Some weeks I have a strong opinion about what is happening. Last week was one of those - and the market duly paid off with a solid rally.
This week I'm much more ambivalent.
Was this week a dead-cat bounce - or the start of something bigger? I don't know. More definitive action is needed to answer that question. The coming week will possibly be a week of consolidation.
WEEKLY MARKET SUMMARY This week the XAO rose +3.6%, almost erasing the previous weeks fall of -3.9%. Despite the bullish tone, Volume was well below the 50-Day average on five of the five days this week. Strange. Weekly Volume peaked in the week the RSPT was announced (early May) and have been heading down ever since, back to levels last seen in the holiday period in early January. Investors seem to have become disillusioned with Australia as an investment destination. No doubt those of a particular political bent will appoint obvious blame and perhaps they are right, perhaps not.
Heres a chart of relevant movements in S&P Industry Sectors and Sub-Sectors for the past Five Days:
The three best performing Sectors were: Energy, +5.8%, Industrials, -4.9%, and Financials, +4.5%. Two of the worst performers recently (Industrials and Financials) found renewed strength this week. The three worst performing Sectors were: Utilities,+1.6%, Telecommunications, +1.7%, and Consumer Discretionary, +2.4%. Theres a clear swing there from defensives back into cyclicals.
Small Ordinaries were up on the week +3.1% while the 50-Leaders were relatively stronger, up 3.8%. This suggests that risk aversion is still a factor in investment decisions, with large caps being preferred over small caps. If this upswing in the market is to be maintained, risk appetite must dominate. With risk aversion still in the market, and lower volumes, some doubt must be thrown on the strength of this weeks rally to sustain very far into the future. But its early days yet.
Gold miners had a poor week for the second week in a row, down -3.3%. Gold Miners have been the star performer in recent weeks.
LONG TERM TREND
The 13/150DSMAs remain bearish. Until the 13DSMA crosses back above the 150DSMA Ill maintain a bearish stance. That may mean giving up part of a solid rise. So be it.
Chart Three XAO Monthly
On the above monthly chart we note the following:
o The 10-Month SMA effectively supported the bull market that ended in 2007, formed resistance for the bear market that ended in 09, and supported the most recent bull market which appears to have finished in May 2010 when the XAO crossed below the 10-Month SMA. (Long-term investors could well use this for investment purposes, simply putting money into and out of STW, the tracking stock for the XJO, on the basis of these signals. Simple, clear and cost effective.) o The Monthly MACD Histogram has turned down bearish. o The Monthly RSI is below its mid-line (50) bearish. o The Monthly Slow Stochastic is below 50 and headed down.
Together, these signals make a powerful case that the bull market from March, 2009 has ended. Of course, the market may decide to do something else. But the probabilities in the long term lie with the downside. We shall see. The market is always dynamic and one shouldnt be locked into a particular position, but be willing to change with the market.
MEDIUM TERM INDICATORS
Chart Four Weekly XAO.
Comments on the Weekly XAO Chart (see below): o The Weekly RSI.4 is above 30 indicating a possible change in trend. o The MACD Histogram is showing a mild positive divergence from the index but still below its long-term down trend line. o The MACD (not shown on this chart) remains below the Zero line bearish. o The StochasticRSI.30 is above 0.2 indicating that the medium term downtrend may be changing to the upside. A move above the mid-line, while the RSI.4 is also above its mid-line, is needed to confirm a medium-trend change.
The XAO could be building a solid base for a medium term upswing. The positive divergences on the MACD Histogram and the RSI.4 increase the possibility of such a swing higher. Historically, the American market has a summer rally (albeit weak) from July into August, so that upswing may be in the nascent stage.
SHORT TERM INDICATORS
Chart Five XAO, Daily Candle Stick Chart
The RSI.4 is above 70 and StochasticRSI.30 is above its mid-line. This is confirmation that a short-term up-trend is in place.
Overhead resistance is formidable but it usually is when a trend changes to the upside. On Friday, the XAO reached the first level of resistance. The 50-Day Moving Average and the 4500 level in combination may exert stiffer downward pressure. The down-trend line from mid-April is the most important of these resistance levels. Resistance levels are just that resistance levels not brick walls. The StochRSI.30 allows for plenty of room to move upside, but, perhaps, at a slower rate than the past couple of days. A break above the down-trend line from mid-April would suggest a lot more upward movement in the XAO.
THE OZZIE DOLLAR
This week, the Ozzie had a solid week up reversing the previous down week. It is also above the important low set back in February so it seems to be leading our stock market higher. The RSI.4 and StochasticRSI.30 on the weekly chart are also positive although both need to be above their mid-lines to confirm a medium term up-trend.
Chart Six Australian Dollar Weekly Candle Stick Chart
SECTOR ANALYSIS
This week the Sector Analysis shows little change. Defensives continue to hold the top four rankings. This is a bearish profile. On the ratings the biggest improver was Health followed by Energy.
This list also shows the highest price stock from the 50-Leaders in each Industry Sector. Heres the germ of an idea: go long the top-rated sector (through the sector stock) and short the lowest-rated sector/stock using entry and exit based on technical analysis (e.g., trend lines, MACD, RSI). Ill leave that one with you.
50 LEADERS
Last weeks reading as of Friday 2/7/10. No. Stocks above 10-Day SMA: 2 (4%) No. Stocks above 50-Day SMA: 10 (20%). No. Stocks above 150-Day SMA: 7 (14%).
On a short-term basis (one week), this market is over-bought but, longer term, there is plenty of room for upward movement. A reading over 90 in the short-term is often needed before some consolidation/retracement occurs.
Chart Seven 50-Leaders
The chart of the Cumulative 20-Day NewHighs/NewLows for the 50-Leaders has marginally nudged above the 3-Day Moving Average. Thats a positive, but we need something more decisive to hang our hat on.
Advancers and Decliners
Chart Nine Advancers and Decliners
The Advance/Decline Line has broken back above the long term support/resistance line and is now back above the 13-Day SMA. Recent movements in the A/D Line have mirrored the XAO suggesting breadth is good and more upward movement is possible.
INTERNATIONAL
Charts Ten-Twelve: S&P500, Ten Year Bonds, Shanghai, Copper
S&P500.
The technical damage inflicted on the S&P500 the previous week has been repaired. Support, which had held through 2010, has been regained. The next major challenge for the S&P500 is the 50-Day SMA. While the S&P500 moved up on Thursday and Friday, volume declined, setting up a negative volume divergence from price.
TEN YEAR BONDS
The yield on Ten Year Bonds in America remains below critical horizontal and diagonal resistance. A move back above those levels would be supportive of a longer term upswing in the stock market.
SHANGHAI
Shanghai continues to hold below shelf support/resistance. The 20-Day SMA has effectively provided resistance since mid-April. Those two key resistance levels are now being tested from the underside. A break above those should see continued movement upwards.
COPPER
Last week I mentioned the possibility of an Inverse Head and Shoulders Formation developing in copper. That Formation came closer to fruition this week, but still has to complete. The chart has broken marginally above the 50-Day SMA, which is a positive. Another good days movement upwards would confirm the break and possibly complete the H/S formation. That would be positive for world stock markets and, particularly, Australia.
SUMMARY AND CONCLUSION
Lets try to summarise all of the above and get some perspective on how the market is travelling.
XAO Charts
Long Term: 13/150 MAs crossed negatively. Indicators on Monthly chart negative.
Medium Term: The mid-term outlook improved this week, with alerts by indicators that a change in trend could be occurring. The XAO remains below critical resistance.
Short Term: Short term trend is up. Positive Volume this week abyssmal. That cant be positive.
Ozzie Dollar (Weekly):
Medium term alert trend could be changing to the upside.
Sector Analysis:
Profile Medium term - dominated by Defensive Sectors negative
Small-Ordinaries/50-Leaders Ratio Short-term - Biassed to Risk Aversion Negative.
50-Leaders:
Stocks above the 10-DaySMA: 88%. Overbought
Stocks above 50DSMA and 150Day SMA Below 50 and heading up. Positive
Cumulative NewLows/NewHighs headed up Short-Term Positive.
A/D Line: In sync with XAO. Positive
International
SPX Important support/resistance level regained. Positive. Negative divergence on volume.
10 Year Bonds Negative for the Stock Market
Shanghai Below horizontal and diagonal resistance - Negative
Copper. H/S Formation in process of developing. Until it completes - Neutral.
All of the above describes what is, not what might be. This week was a strong week, but not enough to think that this week was anything but a counter-trend rally. It could, however, be the start of the ubiquitous summer rally (winter rally for us).
Last week the market was very oversold. This week it is overbought. The rally this week was not unexpected. Whether it is just a dead-cat bounce or sufficient to reverse the current medium-term downtrend is still to be seen. More positive action is needed to confirm a change in the medium term. Im expecting some consolidation this week.
The big conundrum is the volume. It is difficult to envisage a strong medium term uptrend without an improvement in the abysmal volume position.
(20min delay)