversal signals at higher levels.

Chart analysis by Matt Simpson - Source: TradingView, ASX SPI 200 Index Futures

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-- Written by Matt Simpson

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