In recent months, trade war rhetoric and more recently geopolitical news have been the primary driver of equity markets. The effect has been that day-to-day and even intraday market swings have been extreme. However, there has been only been limited change in the aggregate level of the ASX200. In fact, last Friday the ASX 200 closed at 5829.1 just 4.6 index points lower than the level it closed after its sharp two day -5.3% fall in early February.
With China’s President Xi offering an olive branch last week with regards to trade tensions and only limited fallout from the US, UK and French targeted strikes on Syria over the weekend it appears some potential downside risks to equity markets have abated for now. This may lead some Australian investors to ask the question - Can the ASX 200 build on its recent bounce?
To answer that question a look at the weekly ASX200 chart (chart 1) confirms the recent dip in February 2018 both held and bounced from trend channel support ~5700 area. This weekly trend channel/support line originates back to February 2016. For now the two year uptrend in the ASX200 remains in tact.
The daily chart (chart 2) also reveals some interesting clues. The first is that there have been two notable declines during 2018. The first one occurred between the months of January and February and from top to bottom measured ~364 points. The second decline from late February into the first trading day of April was ~359 points. The two declines were almost identical in size!!! Followers of Elliott Wave theory call this phenomena “wave equality”. The daily chart also confirms the decline has held trend channel support which also came in ~5700 area.
Finally, from a seasonal perspective the ASX200 has a tendency to rally into late April before falling away during the month of May. The chart below (Chart 3) is courtesy of Moore Research Centre, Inc and illustrates the point above using data compiled over both a 15 year and a 19 year time period.
From our observations of the three charts it can be observed that:
- There is a confluence of support for the ASX200 coming in at the 5700 area.
- The pattern of the 2018 decline is indicative of being a correction within a prevailing uptrend.
- During the month of April the ASX200 has historically rallied before falling away during the month of May.
Hence, the view is that while the ASX200 trades above the 5700 support area, there is preliminary evidence of a base forming. A move and close above 5900 would provide increased confidence of a bounce targeting the 6000/6150 area. As pointed out the month of May is usually a softer one and hence if the aforementioned bounce occurs it might be wise to consider a more neutral strategy come May.
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