XJO (ASX) Indices 01/07

Weekly Wrap. Week ended 5/7/2024. Be prepared.

Is action like this sustainable?

Tesla
In just over three weeks, Tesla has moved up more than +50%. RSI is at 85 - that's extremely overbought, and Money Flor Index is above 80 - overbought. Tesla is close to a major horizontal resistance line. The latest candle is a "hanging man" which often prcedes a reversal.

Tesla is only one of many tech stocks which has been on a tear lately. It may be the most extreme case, but it isn't the only case of a huge surge.

Microsoft
Since last April, Microsoft has risen more than +24%. The beginning of the rise was signalled by a positive divergence on the MACD. Histogram

Now we have a negative divergence on the MACD Histogram. Draw your own conclusions.

NVIDIA.

Nvidia went up even more than Tesla, +86.6%, before falling back - the fall signalled by a negative divergence on its MACD Histogram.

It's no secret that the American market has been "hi-jacked" by a few big tech stocks. All you have to do is to compare the Tech heavy Nasdaq with the Dow Jones Industrials. We have a divergent market - which usually falls to the weaker side.

QQQ, ETF for the Nasdaq
Nasdaq (QQQ) is up more than +20% since mid-April. MACD Histogram is now showing a double divergence. Single divergence is serious. Double divergence is doubly serious. That's almost certainly a sign that Nasdaq is going to fall.

Dow Jones
Since late June, DJI has been up a little more than +4% and remember that Microsoft is part of the Dow Jones.

DJ has now formed a sideways pennant - watch which way it breaks. If it is down, and the Nasdaq also falls, the American markets will be in trouble.

Of course, July is a favourable month seasonally. So we could see upside. But the imbalances will remain, and, perhaps later rather than sooner, gravity will start to affect the big Tech stocks and the result won't be a pretty sight. Be prepared.

XJO
The structural similarity between the XJO and Dow Jones is unmistakable.

XJO is currently in a symmetrical triangle which the Hull MA13 clearly showing the coiling nature of the Index with lower highs and higher lows. Something will give way, and then we'll see either a test of the upper horizontal resistance line, or the lower support line. Patience.

July tends to be a positive month for the XJO - the past eleven years have shown that July has been positive every year. That regularity in the seasonals suggests that the trend will break to the upside.

XJO and Equal Weight.

The XJO is a cap-weighted index which means that the biggest stocks carry more weight in the index than smaller stocks. ASX 20 Leaders, for example, make up about 50% of the Index while the other 180 stocks may up the other 50%. So a cap-weighted index doesn't necessarily show how the broad market is faring. That can be seen in an equal weight chart.

The above line chart compares the XJO with the equal weighted MVW. In the first half of the chart the two are travelling close together, sometimes one is above the other and vice versa.

Now, however, a big gulf has opened up between the two. MVW is now more than -5% below the XJO, i.e., breadth in the market has deteriorated and the XJO is being held up by some of the bigger stocks. That makes it vulnerable to a shock - much like the American market.

Sector performance this week.

XJO was up +0.71%. That sounds good - but it was mainly due to monster rallies in Iron Ore Miners and some of the Gold Mines and Energy stocks on Thursday - FMG up +3.19%, Evolution Mining +4.05% and Santos +4.17%

Only three sectors were up this week. Materials +3,3%, Property +1.43% and Energy +0.93%. That's three out of eleven sectors on the upside.

That's confirmation of the poor breadth being revealed by the equal weight chart, MVW (see above).
The worst performing sectors were Utilities -1.19% and Information Technology -1.08%. XIJ is often a good barometer of the risk-on sentiment in the market.

(Gold Miners +2.19% is on the chart above but not a market Sector, it is an industry group and part of the Materials Sector.)

Long Term Investor Index for the ASX.

My long term Investor Index is based on New Highs minus New Lows cumulative. This is something for long-term investors. While NH-NL Cumulative remains above its 10-day MA, that's a message for the long-term investor to hold.

NJ-NL Cumulative remains bullish, but the best seems to be over. The up-trend from December to April was quite steep, that trajectory to the upside has eased a little, and this week the chart line was close to the 10-Day MA. It wouldn't take much to produce a negative cross-over. Until it happens, long-term investors can rest easy.

Conclusion.
The Australian market is currently in a sideways trend. It is winding up into a tight coil between horizontal support and resistance. It is likely to break out of that coiling action this week.

Breadth is poor in both the Australian and American market. That doesn't mean that the market must fall - it's a cautionary sign to be prepared.

July tends to be seasonally positive both in Australia and the U.S. Seasonality is a tool and not necessarily predictive.

Watch which way the chart moves this week, as it will probably tell us if July this year will again be positive as it has been for the past 11 years.

August, September and October tend to be poor months for the Australian market. So, if July is positive, don't get too cocky.

Take Care.