The Santa rally is looking like a cheap toy.

It looks as though investors’ Christmas rally has broken in the first week of the New Year. Traders finished 2015 contemplating the possibility of the ASX breaking out of the top of its well established trading range. A week later they are staring at the prospect of break below the support.

It looks as though investors’ Christmas rally has broken in the first week of the New Year. Traders finished 2015 contemplating the possibility of the ASX breaking out of the top of its well established trading range. A week later they are staring at the prospect of break below the support. 

Today’s market is going to be driven by China.  Markets will be focussed on the opening of China’s stock market drops at 12.30pm and whether or not the Yuan fix will be moved lower against the US Dollar at 12.15pm.

 At the end of the day, China’s currency devaluation has potential to be a lot more significant for global markets than volatility in its stock market. China’s decision to devalue the Yuan may be nothing more than a sensible and incremental move to rebalance the currency against a basket of trading partner currencies. At this stage though, markets are concerned that it could be something larger, triggering capital outflows from emerging economies and putting strain on financial markets. Markets also have in the back of their minds that China’s currency devaluation may reflect mounting concern by authorities about the state of the economy.

The impact of removing the circuit breaker trading halts on China’s stock market is hard to judge. Traders will be prepared for anything including the possibility that the market could stabilise. Valuations on China’s stock market have already fallen considerably and there is a possibility that authorities will seek to use buying by state owned funds to bring some calm to the market.

The bottom of the current trading range in the ASX 200 index is going to be a key psychological level for traders over coming days.  Despite recent volatility, the ASX 200 remains within the 4900- 5385 range that has contained it since August. A clear break below support would be an indication of escalating concerns on world stock markets. However, experienced traders will be alert to the possibility of a minor false break to the downside.

Gold stocks may attract some support this morning. Gold is attracting safe haven buying and showing signs of breaking through a zone of resistance around $1100. The Aussie Dollar has weakened at the same time which is an added benefit for gold mining stocks.

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