Weekend Charting and Chat 23/24 January, page-8

Weekly Wrap. 22/1/21. XJO breaks out of consolidation.

This week, XJO rose +1.27%. That took the XJO above the top of the recent sideways consolidation:

Consolidations usually break in the direction of the previous trend, which, in this case, is to the upside.

XJO is now in a narrow band of support/resistance. Support is provided by the top of the recent consolidation and the long-term major resistance level set back in late 2019. Because this was set so long ago, it shouldn't have much strength, but it did provide to be resistance on Friday when the XJO fell modestly, -0.34%. Markets overseas on Friday were indecisive, so there's no clear sign we will be up on Monday.

Despite the strong week, there are some subtleties that should be noted.

Market leadership swung from aggressive to a more defensive stance. That's unusual in an up-move.

The two strongest sectors this week were Information Technology (XIJ) and Consumer Discretionary (XDJ). Fair enough.

The next three strongest sectors were all defensives: Health (XHJ) up +3.33%. Health has been one of the weakest sectors in recent times. That was followed by Telecoms (XTJ) up +2.94% and Consumer Staples +1.96%.

Resources and Financials have been the recent power-houses of our market. Energy (XEJ) was down -0.95%, Materials (XMJ) was down -0.15%.

Although Financials (XXJ) finished on the plus side, it was relatively weak compared to most other sectors, up just +0.32%.

My Aggression Indicator (XMJ/XSJ) fell this week, indicating defensiveness in the market:

The important panel here to look at is the bottom panel. This shows the relative strength of XMJ (Materials) compared to XSJ (Consumer Staples).

This week the chart fell decisvely below its 20-Day Moving Average for the first time since early November.

This may be the start of a trend of the market preferring defense over aggression, or it could just be a minor aberration. But, once trends start they tend to persist.

In the top panel, the chart shows XMJ at the lower edge of its Standard Error Channel. These usually result in a move back up further into the channel. But, there are no guarantees.

Below is a chart of the one-week performance of the 10 largest stocks on the ASX:

Four stocks out-performed the XJO this week. Three were defensives: TCL +4.37%, CSL +3.56% and Woolworths +3.1%. The strongest stock was Wesfarmers +6.96%, which is from the Consumer Discretionary sector. Four banks and BHP were all negative. The only bank on the positive side was Westpac +1.13%, but still underperforming the XJO. This is a picture of defensiveness, with the recent power-houses, banks and resources performing relatively poorly.

NewHighs-NewLows Cumulative:

NewHighs-NewLows Cumulative continues its upwards rise. Long-term investors should remain invested until the NH-NL drops below its 10-Day Moving Average.

Strong Stocks in each Sector

Utilities: No Entries. Previous week: No Entries

Industrials: ALQ, Previous Week: CIM.

Materials: BLD, S32. Previous Week: IPL, S32.

Financials: BOQ, CGF, NAB, WBC. Previous Week: ANZ, BEN, BOQ, CBA, CGF, NAB, SUN, WBC.

Property: SGP. Previous Week: SCG.

Health: No Entries. Previous Week: No Entries.

Info.Tech.: APT, WTC. Previous Week: APT.

Consumer Staples: No Entries. Previous Week: No Entries.

Energy: ALD Previous Week: BPT, OSH, STO, WPL.

Consumer Discretionary: DMP, TAH, WES. Previous Week: CWN, JBH.

Telecoms: TLS. Previous Week: No Entries

The previous week, 19 stocks made this list. This week, 15 stocks have made the list, so breadth has been weakening despite the positive result in the XJO.

New stocks to the strong list this week are: ALQ, BLD, SGP, WTC, DMP, TAH, WES and TLS. These are improving stocks and may be worth a look.

Large Cap Stocks with Low Volatility

Experiment:

Eight weeks ago, I started an experiment - an experiment in medium-term momentum As of 27/11/20, I'd buy (hypothetically) the best three performing stocks from the three top performing sectors in the past three months, and hold them for the next 12 weeks. We have four weeks to go in the experiment

The stocks would be: BEN, VUK, CGF, BPT, WOR, OSH, and TLS. (Telecommunications is a small sector and there are not three candidates available.)

Here are the results for the first seven weeks of the experiment: BEN +5.51%, CGF +21.14%, BPT +6.86%, WOR -6.89%, TLS +2.56%, VUK +2.56, OSH +19.18%. Average: +6.37%. That's now well ahead of the XJO figure for the past seven weeks of +3.02%. Momentum stocks continue to hold a decisive advantage over the XJO.

Conclusion: The current trend of the XJO is up. Stay with the trend until it is decisively ended. The recent defensiveness in our market is a warning sign not to get too complacent.