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Analysis and forecast. Main fundamental factors.

July 21, 2020

July 21, 2020

Fundamental and technical analysis of ASX200Mikhail Hypov

Fundamental and technical analysis of ASX200

Today we’re examining Australia’s stock index ASX200. It embraces 200 biggest companies of Australia whose total capitalization exceeds 80% of the stock market. The specifics of this local market are closely related to the specifics of the Australian economy. Today we’re going to forecast  ASX200’s cost, provide its technical and fundamental analyses and examine its wave structure. We will also compare the index with other global stock indexes and determine its key levels and actual scenarios.

By the way, the official name of Australia is the Commonwealth of Australia, but the unofficial name popular with the Australians themselves is Land of Oz or just “Oz”. Also, there are many other nicknames such as:

New Holland

Straya

the Land Down Under

the Great Southern Land

the Lucky Country

the Sunburnt Country

Ulimaroa

These numerous nicknames can be explained by the fact that Australia lies far away from the Western world. The big distance and hard access to its territory made Australia even more attractive and mysterious, and spread lots of legends and rumours about that faraway Land of Oz. However, Australia’s location turned out to be beneficial in the current pandemic circumstances.

![LiteForex: ASX200: Analysis and forecast. Main fundamental factors.][1]

Epidemiologists would unanimously predict another pandemic wave worldwide, and it seems to have already started in Australia if you look at the chart above. But at a closer look, the ratio of Number of deaths to Number of new Covid cases is less than the one registered during the first wave. It is a good factor which means that the government and the population have managed to set up some efficient ways of combatting the disease. The latest statistics on coronavirus are rather encouraging: a large scale lockdown may not be necessary and the Australian economy may avoid another stress test.  However, besides important domestic factors, there are some external ones that may affect the behaviours of indexes. The Australian economy’s peculiarities have already been discussed in one of my previous [articles][2]. I will only remind you that the economy of Australia is based on resources. This fact is clearly reflected in the composition of the [ASX200][3] index. Almost 20% of the companies are directly connected with production of raw materials and they account for 20% of capitalisation as of 1 June 2020 according to [asx200list.com][4]. Another important factor which influences the state of the index is macroeconomic stats from Far East and South Asia.  In the first place, I mean China and Hong Kong that import 40% of Australia’s production.

Fundamental surprises aren’t expected either. Since China remains the only country that will keep its GDP growth in the positive zone according to IMF, the general forecast is positive. But the Chinese government itself holds off making an economic forecast for the second half of 2020, which means China fears the consequences of the second coronavirus wave.

After all, Chinese macroeconomic figures may be doubtful considering the alleged cover-up of the epidemiological situation on the eve of the global pandemic.  Those rumours are still being discussed by the US government and Donald Trump personally. Political engineers say that confrontation with China will be at the top of the agenda in the upcoming electoral cycle. The US presidential election scheduled for 3 November 2020, we are expecting 3 tense months where Trump may worsen the US-China relations with a couple of tweets. Obviously, the Australian market is sensitive to that confrontation and every new round may hit hard the sentiment of the Australian stock market.

Global technical analysis of ASX200 index

Now that we’ve examined the fundamental factors let’s have a look at the technical component. I don’t know why but the index ticker is XJO. If you’re a LiteForex trader, you will easily find the index as [ASX200][3]. As usual, we will check the global history of the index movement first.

![LiteForex: ASX200: Analysis and forecast. Main fundamental factors.][5]

It’s displayed in the 12-month chart above. At the macro-level, we see a stable bullish trend - the orange trade range - that even the current crisis failed to break. It’s a good factor for a future long-term growth. However, the current slump broke a local bullish trend which started in 2009. The same situation concerns any other stock index, but it’s a bad sign from the point of view of technical analysis.![LiteForex: ASX200: Analysis and forecast. Main fundamental factors.][6]

The ultimate candlestick’s long shadow gives rise to a movement in the area of 4,600-4,700. So technically, nothing can prevent an attempt to return to the previous minimums at this macro-level.

Analysis of ASX 200 G35

![LiteForex: ASX200: Analysis and forecast. Main fundamental factors.][7]

If we [express][8] the ASX200 index in terms of the 1971 Gold standard, the situation looks sad: we can observe a regular fall instead of a growing trend. It indicates the fatal depreciation of the stock against gold.  The ultimate candlestick in the 6-month chart above points to the continuing downtrend of  [ASX200 ][3] relative to the gold standard. Thus, the index shouldn’t be expected to grow on the “long” money of institutional investors in the nearest time. This situation rather indicates a speculative nature of the index price’s recovery and confirms the fear of a probable future correction.

ASX200, S &P500 and Shanghai Composite: correlation analysis

To analyse those fears thoroughly, we will compare the evolution of the [ASX200][3] index with S&P500 and Shanghai Composite.

![LiteForex: ASX200: Analysis and forecast. Main fundamental factors.][9]

As we see in the chart above, ASX200 and S&P500 fell at the same time and almost to the same depth, but the Australian index is far behind.

![LiteForex: ASX200: Analysis and forecast. Main fundamental factors.][10]

Correlation analysis shows that SPX is outrunning XJO on growing waves. Those green-circled areas coincide with the deepest troughs marked by the correlation indicator below. In the rest of cases these indexes’ movements are almost identical. The Australian index’s current deviation from SPX is about 12% in general.

Fundamentally, such a big gap may be due to the difference between economic stimuli in the countries. Trump literally flooded the stock market with money, having printed trillions of dollars to save the national economy. Another factor that may cause such a big difference is markets’ speculative nature. S&P500 is obviously more popular with private investors than ASX200. Many experts continue pointing to the fact that such a fast pace of retracements is groundless. It contradicts macro-economic multipliers and the real state of economy. This concerns NASDAQ 100 in particular.

![LiteForex: ASX200: Analysis and forecast. Main fundamental factors.][11]

The NDX index broke out the historical high of the pre-crisis epoch in June and since then has been growing.  This situation means that private investors have been buying the idea of a higher demand for the IT sector’ s production amidst global crisis and quarantine. But the thing is, the digital economy is linked to the real sector.  While large investment funds are hedging risks and turning to treasuries and gold, the money of an average housewife from New Jersey continues supporting Tesla and Amazon. ![LiteForex: ASX200: Analysis and forecast. Main fundamental factors.][12]

Now let’s compare ASX200 with China’s main stock index Shanghai Composite (SHCOMP). We see that SHCOMP began falling much earlier, but the fall wasn’t as deep. Thus, the recovery period was flatter than the Australian index’ one.

There are two interesting facts about this chart:

  1. There’s no correlation between these two indexes, which is good for portfolio diversification.
  2. The sharp growth of SHCOMP, green-circled in the chart above, is linked to the optimistic macro-economic statistics published by China’s government at the end of Q2.

We see that ASX200 paid no attention to the Chinese index’s first wave of fall amidst the beginning of the pandemic and its latest growth wave. This fact indicates that the two indexes’ evolutions aren’t correlated even if China has a big influence of the Australian economy as a consumer of 40% of its production. Thus, we can make an intermediate conclusion that even Australia’s favourable geopolitical situation, with the US being an ally and China being a big business partner, can’t make ASX200 a protective tool because of the US-China confrontation. Because of a high correlation with S&P500, ASX200 is very likely to catch up with the US index.  Let’s move to technical analysis to find out how that will be possible.

Technical analysis![LiteForex: ASX200: Analysis and forecast.

Main fundamental factors.][13]

Have a look at global cycles in the chart above. We see a typical 5-wave impulse with a long wave 5. The extension of wave 5 is confirmed by Robert Prechter’s ratio of 38.2⁄61.8. If we proceed with that approach, we can suggest 2 various scenarios for ASX200.

Scenario no 1

![LiteForex: ASX200: Analysis and forecast. Main fundamental

factors.][14]

The first scenario is displayed in the chart above. We see a correction in the form of zigzag ABC with irregular wave C. ![LiteForex: ASX200: Analysis and forecast. Main fundamental factors.][15]

The main requirement is that wave C drops below 0.382 of wave B. This requirement has been observed in the chart above.![LiteForex: ASX200: Analysis and forecast. Main fundamental factors.][16]

Based on this scenario, we expect that a new impulse pattern should start developing after the zigzag. In the chart above, the second wave of that impulse dropped below 0.232 of the first wave. This fact doesn’t comply with wave ratios, so we can’t say that a new impulse started developing. So, this scenario didn’t prove to be successful.

Scenario no 2

![LiteForex: ASX200: Analysis and forecast. Main fundamental

factors.][17]

In the second scenario, we see an irregular correction ABC (3-3-5) in the chart above. It’s called “irregular” because wave (B) crosses the tops of wave 5 and updates the historical maximum. The peak of wave 5 is marked with a red dotted line at 6,851 in the chart above. This wave patten is complicated because wave © may drop below wave (A) or fail to update minimums, i.e. form as a triangular correction. The main requirement is that wave C drops below 0.382 of wave (B).![LiteForex: ASX200: Analysis and forecast. Main fundamental factors.][18]

The chart above shows that requirement was observed when the first sub- wave A formed. The global bullish trend wasn’t broken, though. So, we don’t have any current reason to believe that wave (С) of the super cycle will fall below wave (A) (check the blue wave pattern). So, the correction in wave © will most likely continue as triangle ABCDE  - the crimson pattern - with the lower edge located at the level of the global trend. As nothing contradicts the second scenario, we may go more into details.

Details of Scenario no 2

![LiteForex: ASX200: Analysis and forecast. Main fundamental

factors.][19]

The chart above confirms directly this scenario through MACD divergence marked with thick green lines.![LiteForex: ASX200: Analysis and forecast. Main fundamental factors.][20]

In the monthly chart above, 0.382 fib (green level) of wave (B) of the super cycle (blue pattern) supports bulls and coincides with the closing level of the candlesticks in the latest fall wave.![LiteForex: ASX200: Analysis and forecast. Main fundamental factors.][21]

That level also coincides with support level S3 of the Pivot point indicator. Most likely, a future correction won’t drop below that level or there will be a short-term breakout with a fast pullback to that level at around 5,100 points. So, zigzag of wave (A) - light green pattern - is expected to have an irregular wave C too.![LiteForex: ASX200: Analysis and forecast. Main fundamental factors.][22]

As wave C must cross 0.382 fibonacci of wave B and we know the start point of wave B, we may extrapolate a projection and suppose that the peak of this wave will be located in the area of 6,100 – 6,300. Since the index is in that area at the moment, the waves may be expected to change quite soon. Numerous resistance levels are accumulated at 6,300-6,500:

  1. Pivot level (orange segment) of the Pivot point indicator
  2. Closing level of peak of August 2018 (green-circled)
  3. The lower limit of the tolerance level at 6,500 of TM candlestick projection. According to TM theory, the price isn’t supposed to return to the tolerance zone, marked with a violet rectangle in the chart, because the lower limit of the projection was broken.

![LiteForex: ASX200: Analysis and forecast. Main fundamental factors.][23]

As we suppose that ABC will be a zigzag with an irregular wave C, this pattern will look like waves 3-5-3. We see that wave (b) of the light green pattern has almost formed 5 waves, so the room for growth is limited by both price and time. As there are no clear reversal signals, I may assume the price may grow to 6,300 points in the area where the above mentioned resistance levels accumulated.

Trading plan

![LiteForex: ASX200: Analysis and forecast. Main fundamental

factors.][24]

The strongest sign of the local bullish trend’s reversal and move to wave © will be a breakout of the trend blue line of the bullish channel. Short positions can be opened at the level of breakout of psychological level of 6,000 points with a target at around 5,100 – 5,200. Stop orders should be placed above 6,400.![LiteForex: ASX200: Analysis and forecast. Main fundamental factors.][25]

The plan is the same for long-term investors. Considering the index’s weak dynamics, we may see a long movement within a range of 5,000-6,400 fading into a horizontal triangle. Thus, the wisest approach will be earning form retracements from the upper and lower limits of the channel, factoring in the edges of a future pattern. These trading plans can be realised with [LiteForex][26]. This broker offers low swaps for carrying trades over or swap-free Islamic accounts with leverage of up to 1:500.   What’s more, the company is raffling amazing prizes among its traders to celebrate the [15th anniversary][27]. It’s high time to join the army of its traders!

 That’s all for today. Feel free to put forward any suggestions in the comments section. Subscribe and keep in touch!

I’d like to remind you that all materials are provided for educational purposes only. They aren’t financial advice and don’t guarantee any profits. All trading decisions you make are your responsibility only.

Good luck and profits, everyone!

Yours,

Michael @Hypov

P.S. Did you like my article? Share it in social networks: it will be the best “thank you” :)

Ask me questions and comment below. I’ll be glad to answer your questions and give necessary explanations.

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  • I recommend trying to trade with a reliable broker [here][28]. The system allows you to trade by yourself or copy successful traders from all across the globe.
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  • Telegram channel with high-quality analytics, Forex reviews, training articles, and other useful things for traders

Price chart of ASX200 in real time mode

![Fundamental and technical analysis of ASX200][30]

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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