S&P ASX 200 index forms inverted H&S, bullish divergence patterns

The S&P ASX 200 index continued its recovery on Wednesday after the Reserve Bank of Australia (RBA) pointed to an April pause of interest rate hikes. The closely-watched Australian index jumped to a high of A$7,033, the highest point in more than a week. 

RBA and Federal Reserve actions 

The ASX 200 index rose for the second day straight after the RBA published a relatively dovish report on Tuesday. In its minutes, the bank said that it will likely pause its interest rate hikes trend in April in a bid to assess the impact of the past few minutes. In that meeting, the RBA hiked interest rates by 0.25% and pushed them to the highest level in more than a decade. 

The ASX 200 index jump on Wednesday coincided with the performance of its American counterparts. On Tuesday, all key indices like the S&P 500 and the small-cap Russell 2000 index jumped, helped by banks. First Republic Bank shares popped by over 40% as the company hired Lazard to assess its strategic alternatives.

As a result, Australia bank stocks were among the top gainers in the ASX 200 index. Commonwealth Bank (CBA) share price jumped by 1.2% while other banks like Westpac and National Bank of Australia rose by over 1%. Small cap mining companies like Besra Gold, Whitebark Energy, and Mincor Resources stocks rose by over 10%.

The next key catalyst for the ASX 200 index will be the Federal Reserve decision scheduled for Wednesday. Economists believe that the Fed will continue hiking interest rates in a bid to continue fighting inflation. It will, nonetheless, take a more measured approach because of the recent bank failures. A recent study warned that as many as 190 American banks could fail in the coming months. 

ASX 200 index forecast 

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ASX chart by TradingView

The ASX 200 index has crawled back in the past few days. A closer look at the four-hour chart shows that it has formed what looks like an inverted head and shoulders pattern. It has also crossed the 25-period exponential moving average (EMA). 

At the same time, the MACD and the Relative Strength Index (RSI) have formed a bullish divergence pattern. In most periods, these divergences tend to be positive for assets. Therefore, there is a possibility that the index will have a bullish break-out as buyers target the next key resistance level at A$7,100. The stop-loss of this trade is at A$6,800.