Australian index bounces after dip

Price at time of writing - 5108

My last note on Australia's S&P/ASX 200 was on 15 April, where the benchmark index stood at 4953.

The index had fulfilled my former target band of 5021-5063 earlier in the year and, as a result, I had reverted to a neutral position. My recommendation suggested buying the index on any further dip to its G2 level at 4775, however, where a lower-risk opportunity to invest would re-present itself. In the event the correction went further, eventually achieving an intraday low of 4632 (on 25 June). Although the index dipped a little more than I expected, the long recommendation remains valid and in place. Today I look to determine where profits should be taken.

Australia is an odd stock market, lacking in sector diversification and depth of two-way trade volumes. Why its benchmark index has 200 components is anyone's guess (the Dow has 30 components, while the FTSE makes do with 100). Compounding this, participants in the market tend to be all one way, ie they are either all buyers or all sellers. Apart from the major banks, retailers and global resource companies, many of the index’s smaller components suffer from this lack of two-way volume. Furthermore, with the heavily-weighted resources companies dual-listed nowadays, much of the price discovery is achieved abroad, with the domestic market simply playing catch-up the following day.

Australians investors also have to navigate an overly-opinionated media, whose agenda often conflicts with reality. Much of the media has spent the past year talking down the prospects for the local economy, focussing only on the negatives, and investors have been influenced to their cost. Even with cash interest rates at record lows, many investors still remain sidelined. The reality is that China continues to manage its path to sustainable growth in an effective manner, and is likely to be growing its population of middle-class consumers long after we have departed. Although the peak of the resources investment boom may be behind us, now is the time to enjoy the fruits of that earlier activity.

The 476-point bounce on the Aussie market (since the June intraday low) appears unfinished. A minimum expectation would be for this rally to extend to 12.5%, taking the index to at least 5211. This would also position the index near to its recent high, and where a triple-top formation could be formed. Traders can book profit at this level. 

Recommendation: stay long. Target 5211. Stop-losses can be placed on weakness below 4770.

S&P/ASX 200 index chart

 

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CFD’s zijn complexe instrumenten en brengen vanwege het hefboomeffect een hoog risico mee van snel oplopende verliezen.