The Weekly Slow Stochastic (5,5) shows a reading now at 71.78. Below its signal line (78.05). The Weekly SlowStoch is below both its signal line and the 80 line. Bearish.
WEEKLY MARKET SUMMARY
We finally have the retracement we had to have. Nothing too serious so far ? but let?s see where it ends.
XAO was down, -1.93%. On a 20-Day (Monthly) basis, the XAO is up +0.43%. The only day the volume was below average was Monday, a day when volumes are often below average. The only up-day on the market was Thursday ? Thursday is often ?counter-trend day?.
Nine out of ten S&P Industry Sectors were up. The only ?up? sector was Health, +0.42%. The biggest loser was Information Technology, -5.2%, followed by Financials, -3.3%.
Among other factors, the market is disconcerted by the current brouhaha from both sides of politics about the banks. Queen Joolia is on the world stage playing to the audience back home, shaking her Boadicea sword at the Usurers. By-hook-or-by-crook-I?ll-blow-your-house-down Hockey is doing a great job of blustering at the bricks and mortar in Martin Place.
When the noise and tumult settles, will the big banks continue on their profitable ways regardless of the sabre rattling and the huffing-and-puffing? If they don?t, then it will be another blow to the incomes of retirees many of whom depend on the big dividends which flow from the big bank sector. After having incomes decimated by the plunge in the REITs during the GFC, the outlook for retirees, who are generally investment illiterate, is bleak. Did someone mutter the words, ?Unintended Outcomes??
Last week I noted that the Small Ordinaries rise was dwarfed by the rise in the 50-Leaders ? that was an ?up? week. It looked like the smarties were prescient about the coming drop. This week the positions are reversed. Small Ordinaries, -0.69%; 50-Leaders, -2.5%. If the smarties are right once again, this retracement won?t last long. Gold Miners (XGD) was up marginally, +0.1%. Gold usually has a good seasonal period from late August to mid-0ctober, then has a rest into mid-November, before making another big run up to the end of January and Chinese New Year. Gold in U.S. dollars has been hit hard in the last couple of days? trading. In the overnight market, Gold (Continuous Contract) was down -2.84%. Gold in US$ might have got a bit ahead of itself before the usual seasonal run-up. The action this week, not only in Gold, but bonds, commodities and stocks, has spread fear in the market. Optimism was rife, so a sell off was on the cards. The fact that it has occurred across markets, some usually uncorrelated, is a surprise ? and probably indicative of the degree of fear currently present.
The XAO finished at 4779. That?s well above the August high (4616) and the 150-Day Moving Average (4589). The 50-Day Moving Average is at 4715. Any pull back will have solid support underneath. Any notion of a major correction in the medium term seems unlikely.
LONG TERM TREND
Chart Two ? XAO Monthly
The Monthly XAO remains healthy. It broke above the 10-Month SMA at the end of September. Since then the Index has remained solidly above that important benchmark.
The Monthly RSI is above its mid-line, while the W%R is headed north and well above its mid-line. A move above -20 would indicate a strong uptrend.
The MACD Histogram is above Zero.
The only further bullish indication we need is a break by the MACD above Zero.
MEDIUM TERM INDICATORS
Chart Three ? Weekly XAO.
The RSI.4 is back below 70 while the StochasticRSI.30 has ticked down below 0.8 ? warning of a possible trend reversal. Both these indicators need to fall below their mid-lines for a down-trend to be confirmed. The MACD Histogram ticked down this week but still shows no sign of a negative divergence.
The Weekly Slow Stochastic (5,5) shows a reading now at 71.78. Below its signal line (78.05). That?s usually a sign of a weakening market. Solid support still remains in the 4600 area, so any sell-off might be held at that level. Even if that breaks, support of the lowest fan line would probably hold this market up and remain technically bullish.
The weakness this week in the XAO looks like a normal retracement in an ongoing bull market. Events can, of course, change that view. At this stage, the trend remains up.
SHORT TERM INDICATORS
Chart Four ? XAO, Daily Candle Stick Chart
I find this chart fascinating from a Technical Analysis perspective. First, it looks like we can expect some more downside as the SlowStochastic(14.3) has crossed below its mid-line and the uptrend line from late August. The congestion area (blue oval) will probably provide good support and a bounce from that region is likely.
If the market is in a bull market of medium/long-term duration, which I believe it is, then we can expect an upside reversal somewhere in line with that congestion area when a series of events come into confluence:
o The chart hits against the next uptrend line in the Fibonacci Fan and bounces o RSI.14 hits 40 and bounces o The Daily Slow Stochastic crosses above its signal line. o The MACD crosses above its signal line.
If all of those occur at about the same time, then I think we can buy with ears pinned back and have a great Christmas and New Year.
Of course, none of that may happen. In which case we?d look for the following:
o The chart hits against the second lowest line in the Fibonacci Fan and bounces o RSI.14 hits 30 and bounces o The Daily Slow Stochastic falls below 20 and then crosses above its signal line o The MACD crosses above its signal line.
If that is the scenario, then it will probably be a Santa rally starting in early to mid-December.
These are just scenarios to watch. Not predictions. The market could, of course, just continue on down to the South Pole, or, at least, the August low. In which case, JB-HiFi execs will be lining up at Red Rooster on Xmas day instead of splurging on turkey and Bolly in the ski resorts at Aspen.
THE OZZIE DOLLAR
Chart Five ? AUD/US$
The Ozzie Dollar has been in a strong uptrend. Good support should be provided by the congestion area marked with the oval. The lower part of that congestion area (which approximates the similar one on the XAO) is currently level with the 50-Day Moving Average. If the 50-Day Moving Average is broken to the downside, then the next obvious level of support is the second line in the Fibonacci Fab, about the 96 level.
The MACD Histogram has broken below the Zero line and the RSI.14 has fallen below its mid-line. Those two events usually provide evidence of more downside. Again, if this is a strong continuing bull market, expect a bounce to occur when the RSI.14 gets down to 40.
INTERNATIONAL ? BullishPercentOEX, SHANGHAI, AGRICULTURAL INDEX.
Chart Six ? BullishPercentOEX
I?ve shown this chart for several weeks, so I?ll stick with it for the sake of consistency. The Bullish Percent Graph is a breadth indicator determined by the percentage of stocks on the OEX (American S&P100) which have given ?buy? signals on Point and Figure Charts. Overbought/oversold levels are usually considered to be 70/30.
A cross-over by the chart of its 10-Day SMA is usually a reliable indicator of further movement. When that is accompanied by a cross-over of the SlowStochastic (14,3) of relevant overbought (80) and oversold (20) levels, further falls seem to be in its destiny. The RSI.14 has fallen below 70. So only one more penny has to drop, a cross by the chart below the 10-Day SMA. That seems to be a foregone conclusion given the action on the other indicators.
Chart Seven ? Shanghai
Shanghai fell over 5% on Friday after reports showed that inflation for October came in at 4.4%, a little above the long term average of 4.25% (1994-2010). The high number raised concerns that China will raise interest rates and slow the economy. While this news provided a reason for the market to drop, it was just looking for a reason. The market had gone up over 20% in October. The Fibonacci Fan and the 50-DSMA would suggest that a pull-back to the 2900 area is likely. The big drop on Friday looks overdone, so Shanghai could have a bit of upside before falling again.
(Given the big drop in Shanghai on Friday, it?s a bit surprising that Australia didn?t fall further.)
Chart Eight ? AG Index
I usually show the Commodities Index in this section, so for a change of pace, I?m showing a sub-section of the Commodities Index ? the Agriculture Index. The two are highly correlated. On Friday, the Ag Index dropped even more than the Shanghai Composite index, -5.74%. The Ag Index has been on a tear higher since early June as a result of poor weather conditions (drought) in the U.S. Further upward pressure on the Index occurred when Russia banned wheat exports in September. The Russian wheat belt ha also experienced drought conditions ? the worst in decades.
Retreat by the Ag Index will again probably be held by the 50-DSMA and the corresponding line in the Fibonacci Fan.
It should be noted that Australia is just coming out of its worst drought in decades. Australian weather tends to be inverse to the major conditions in America due to the LaNina/ElNino effects which bring rain to Australia when America has a drought. So a agricultural producers in Australia are likely to benefit from a double whammy ? a bumper crop with high prices for Ag Products caused by drought in America and Russia. If our mining industry does come off a little due to a slowing Chinese economy, the slack could well be taken up by the Agricultural and Pastoral Industries. Australia, once again, might get lucky.
SECTOR ANALYSIS
The following is a chart of relative strength of the various sectors.
This chart shows that the strongest sectors of the market continue to be the export-oriented cyclical sectors ? Miners (including Gold Miners) and Energy. When this pullback is over, they will remain the sectors of choice for efficient trading. The sectors to avoid are clearly telecommunications (read Telstra) and the property trusts.
SUMMARY AND CONCLUSION
The theme of this week?s report can be summed up:
The market sold off this week, the sell-off probably has further to go.
The medium/long term trend of the market is still bullish. That doesn?t mean it can?t change. The market is dynamic. But, at the moment, while the medium/long term is still sound, we can adopt a ?buy the dips? policy.
Be careful. Be cautious. Follow the trend.
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