Financial headlines in the global stock markets have been largely centered in the U.S., given the fact that commonly watched instruments like the S&P 500 and Dow Jones Industrial Average are consistently trading at record levels. But when we look at some of the other developed economies, it is quickly becoming clear we could be seeing new opportunities in options related to the Australian Securities Exchange (ASX) as it now looks poised to break critical resistance levels.
Rallies in the ASX are being supported by the improved outlook for energy and materials, as both of these sectors have strong roots in the Australian economy. Markets are currently trading above long-term resistance in the ASX 100 and investors are now looking ahead to the 5,000 mark. This area is viewed as a key psychological resistance, so it is more than likely investors will have some difficulty breaking above this area on the first test.
To get a sense of when this area actually will be tested, it will be important to watch some of the peripheral factors that have been guiding sentiment over the last few months. Australia is a massive export economy. This means that materials demand in emerging markets will continue to be a critical factor in determining the broader strength or weakness in the corporate earnings outlook.
This is something that should be viewed as a requirement for any sustainable rallies. When markets are trading at these types of elevated levels, it is always a good idea to take a somewhat protective stance. From an options perspective, this could mean buying put options as markets are approaching the next round of selling pressure that could be seen relatively soon.
One of the benefits of using options in these types of situations is the fact upside risks are drastically reduced relative to what would be seen using an outright short position. So if you are a conservative investor looking to gain exposure to price movements in Australian stock options, this is something that should be considered.
Of course, the broader risks are lowered even more if investors are able to wait for rallies before entering into positions. This is because upside potential will be even further reduced and any declines that might be seen when failing at resistance can be used almost entirely for profits in the active markets.
On the other side of the equation, bullish investors should wait for a drop to support at 4,840 as this presents a much better area to buy call options. Remember, the broader trend is still clearly bullish, so when we are viewing things on a trend basis, there are not many arguments against gaining long exposure at lower levels.
Disclosure: The author has no position in any asset mentioned.
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