The Australian market broke out from its consolidation range yesterday closing above its key resistance level of 4700 as shown in the chart above. This level has provided a top in the market since mid September and yesterdays move is a positive one. It was actually a little surprising to see the market up so strongly (+62 points by the close). Put it down to takeover activity with an $8.2 billion bid by the Singapore Exchange for the ASX and at the smaller scale, a $1.25 billion bid from Copper Miner Equinox for Citidel Resources - a Saudi Arabian based Copper Company that's on its way to becoming a producer.
Corporate activity is a plus particularly for a market thats looking for some confidence.
On the market last night the DOW JONES added +31 points or +0.28% to close at 11164. In London the FTSE 100 finished up +10 points or +0.18% to 5751. Locally, SPI FUTURES are suggesting a drop of 18 points on the local market with some profit taking after yesterdays rally.
The million dollar question is obviously where the market is heading over the next few months. As is the case with anyone, I can only make an assessment based on the information I have. So here are a couple of key points I think are important:
1. Looking at the price action on the local market, a break of 4700 now gives a strong technical sign that we'll reach 4800 in short order (next week or so).
2. The USD remains the key - although the USD has found some tentative support at current levels, I believe the USD will ultimately track lower on the back of larger than expected QE2 due to be announced at the start of November.
3. Why will the fed offer a larger support package? Because they can't afford not to..! Unemployment is the biggest concern in the US (currently just under 10%) while deflation is firmly in the Feds sights. Core consumer prices had the smallest gain in more than 50 years last month (0.1%) and the Fed is likely to act decisively to try and support prices (create inflation)
4. The bond market is already pricing in rising consumer prices with Yields of the 30 year Treasuries climbing as much as half a percent more than the similar inflation indexed security. This means that bond investors are starting to price in a higher chance for inflation and presumably this is going to be created by the upcoming stimulus measures.
5. Asia remains resilient - We know that Asian economies are resilient. China continues to grow at 9.4% and took steps last week to raise rates because of their economic strength. Domestic investors are bullish the Chinese market as shown by the Shanghai Composite
These are some of the more bullish factors playing out in the market.
On the flip side, I'm a little concerned about the price action in the Dow Jones overnight. The US market tried to push above its current trading range however sellers pushed it lower into the close. For those that follow GANN Cycles, there is a 180 day change of trend cycle which could suggest a market top (I'm not a big fan of this but some are).
My View: If the US market makes a new high tonight, I think the market will move higher over the next few weeks and we'll see 5000 before year end.
By James Gerrish
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