ASX 200

From a technical perspective, price action is not painting a pretty picture. The market formed a lower high and sharply lower low this week which reversed the short-term upwards trend that was in place. The market traded right down to the lows of 4450 seen three weeks ago before bouncing moderately. This 4450 area should offer strong support but one or two more negative leads from the US and the market could break sharply lower.

If this happens, it could be a bit of a vacuum down to the next significant support around the 4250 to 4300 levels. Having said that, if the markets manage to stabilise and price action shows a reversal at current levels, we could see stocks edge higher to test the 4600 levels again.

The big talking point over the past week was the government's carbon tax. Usually markets like certainty but this certainly was not the case. One would have to look as far back as the 1970s to the Whitlam government for a more politically uncertain time in Australia. Textbooks always tell you that political risk is the number one risk for markets, and we are seeing a perfect example of that now. From April 30, 2010, when Labour announced the resource super profits tax, the domestic market is down 6.9 per cent versus a gain of 10.9 per cent for both the S&P 500 and Dow Jones World Index.

Looking ahead, there appears to be no quick fix to the political situation in Australia, and this is likely to continue to act as a significant headwind. In the coming week, trade is going to be dominated by offshore leads, which will be driven by progress on US debt talks, the European situation and the US earnings season, although the latter will probably pale into insignificance when compared with the first two concerns.