In this post, I take a look at the relationship between the charts of the index, copper and BHP and discuss the potential impact of some of the data releases for the rest of the week.
Australia 200 – Medium term scenario
For me, the most likely index scenario remains the one I have outined over recent weeks. Under this scenario:
- The index has completed the first or “A” swing in a correction of the 4312/5165 rally. This possibility is reinforced by fact that it ended very close to the 38.2% retracement level which is common behaviour.
- This correction has a decent chance of being deeper than 38.2% before it finishes. There remains a reasonable prospect of a move down to the 50/61.8% retracement zone between 4640 and 4740.
- A move below the last major peak at 4584 (dashed support line) would be a warning that this is more than just a correction of the rally from last November. The 200 day moving average is now at this level, reinforcing the potential significance of that support level.
Australia 200 – short term scenario
- In the shorter term we appear to be in a corrective rally against the decline from 5165 to 4853
- It would take a move below the support at “A” to indicate conclusively that this rally has ended
- One possibility is that this corrective rally will take a more complex form with further upside yet to come. If this happens technical traders may be presented with selling setups to position for another swing down in the medium term correction. An example may be an ABC type structure like the one I’ve pencilled in on the chart.
This week’s news releases and commodity markets
Resource stocks may be the key to whether we get a deeper correction in the overall index.
As has been much discussed, supply capacity is increasing in a number of commodities while at the same time, indications of moderating economic growth are bringing forward expectations of a surplus . This now seems the consensus outlook in both copper and iron ore.
Friday’s retail sales figure added to the impression that the US economy is throttling back to a fairly sluggish growth rate. Retail sales have grown at a moderate 3%pa over the past 4 months and 2.8% year on year. This builds on recent disappointing jobs growth and manufacturing PMI’s.
Today’s announcement that China’s GDP growth was 7.7%pa in the March quarter while its industrial production grew 9.5% add to the possibilty of moderating growth in demand for resources
Taking copper as an example, the following demand profile features provide some background to the impact of this week’s data releases
- China accounts for well over 40% of world copper demand while the US is the 2nd biggest customer. In 2012 world copper demand grew by 3.1%. This was due to an 11.1% increase in China’s demand which more than offset an aggregate 3.8% decline in demand by Japan, the US and Europe (Source: International Copper Study Group)
- The main uses for copper internationally are:
- Construction 33%
- Electricity 33% e.g wiring; transformers
- Industrial machinery 13%; transport (vehicles) 13%; other consumer products 8%
- This profile means that housing; construction and industrial production are the key drivers for the copper market.
So some key events for this week are likely to be
- US housing starts and Industrial Production for March both due for release on Tuesday night.
- Quarterly production reports due from RIO (Tuesday): BHP (Wednesday) and FMG (Thursday).
- The greatest risk could be to the downside with all these figures. As we saw with China’s numbers today, even a relatively small miss has the potential to feed current downward momentum
I published a copper sell setup based on a break below triangle support back on 6 March. This is a work in process with the measuring target that projects the height of the triangle from the break out point being down at 2.78.
If this target is to be reached, there is likely to be further downside in the resource sector. This may be what delivers that deeper correction in the Australia 200.
In the meantime the base of the triangle around 3.23 looms as a possible support level (dashed line).
Interesting to see that the bottom of the short term channel now sits at about the same price on the chart below
This could either give us a bit of a corrective bounce this week or see new downward momentum if it’s broken.
BHP and the Index
This chart provides a quick visual of the extent to which the recent decline in the Australia 200 has been about resource stocks
BHP Support Level
Finally, if commodities continue to weaken, the $29.95 support shown on the chart below could be significant for BHP and therefore for the index as a whole. A break below that level would look like further declines may be in store.