ASX 200

THE Australian market closed lower for the first time in four weeks last week, significantly underperforming the US indices as the combination of political concerns and global macro issues once again became too much for investors to bear. The S&P/ASX 200 fell 3.9 per cent to close the week at 4473.5 as participants headed for the exit.

By InvestSMART · 18 Jul 2011

By InvestSMART ·
18 Jul 2011

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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.

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Frequently Asked Questions about this Article…

Why did the Australian market fall last week and how much did the S&P/ASX 200 drop?

The Australian market slipped due to a mix of political concerns (notably uncertainty around the government's carbon tax) and broader global macro worries. The S&P/ASX 200 fell 3.9% and closed the week at 4,473.5 as many participants moved for the exit.

What technical levels should everyday investors watch on the S&P/ASX 200?

Key levels from the article are immediate support around 4,450 (the lows from three weeks ago), next significant support in the 4,250–4,300 range if the market breaks lower, and resistance near 4,600 if prices stabilise and rebound.

How has political uncertainty like the carbon tax affected Australian markets historically?

The article highlights that political risk can hit markets hard. For example, after the April 30, 2010 announcement of the resource super profits tax, the domestic market fell 6.9% while the S&P 500 and Dow Jones World Index gained 10.9%, illustrating how policy surprises can weigh on Australian shares.

Could the ASX 200 fall sharply, and what could trigger a deeper decline?

Yes. The piece warns that if more negative leads arrive from the US, the market could break below the 4,450 area and potentially drop toward the 4,250–4,300 support zone, creating a vacuum of selling pressure.

Is a rebound for the ASX 200 possible in the near term?

A rebound is possible if markets stabilise and price action shows a clear reversal around current levels. In that scenario, stocks could edge higher and test the 4,600 level again.

Which offshore developments will most influence Australian trading next week?

Trading is expected to be dominated by offshore leads: progress on US debt talks, developments in the European situation, and the US earnings season (though the article suggests earnings may be less impactful compared with the first two issues).

How did the market's price action change this week from a technical perspective?

Technically, the market formed a lower high and a sharply lower low, reversing the short-term upward trend. Price traded down to the 4,450 area before a moderate bounce, signaling increased downside risk unless a clear reversal appears.

What does the article suggest everyday investors should be mindful of during this period of uncertainty?

The article suggests investors should be aware that political risk (like the carbon tax debate) is a significant headwind and that offshore events will drive trade. Monitoring key technical levels (4,450 support, 4,250–4,300 deeper support, and 4,600 resistance) and watching US and European developments can help investors gauge likely market direction.