Yesterday, (Friday), the bull chorus was singing, "Happy Days are Here Again". This morning, the bear chorus are in full voice singing that wonderful Queen anthem, "We are the Champions". Who’s right? I dunno. I’m just a simple chartist who follows signals. I’ll be discussing long-term and medium-term direction later in the report. But, first, to the market wrap-up.
The general market (XAO) was in pullback mode this week. Friday saw a remarkable reversal day to the upside. (See the comments in the Advance/Decline Section below). Judging by the American market last night, all that positive gain on Friday will be reversed on Monday. On the week, the XAO, despite a healthy rise of 1.6% on Friday, was down a very unhealthy -4.38%.
The XAO is below a falling 13-Day Exponential Moving Average. Eight out of ten SP Industry Sectors were down. The only two sectors up were Telecommunications and Information Technology. Until recently the Telecommunications sector was the worst performer in the market (and so the Future Fund sold). Now – it’s returning to its usual status of outperformed in bearish conditions. (Eat your heart out, Future Fund.)
Best Three Sectors: Telecommunications: +3.51% Information Technology: +0.82% Consumer Staples: -1.43%
Risk Aversion is clear with two defensive sectors at the top of the list and the powerhouses of the Australian market (Financials, Energy and Materials), at the bottom of the list
Among the sub-sectors: Property Trusts down, -6.73%; Metals and Mining, -6.83%; and Small Ordinaries, -5.22%. The 50 Leaders was line ball with the XAO at -4.31% but performed better than the Small Ordinaries. Risk Aversion/Risk Inclination was weighted slightly to Risk Aversion on that measure. Gold Mining was down at -6.23%.
At the end of this report, I put a disclaimer saying that I’m not a financial advisor and that any decision regarding the stock market is your decision, alone, and probably should be taken in consultation with a financial advisor.
Many personal factors come into financial decisions such as your stage in the life cycle (the young can be adventurous in their investment decisions), how your financial affairs are structured (companies, trusts, self-managed super funds), your temperament (your ability to sleep at night through market turmoil), and so on. One of the main planks in the “buy and hold” philosophy is that tax and expenses can decimate any apparently good returns by trading the stock market. If you have structured your affairs in certain ways and are of a certain (old) age, tax can be virtually eliminated on some forms of trading gains. So, a long-term investor might make two or three trades in and out of the market without incurring much of a tax burden. (Discuss this with your financial advisor.) The following indicators provide me with a guide to making a few judicious trades a year taking advantage of long upward trends and provide protection from catastrophic, long-term market declines. The following charts with simple strategy rules provide such guides.
Chart Two – XAO with 13/150-Day Moving Average Cross-overs.
Long Term Strategy:
Entry: 1. 13-Day Simple Moving Average must be above the 150-Day Simple Moving Average.
2. The Index Chart must be above both the 13-Day and 150-Day SMAs.
3. The Weekly MACD must be positive (above its Signal Line).
Exit: 1. The 13-Day Simple Moving Average must be below the 150-Day Simple Moving Average.
2. The Index Chart must be below both the 13-Day and 150-Day SMAs.
3. The Weekly MACD must be negative (below its Signal Line).
Preferred Investment Vehicle: STW – tracking stock for the XJO Accumulation Index.
Using this strategy an investor would have been out of the market from December, 2007 until April, 2009. They would still be in the market. With any Moving Average strategy, you won’t pick tops and bottoms of markets – but you will get most of the meat between the extremes. Whipsaws can occur – but shouldn’t be a big problem.
CONCLUSION: LONG TERM INDICATORS ARE GIVING A “HOLD” SIGNAL.
MEDIUM TERM INDICATORS
Chart Three – XAO with Positive Daily MACD, Williams %R, RSI.
This simple system is readily used by anybody with access to a free chart site such as www.bigcharts.com.
Strategy (Long Only):
Entry when all three indicators agree: 1. Daily MACD above the Zero line. 2. Williams %R above -50. 3. RSI above 50.
Exit: 1. Daily MACD below the Zero line 2. Williams %R below -50. 3. RSI below 50.
Preferred Investment Vehicle: STW – tracking stock for the XJO Accumulation Index.
The XAO could be one day away from qualifying the three exit criteria. The Daily MACD is headed down and sitting at +13.921, just above the Zero line. Williams %R and RSI are below their signal lines.
This will provide some whipsaws. But you won’t be in the negative trade for long.
During the past year, trades on the XAO would have been:
08/01/09 – Enter at 3643.6 16/01/09 – Exit at 3476.8 Loss: 166.8. Using STW: Loss – 34.61-33.35 = $1.26. Using a buy parcel of 1000 shares = +$1260. -6.7%
23/03/09 – Enter at 3505 08/07/09 – Exit at 3767.8 Gain: 262.8. Using STW: Gain 35.21-32.78 = $2.43 Using a buy parcel of 1000 shares = +$2430. + 7.4%
17/07/09 – Enter at 3987.8 30/10/09 – Still in the trade at 4546.9 Unrealised gain to date on STW: 43.84 - 37.8 = $6.04 Using a buy parcel of 1000 shares = +$6040. +13.78%
About 20% for the year. (Remember, this will keep you out of a bear market when losses can be devastating.)
Gain on STW for the year: 43.84-37.34 = 17.41%
The following system is more complex and requires either access to my charts or personal charting skills. It is based on Alexander Elder’s Force Index, but on my chart the primary chart line is eliminated and replaced it with an 8-Day and a 21-Day Moving Average. (See below.)
Chart Three – XAO: 8/21 FORCE INDEX
Strategy (Long Only):
Entry:
1. Buy when the green (21-Day MA) line moves above Zero if the orange line (8-Day SMA) is also above Zero. 2. Sell when the green (21-Day MA) line moves below Zero.
Preferred Investment Vehicle: STW – tracking stock for the XJO Accumulation Index.
Even shorter term, earlier signals can be generated by using medium term trend lines on the green line.
I won’t go into detailed profit and loss analysis, but intuitively, I think it can be seen that this improves considerably on the first medium-term indicator system which was profitable.
The XAO is now on a “sell” signal. How long wills it last? I have no idea. This is a trend following system. These are not predictive, but try to get you into a trend and keep you in it for most of the movement – and get you out of it before disaster strikes. Just follow the buy and sell signals.
I must admit that on Friday I was looking like a “goose” after giving out a sell signal on Wednesday. However, the overnight action in America has turned me from looking like a goose to looking like a genius. Hamm – we won’t get carried away – hubris is quickly quelled by the stock market. We’ll continue to follow the signals and forget about be a goose or a genius. It’s money in the back pocket that is important.
CONCLUSION: MEDIUM TERM INDICATORS ARE GIVING “SELL” SIGNALS.
VOLUME
For the last couple of issues, I’ve been detailing changes in volume and relating them to price change. The main thesis was that volume had been dropping from August while the stock market continued upwards. This is usually a danger sign that a reversal is coming. During the past two weeks, price has been dropping while volume has been rising. This suggests that downward pressure is increasing – big money is moving out of the market. On Thursday the market appeared to make a capitulation move with a large move down on big volume. That assumption of a capitulation move seemed to be vindicated on Friday – but now the downward movement is once again accelerating in America. This could get serious folks.
Following is a chart of daily volumes since before Christmas. Various seasonal patterns are evident in the volume figures. Naturally, with many people on holiday, volume drops off over Xmas and New Year. No great significance should be attached to that. Also, every three months, volume spikes with options expiries. Again, no great importance should be placed on those spikes. Recently, total volume spiked with a huge overseas cross-trade in GPT. Again – this has no significance. It is, however, important to note the trends clearly evident from the moving averages. To put the volume chart into perspective, here, firstly is a line chart since the beginning of the year for the XAO.
Chart Four – XAO (Line Chart)
Now, here’s the volume chart since before Christmas:
Chart Five – Volume
Since mid-August, while the stock market has been on a rip upwards, volumes have been steadily declining. We now have a clear divergence between the chart of the XAO and the On Balance Volume Chart. (On Balance Volume is a running total of volume calculated by adding the day's volume to a cumulative total when the price closes up, and subtracting the day's volume when the security's price closes down. It shows if volume is flowing into or out of a security. When the security closes higher than the previous close, all of the day's volume is considered "up" volume. When the security closes lower than the previous close, all of the day's volume is considered "down" volume.) This divergence between the XAO and the OBV suggests that there is now more selling pressure than buying pressure in the market.
On Thursday, the chart developed a clear double top with a break below the middle ‘valley”. It tested the support/resistance line on Friday and seems certain to fall away from that line on Monday. A break by the 13-Day SMA below the 34-Day SMA would confirm.
Chart Six – On Balance Volume
To Summarise: Volume studies have suggested a possible retrenchment or correction for some weeks. A clear SELL signal was given by the OBV chart of the XAO on Thursday.
SECTOR ANALYSIS
Here’s how the 10 S&P Industry Sectors fared, ranked from top to bottom for the past week. The ratings are in order of magnitude with the previous week’s ratings in brackets
For weeks the Defensive Sectors (Consumer Staples, Telecommunications, Utilities and Health) were registering -100. Now none of them are showing that extreme reading. Slowly, the market is turning more defensive – this is in keeping with the beginnings of a medium term down trend.
CURRENCY
For some weeks I’ve been saying: This market won’t start to drop until we see the Ozzie Dollar start to weaken. Last week, the Ozzie was stubbornly above 92 cents. This week it has dropped down to just above 90 cents. Until we get a decisive break below the lower supporting trend line on the following chart, we have a non-confirmation of the bearish trend in the stock markets. This warrants some caution.
50 Leaders
Last week: No. of Stocks above 10-Day SMA: 30 (60%) No. Of Stocks above 50-Day SMA: 43 (86%). No. Of Stocks above 150-Day SMA: 48 (96%).
This week: No. of Stocks above 10-Day SMA: 6 (12%) No. Of Stocks above 50-Day SMA: 20 (40%). No. Of Stocks above 150-Day SMA: 48 (96%).
These figures show just how big the crunch was this week. This suggests a sideways to up movement in the short term. Long-term figures still allow for further downward movement.
ADVANCES AND DECLINERS. The Advance/Decline Line weakened this week and broke decisively below its uptrend line:
Chart Eleven – Advance/Decline Line
Action on Thursday and Friday was extraordinary. The Advance/Decline Ration hit a bull market low on Thursday suggesting a sizeable bounce was imminent. Well – we got a sizeable bounce – with the Advance/Decline Ration hitting a bull market high on Friday. From rags to riches.
Now – this could be interpreted two ways. First, Friday’s action signalled the end of this pullback. And I was tempted to accept this. The one-day change in the A/D Ratio was far more extreme than any previous recent action in the A/D Ratio which invariably saw the end of a pullback. The other interpretation is that such volatility is only seen at market tops – beware – further falls are expected. So, we’ve got two possible interpretations. After Friday night’s action in America, I’m now swinging round to the second interpretation. The next few days should confirm.
Chart Twelve – Advance/Decline Ratio - Daily
CONCLUSIONS
This week the market fell heavily and triggered some medium term sell signals. Recent warnings of impending weakness have now been confirmed.
No long-term sell signal has been triggered.
Some caution is still warranted as the currency is has not broken down from its uptrend, and a contrarian reading of Advance/Decline data suggests a bounce. The market is currently very oversold - which merits a bounce. But maybe we'll just go into a bit of sideways action before the next move down.
The reading for “Number of Stocks above the 150Day SMA” is extraordinarily strong and as long as it remains above 50% the bull market remains intact. This is supported by positive readings on the monthly RSI and MACD. Given these readings we must presume this bull rally is intact, albeit prone to sudden corrections such as we saw this week.
Sell signals are not etched in stone never to be erased. The market is dynamic and can reverse a trend quite quickly. One must be willing to go with the flow. Be prepared to re-enter the market if optimistic buy signals are triggered. That could be in the next few days, or the next few weeks.
I’m not on the side of the doom’n’gloomers predicting a catastrophic decline. This rally, on big volume, has been too strong to be predicting catastrophe. But – I think we must now accept that we are in a correction of some significance.
(20min delay)