ASX 200 Reacts to Soft US Data

• The ASX 200 continues to test $AU7900
• Doubts about sustained economic support raise fears of real economic impacts
• Technical resistance at AU$7900 with key EMA support

The Australian equity markets have reacted over the last 24 hours to soft US data, and of course corporate earnings in the United States that suggests that perhaps the US economy is starting to roll over. The readthrough in this situation is that people believe money will step out into further risk assets because the Federal Reserve will jump in and save the day. The idea being that not only will people be looking for assets to take advantage of potential “cheap money”, but also certain hard assets such as gold. In that sense, it makes sense that people may start to look toward Australia.

That being said, there are concerns

With the US economy rolling over, that typically means less demand, not more. This initial move in the ASX 200 was more or less due to a “knee-jerk reaction” to the idea that the economy is slowing down in America, and therefore the Federal Reserve would stimulate things. A stimulation all the economy should bring more demand into the picture, so it does make a certain amount of sense that the ASX 200 would break above the AU$7900 level.

That being said, there are concerns that we may be entering a phase when “bad news is actually bad news.” Financial markets have been heavily distorted since the Great Financial Crisis, a bit more than a decade ago. Over the last several years, traders have lived off the idea of cheap money, and of course liquidity. If more liquidity is pumped into the system, that might help some asset prices, but at the same time it probably sends inflation higher, thereby affecting the real economy. It is at that point where traders and reality may finally meet.

Short-term barrier

Keep in mind that the AU$7900 level is a bit of a barrier based on “market memory”, as it was massive support a few weeks ago. The fact that we have pulled back from that level is not a huge surprise, but the question now is whether or not the market can pick up the momentum to continue going higher? Ultimately, one of the biggest things that traders of the ASX 200 and equities within it are going to have to pay attention to is what happens in New York. As things stand right now, it seems as if the United States is essentially holding everybody else up from falling significantly. If things get worse on Wall Street, they will almost certainly be felt in places like Australia, and the index will more likely than not show that concern.

Technical analysis

The technical analysis for the ASX 200 shows a bit of indecision at the crucial AU$7900 level, but the 50-Day EMA sits just below, perhaps offering a little bit of technical support. Underneath there, the 200-Day EMA currently sits right around the AU$7640 level and is rising. That should also end up being a significant support level. However, it’s obvious that there is a bit of hesitation just above so the technical analysis looks a little bit flat at the moment, and perhaps suggests that the market may be somewhat range bound as we wait for more clarity from larger markets such as the S&P 500 and the New York Stock Exchange overall.

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