Technical analysts say the 200-day moving average is signalling a push higher for the ASX 200. Photo: Lucas Jackson Rather than looking stretched, analysts say the high percentage of stocks above the 200-day MA is a positive sign for the Index.
Nanjing Night Net

The positive momentum sweeping the sharemarket in recent weeks has sent the number of stocks trading above a key technical level to its highest point in almost seven years, and analysts believe it signals a move higher for the local index.

According to Bloomberg, 84 per cent of stocks on the S&P/ASX 200 Index are trading higher than their 200-day moving averages; that is, the share prices of around 168 of the top 200 stocks are sitting above their average daily price since late January.

The high percentage of stocks above the average indicates the rally has been broad-based – “a very encouraging sign,” Rivkin Securities global investment analyst James Woods said.

“The rally looks sustainable, the number of stocks above the 200-day are quite significant. It’s not just large caps driving the Index, it’s a broadly driven rally,” he said.

But it’s not the only market enjoying strong momentum. According to a recent Bloomberg analysis, three quarters or more of the stocks are trading higher than their 200-day average in one third of a total 77 indices tracked.

Among them is Wall Street’s S&P 500, which overnight on Monday joined the Nasdaq and Dow Jones in hitting fresh record highs.  The number of stocks trading above the measure is 76 per cent, lower than its Australian counterpart.

Saxo Capital Markets sales trader James Kim said the lower figure on the S&P 500 indicated its record run was being propelled by more specific sectors, compared with the broad nature of the ASX 200 push.

But can it last? Mr Kim said the banking sector provided clues, being the biggest sector on the Index by weight. All four of the big banks have provided either a profit result or trading update, and while ANZ Banking Group and National Australia Bank were sitting above the 200-day moving average, Westpac Banking Corporation was below and Commonwealth Bank of Australia was trading at or just below, and expected to slip when it trades ex-dividend on Wednesday.

“Obviously CBA goes ex-dividend overnight, which would push it naturally below the 200 DMA. The market will be seeing whether it can reclaim that mark,” Mr Kim said.

He said that more than being driven by earnings results, which have been relatively benign so far, the index was being driven by consolidation of its technical levels.

Mr Woods outlined two scenarios for the index over the next two weeks: one is a continuation of the rally to push higher, potentially with the benchmark top 200 measure closing back above 5600, or a temporary pull-back in a longer period of consolidation.

“The 50-day moving average is around 5369, that’s just below the top of the support range of 5400 and 5300 for a pull-back, and we continue to favour a pull-back,” he said.

The chart, however, is showing the sharemarket is in a “significant support zone” meaning a corrective pull-back could present a good buying opportunity, he said.

Mr Kim said the 5600 mark would be the first test for the market’s move higher. “Above that, you are looking at whole numbers – 5700, 5800 ,and ultimately testing the 6000 level,” he said.

“It would have to come with a healthy consolidation basis because the last thing you want is a very sharp run into it,” he said.

Easy central bank policy in Australia, Japan, Britain and the eurozone, along with the likelihood of the US Federal Reserve delaying raising rates will also continue to support equities and put a floor under markets, at least until the Fed hikes again, Mr Woods said.

“Any improvement in earnings will certainly see the market move justifiably higher both here and in the US,” he said.

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