Australian Stocks Drop “Down Undah” Key Support
You may hear the term “decouple” bandied about in investment circles when discussing global markets. It simply refers to one market’s ability to move irrespective of other global markets. In recent years, unlike emerging markets, developed markets have tended to move more or less in a correlated fashion, i.e. they have not decoupled. This has been especially true this year as emerging markets have had a rough go of it while most developed markets have hung in pretty well, even if they haven’t made much headway.
One subtle change in this dynamic occurred last week. Most developed markets have weathered the recent volatility without breaking any key support levels. The Australian stock market is an exception, however, having now broken, er, down under a key support area.
Specifically, the broad Australian All Ordinaries Index broke below the 5440 area which was marked by several key analyses including:
- The 23.6% Fibonacci Retracement of the 2011-2015 Rally ~5459
- The 38.2% Fibonacci Retracement of the 2013-2015 Rally ~5447
- The 61.8% Fibonacci Retracement of the 2014-2015 Rally ~5443
- The Post-2012 UP Trendline
For the All Ordinaries Index, this 5440 level now becomes resistance that should pose a hurdle to any bounce attempt. Meanwhile, it opens up immediate downside of about 5% down to the 5120-5150 level. While that isn’t a substantial amount of risk, there may be a bigger message to the price violation.
Given the lack of decoupling – again, most developed markets have been highly correlated – an expectation has developed that these markets will trade in lockstep. Therefore, with the rest of the developed world exhibiting impressive resilience, the possibility of any type of meaningful price breakdown has been considered remote. Perhaps this breakdown in the Australian market at least cracks the door open a bit more to that possibility.
Certainly the dynamics of the Australian market, e.g., heavily influenced by commodities and China, render it unique among the developed world. Thus, it is possible that it truly has decoupled and that the recent price breakdown is simply a one-off. Then again, perhaps it is a warning that the major global indices are not as bullet-proof as they are thought to be.
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The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.
