ASX 200 Likely to Pull Back

• Australian index drops 90 basis points
• Gold continues to be highly correlated to the ASX 200
• Could this provide a buying opportunity based on value?

The ASX 200 fell significantly during the trading session on Wednesday, losing 90 basis points along the way. The ASX 200 has been extraordinarily bullish for the last several weeks, but as it approached the significant resistance barrier in the form of AU$7900, it appears that we are going to continue to see a little bit of an issue going higher. This does make a certain amount of sense considering that of course a lot of traders are attracted to these large, round, psychologically significant figures such as AU$8000.

Technical Analysis

Looking at the chart, it’s obvious that there have been a lot of buyers involved in this market as of late, but as we approached the previous high, we started to see a lot of old selling pressure. The size of the candlestick is somewhat telling, it does suggest that perhaps there might be further bearish pressure out there as these types of candlesticks very rarely happen in a vacuum. However, the market is still very much in an uptrend as denoted by the 20-Day EMA just underneath the candlestick, and then of course the 50-Day EMA just below there. In other words, we could very well be approaching an area where we have a bit of a fight on our hands.

Gold

Gold markets were very negative for the session as well, losing over 1% during American trading, but it is worth noting that the gold market has been very strong for some time, but if you look at one chart and compare it to the other, you can see just how tightly correlated they can be at times. This of course makes quite a bit of sense considering that BHP, Fortesque, and several other large miners will obviously have an influence coming from not only the gold market, but iron, copper, etc.

However, it’s worth noting that there is still a lot of reasons out there for traders to be interested in gold, not the least of which will be the fact that several central banks around the world continue to buy it. Furthermore, there are a lot of concerns when it comes to geopolitics, and that is a situation that is going nowhere. The market did get a little stretched over the last couple of weeks but is very difficult to ignore the correlation between the 2 markets. Because of this, it appears that traders will continue to pay close attention to assets such as gold, copper, etc. to sort out whether or not they are going to be buyers of the ASX 200.

It is also worth noting that perhaps the same can be said for BHP, Fortesque, RIO Tinto, and many others. Ultimately, this is a market that has been focusing mainly on how gold has been reacting, at least as far as correlations are concerned, and there’s nothing out there to suggest that correlation is going to disappear anytime soon.

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