Friday, 19th March 2021
ASX 200 Index (XJO)
For the last 6 weeks the XJO has been trading within a contracting triangle. In technical analysis the identification of a triangle is often seen at the end of a particular pattern. Given the sustained nature of the rally since last November, the break of the bottom trend line may be a sign that the market has finished this rally.
Of course, the contracting nature of the triangle may also be a sign that the market is merely taking a breather and the index is about to rally to new highs. This is a plausible outcome, provided the market was rallying on the improved outlook for the economy.
There is a lot of speculation about the effects on the economy that the withdrawal of JobKeeper will have. There is bound to be a spike in unemployment and we await further stimulus packages from the current government.
For now, we can use the parameters of the triangle to determine what happens next. On the upside, the recent rally to just over 6800 points will determine if a new rally occurs.
The fact that the market broke the lower leg of the triangle means that 6740 appears to be resistance. The longer the XJO remains below this level would be a sign that the rally is over.
XJO Sector Performance
The best performing sector over the past 12 months remains the Information Technology index which has rallied 122% in the past 12 months. The sector has fallen 17% since the high created on 10th February this year.
The star performer of this index has been Afterpay, which has suddenly faced some serious competition with the entry of Commonwealth Bank. The sheer size of Commonwealth Bank would allow the bank to shave margins on this business and serious questions about the profitability of the sector will be asked.
The worst sector performance for the past 12 months in the XJO has been the Utilities sector. Whilst the XJO has rallied quite hard over the past 12 months, Utility stocks have under performed.
A contrarian investor might look to take profits in the IT sector and purchase some beaten down Utility stocks. The market constantly changes its focus and what is hot now rarely holds the course.