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Taking a look at the ASX 200 for 2017

For most of the seven years since the markets formed a price base in early March 2009, the Aussie 200 index has traded within a range from 3770 points to the 6000-point high achieved during March-April 2015.

Sydney
Source: Bloomberg

Hasn’t the world become a better place, with lower volatility, US quantitative easing, Bank of Japan quantitative easing and Draghi doing whatever it takes? Yet, even with all this, the Australian index remains below the all-time highs of 2007.

Taking the longer-term view of the ASX 200, there are some very clear support and resistance levels that have developed over many years, from as far back as 2002.

The 2003 - 2007 bull run and the following retracement to the March 2009 low now contains all of the price action in this very large consolidation. Within this consolidation, past support and resistance levels are being adhered to.

A very good technical market is in place. The 5000-point level marked is the major support level still in play with resistance shown at 6000 points. Notice that this level was tested in the 2008 bear market, providing the first significant failure point in the run down to the 2009 lows.

Australia 200
Click to enlarge

The drivers: inflation

Inflation is the key economic indicator for interest rate decision making at the Reserve Bank of Australia (RBA). From 2006, inflation shows a general decline and the 5% highs from 2008 have not been challenged. Price inflation for food, costs associated with housing and transportation affect this number. Inflation rates this low were last recorded in 1962.

Inflation
Source: ABS

The drivers: GDP resources

There are no problems here, except that the largely automated mining sector provides little in the way of employment, but it is great for government revenue.

GDP Mining
Source: ABS

The drivers: GDP manufacturing

Manufacturing has been in a general decline from 2008 which is often reflected in declining wage growth. Participation rates between full time and part time employment are also trending lower.

GDP Manufacturing
Source: ABS

So where to from here?
The seasonal chart of the Aussie 200 will give insight. Keep in mind that this is an average of 30 years of data, so the dates nominated are also the 30-year average. However, the trend cannot be denied as being clearly seasonal and reoccurring. 

As the markets enter the final month of the calendar year, the index is showing a 3.7% or 200-point gain for the year.

The index has also broadly followed seasonality for the year. Following on from the seasonality, could there be a short retracement before the December rally?
From a technical analysis basis, the answer is yes, with the index moving back to 5626 resistance level in this current rally from the key 5000 point level tested again in the first week of November.

A consolidation move back to 5500 in early December would set the index up for a run back to 5600.

The average December rally has been around 2.3%, which does not suggest a market about to break much higher over 5600 by January 2017.

ASX January
Click to enlarge

Take into account improving outlook for the resources on a rising bulk commodity market, and expansion of margins on rising bond yields for the insurance and financials sector.
The Aussie 200 index has a strong technical picture on expectations of stronger fundamentals. Should the expected December rally take out the resistance band of 5530 – 5630, the next target would be 6000 points.

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