Is a pullback on the cards for the ASX 200?

Mon 08 Aug 22, 2:54pm (AEDT)
Bear Market - A graph showing large selling of global stock markets
Source: iStock

Key Points

  • Its all about US inflation this week and 2022 has had a poor track record of hotter-than-expected surprises
  • In 2022, the S&P 500 has fallen on average -1.04% on the day of CPI data
  • More strength is needed to help repair the longer-term trend for the ASX 200

Its been a V-shape rebound for S&P/ASX 200, up almost 7% since June.

After such an extended rebound, many investors can't help but to think - are we due for a pullback?

Here's some food for thought.

Thinking technicals

The ASX 200 has rallied itself back up to a cautiously optimistic level. By that, I mean:

  • 20-day (red): Short-term trend is pointing upwards

  • 50-day (green): Indicator many use as a trend filter for mean reversion, closed above the 50-day on 27 July. It's flattened out and starting to point upwards

  • 100-day (yellow): Mid-term trend indicator is flat

  • 200-day (blue): Starting to flatten. The ASX 200 is about 0.7% away from the 200-day, it hasn't closed above the 200-day since 30 May

ASX 200 price chart
ASX 200 price chart (Source: TradingView)

Short-term momentum is building but more is needed to help repair the damage that's been dealt to longer term moving averages.

At the same time, a momentum indicator like relative strength index suggests the ASX 200 is in overbought territory. The last time the RSI hovered around 68-70 was in early January and late April - both of which were followed by sharp selloffs.

US inflation: History looks ugly

Markets have rallied on hopes of a dovish pivot from the Fed as inflation eases and economic growth weakens.

This week will serve as a reality check for markets, with US inflation data due on Wednesday night.

Year-to-date, US inflation prints have been above consensus every single month except January and on average, the S&P 500 has fallen -1.04% on the day of CPI data.

However, its worth noting that US gasoline prices have fallen for 50 consecutive days from highs of almost US$4.4 to US$2.8 a gallon.

Us inflation and gasoline comparison chart
Gasoline futures vs. US inflation (Source: TradingView)

Contrary to what might support a cooler-than-expected inflation print, Fed Governor Michelle Bowman said last week that she had seen "few, if any, concrete indications that support this expectation," of easing inflation.

"I will need to see unambiguous evidence of this decline before I incorporate an easing of inflation pressures into my outlook."

"My view is that similarly-sized [75 bp] increases should be on the table until we see inflation declining in a consistent, meaningful, and lasting way," said Bowman.

Will the markets see a cooler-than-expected inflation print, which would then support a dovish Fed. Or, will history repeat itself and we get an ugly print, which causes another cycle of hawkish interest rate revisions and selling for equity markets?

Written By

Kerry Sun

Content Strategist

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

Get the latest news and insights direct to your inbox

Subscribe free