Why Use the ASX 200 Index?
The ASX 200 index (XJO ), composed of the 200 largest Australian stocks by market capitalisation, is my preferred guide to market performance These are the companies that have most influence on the market, and with few exceptions, the ones I include in my portfolio. It excludes the more speculative stocks.
Market movement for the week past
This week the index crept cautiously a little higher (31 points). Surprisingly however, it still managed to make a higher peak on both the weekly and daily chart, thus continuing the current uptrend of six months duration.
Market analysts seem to feel confident that the US Republicans and Democrats will reach an appropriate compromise over how to manage the $16 trillion of US debt, $6.4 of which has been incurred since President Obama took office. The debt is now larger than the whole US economy. Surprisingly world markets too seem relaxed with the “fiscal cliff” getting closer, judged by the behaviour of the VIX index. Both buyers and seller seem to adopting a ‘wait and see’ approach.
The VIX Index
VIX index is a derivative, calculated from derivatives. It is based on settlement prices for put and call options. Puts protect against falling prices, calls benefit when prices are rising. From the prices of selected option series, it is possible to measure the expected volatility of the ASX 200 for the next 30 days.
High VIX levels implies that the market is expecting substantial movement in the market, whilst the low VIX levels now seen suggest little change. It is not so easy to interpret however since the VIX index has a tendency to revert towards the mean, so that low volatility may just be a prelude to significant price movement.
The present low “fear level” could change quickly should the political parties fail to reach early agreement on how to manage the growing mountain of US debt.
How did the week finish?
The rising market momentum stalled towards the end of the week and finished quite flat with “Doji” candlesticks for both Thursday and Friday. This reflects uncertainty, as to where the index will go next.
The market close was 4583.
What is most likely to happen next week?
The market could change direction and head lower at least in the short-term.
The market has rejected higher prices for the time being, so it looks like a “wait and see” approach for buyers.
On the selling side of the equation, one might expect more selling to meet the expenses of the holiday season.
Should the market continue to move higher, the next resistance level target is 4700.
Should prices weaken, one would look for support to hold at 4450.