Iron ore and US profits lead to set a positive early tone

Another sharp jump in iron ore prices supported by a better than expected profit reporting season in the US look like providing another solid start to the Australian market today.

The momentum behind the rally in iron ore prices over recent days appears to have surprised the market. Time will tell whether this transpires to be a temporary short covering rally or something more significant. However, even if the spot iron ore price does not sustain large gains from current levels, markets are adjusting to an increased possibility of it forming a base in the $US 50 dollar range. If this transpires to be the case it would be a significantly better outlook than the prospect of the ongoing decline towards $40 or below that was being factored into valuations a few weeks ago.

Spot iron ore prices have now risen to the extent that they are starting to be seen as posing a threat to another rate cut at next week’s RBA meeting. The outlook for another rate cut may impact support for yield stocks like the major banks in coming days. Friday’s strong gains in the ASX 200 were helped by the fact that some buying in yield stocks joined the strong gains in BHP and other major resource companies. Support for the banks is likely to be required to propel the ASX 200 convincingly past the 6000 mark.

The question of whether or not the ASX 200 can get convincingly clear of the 6000 resistance is now the key feature of the charting landscape. A strong move past this level would re-establish the medium term up trend after nearly 2 months of sideways movement. Apart from the question of whether buying for banks can return to restore buying momentum, how BHP handles the resistance of its 200 day moving average could be another determining factor for the 6000 resistance in the index. The 200 day moving average was the resistance that neatly stopped BHP’s rally in early March. It currently intersects at around $32.90.