This week’s report is a little longer than last week’s as the fog of pneumonia starts to lift.
CONTENTS
Indices: One-Week Performance. XJO – Monthly Chart (for the long-term investor) XJO – Weekly Chart XJO – Daily Chart Australian All Ordinaries Point and Figure Chart. Small Ordinaries (XSO) Weekly Gold in Oz Dollars – Daily Chart Currencies AUD/USD Weekly Dow Jones Industrial Average – Weekly American Bank Index – Daily Copper XFJ Financials Gold/CRB Ratio Daily American 10 Yr Treasuries Yield Daily Summary and Conclusion SLF STW
50-Leaders -1.65%, Small Ords -1.8%. No appetite for risk.
Gold Miners: -6.72%
Property Trusts: +0.28%
The Asian sensitive sectors (Materials and Energy) did poorly this week.
MONTHLY CHART – XJO
The long term trend is down.
Using a 10mema, the chart gave a sell signal in May.
The chart is currently at 4141.9
For the third month in a row, the chart is respecting the dual support – horizontal and oblique.
The chart must hold above the 3950 level on a monthly basis otherwise further serious falls are likely.
Prior to October, the XJO had lower closes for six consecutive months. Seven down is unlikely, but not impossible.
All momentum indicators have turned back up.
The intra-day low back in August lies at around 3750.
It’s now the third week of October. With the monthly chart, only the final month end results are taken into consideration. At this stage, October is looking positive.
WEEKLY CHART – XJO
The broad market stalled this week after three up weeks (not a surprise).
This week’s candle looks bearish but most indicators haven’t turned down.
The chart has been in the lower part of the Bollinger Bands since May 2011. It needs to get back into the upper part, or it remains susceptible to further down side.
The mid-line of the Bollinger Bands currently coincides with the long term down trend line. A break above that would be positive.
The weekly stochastic remains above its signal line, so I think we can still say that the medium term trend is up.
DAILY CHART – XJO
The short term trend is down.
The Index finished at 4141.9 at support of 4140. marginally above support at 4200.
CCI.14 has fallen back to the zero area – a bounce here would be bullish.
The chart is sitting right on the lower level of the Bollinger Bands (also horizontal support). On Monday, if the chart pierces the lower edge, we can expect more down side. If we get a solid bounce – we should see more upside. Given overnight action in America, the upside is favoured.
That may see the major resistance level around 4300 tackled.
We shall see.
ALL ORDS – POINT’N’FIGURE
The Point and Figure Chart for the Australian All Ordinaries gave a “low pole warning” two weeks ago, suggesting supply was succumbing to demand.
The chart remains unchanged from last week. This is one of the big advantages of Point’n’Figure charting – it filters out noise. Only major changes in stock movements affect the P’n’F Chart. This week’s weakness hasn’t affected the P’n’F chart.
The current row of Xs needs to break above the previous high marked with a 9 (for September).
That’s the resistance of the September high.
SMALL ORDINARIES – WEEKLY
The health of the market is dependent on health in the Small Ords. The big blue chips can carry the market higher – but only for so long if the rally is not broad based.
The Mansfield Relative Strength Indicator which compares the Small Ords to the XJO, still languishes at a low level. The chart line has been going sideways, however, since late September; i.e., the Small Ords has been performing more or less on a par with the ASX200.
We need to see the Small Ords outperform the XJO to be confident of a return to bullish conditions.
GOLD IN OZ DOLLARS – DAILY
The Oz Gold chart has broken below significant support
RSI,Stochastic and CCI are oversold, so a bounce seems likely.
The down trend seems, however, to be well established. A move back to the mid-line of the Bollinger Bands seems likely.
While the Australian stock market retraced this week, Oz Gold was also dropping. They usually trade inversely. One of these was “wrong” this week, and, given action in America, it looks like Oz Gold.
I reference Oz Gold as a counter-point and reverse confirmation of the Australian market. Oz Gold tends to trade inversely to the XJO and can be used as a hedge against falls in our stock market.
AUD/USD – WEEKLY
AUD:USD medium/short term trends have switched to the long side. The long term trend up from early 2009 is still intact.
After last week’s big move trend reversal move I expected to get some back and filling. That’s what we got with the week ending on the positive side.
The Oz Dollar is now back close to the 1.04 resistance area. It might continue to struggle for a week or so.
A rising AUD is necessary for capital inflows to occur into Australia. Without that a liquidity squeeze occurs which helps to generate falls in Australian asset classes.
Probabilities favour consolidation, but the longer term view is positive. That’s also positive for our stock market.
DOW JONES INDUSTRIAL AVERAGE – WEEKLY
This week the Dow Industrials Index broke out of its medium-term sideways trend between 11700 and 10700.
Four weeks up is a long stretch. The market doesn’t usually go up much more the three weeks in a row. But there’s no stopping it going up six or seven weeks if the “big boys” decide to push it up.
The push up through resistance on Friday was accompanied by strong volume. Unfortunately, that coincides with OpEx day when volumes are always elevated. So that volume figure needs to be discounted. On the other side of the coin, OpEx day is usually a narrow range day – so Friday’s action with a wide range day was unusual and bullish.
On the weekly chart all momentum indicators are heading upwards and have further room to move before overbought is reached.
The daily chart is less sanguine with the Stochastic remaining stubbornly in the overbought region.
The probabilities favour a consolidation or pull back. The bears will then scream “bull trap”, and pile back in.
While the index remains in the upper half of the Bollinger Bands, the trend remains intact.
AMERICAN BANK INDEX – DAILY
Looking for confirmation for the Dow breakout, I turned to the important American Bank Index.
Although in an ascending triangle pattern, which is bullish, the Index hasn’t broken above overhead resistance. The triangle pattern suggests it will – but until it does, the move by the Dow Industrials remains unconfirmed by this key bell wether index.
Patterns can always break one way or another. This one usually breaks upwards, but until it does, judgement needs to be withheld.
COPPER WEEKLY
This is a weekly chart of Copper. Copper is a proxy for world economic growth, particularly Chinese.
The Copper price was in full-blown crash mode, but turned around in the past three weeks.
Note that Copper tends to be correlated with the stock market and is often a leading indicator.
Copper continues to languish as its lows, a negative divergence from the Dow Industrials. Not a good sign.
Until we see a turn around in this commodity, a bull market in stocks looks suspect.
XFJ – FINANCIALS
After completing a H’n’S pattern in September and early October, the Financials have been consolidating at the top of the range and at resistance.
The consolidation has now taken nine days.
The Bollinger Bands have tightened up. A big move is imminent.
The XFJ may be forming a small H’n’S Pattern but it only involves about 85 points. Given the action in America on Friday, completion of the pattern looks unlikely.
Classic Technical Analysis suggests a test of the neckline H’n’S Pattern.
Except for the Stochastic, momentum indicators are benign and allow for movement up or down. The Stochastic on the daily remains stubbornly in overbought territory – it has to come down some time.
In the long term, a test of the one-year high is possible.
Remember, the stock market provides no sureties – the above analysis is just my personal view of what might happen – probabilistic and contingent.
GOLD/CRB RATIO DAILY
The Gold/CRB Ratio provides a clue to the fundamental thinking of investors.
Gold is a “safe-haven” in times of uncertainty, while bearish or bullish conditions in Commodities reflect economic conditions.
A down move in the Gold/CRB Ratio suggests that investors are moving out of the safe haven and into assets where fundamental demand/supply is more important.
This ratio tends to act inversely to the stock market.
The Gold/CRB Ratio has been in a sideways consolidation since early August.
To confirm Friday’s breakout on the Dow Industrials, the Gold/CRB Ratio needs to break support.
It hasn’t done so yet. I still await confirmation.
10YR TREASURY NOTE YIELD
Stocks tend to trend inversely to the yield in bonds. Bonds are usually “right” more often than stocks as they are determined more by fundamentals than stock market hysteria.
10Yr Treasury Yields formed a large double bottom or W formation in Sept/October.
The chart has since been consolidating at the highs – suggesting that the next movement would be up.
Short term, however, the chart is “overbought” with the stochastic hovering above eighty.
That suggests some sort of move down before the next move up.
A bounce off the Support Line across the top of the Double Bottom would be positive for stocks. A fall below there would be bearish for stocks.
A move back above the recent high would be very bullish for stocks.
SUMMARY & CONCLUSION
On Friday, the Dow Industrials on a wide-range day poked above major resistance at 11700. That’s a major development.
The Australian market still hasn’t broken above it’s corresponding resistance level which sits at 4300. 160 Points away or 2.6%.
The question now is: Is this the real deal or a bull trap?
On first glance, the move above resistance by the Dow on good volume suggests it’s bullish. The heavier volume needs discounting because it happened on OpEx Day. It is unusual, however, for OpEx Day to be a Wide-Range-Day. So, I think we take the move on face value.
The American Banking Index hasn’t yet provided confirmation. So we need to withhold judgement for the time being.
Looking to intermarket analysis for guidance we find the following:
* Gold in Oz Dollars has fallen below support. That’s bullish for stocks * 10 Yr Treasuries Yield has formed a big double bottom. That’s bullish for stocks. * The AUD/USD has broken above its long term down trend. That’s bullish for stocks. * Gold/CRB Ratio is at the lower end of a three month consolidation period, but it still needs to break lower to confirm the break upwards in stocks. That’s neutral. * Small Ordinaries is performing in line with the XJO. It needs to begin outperforming. That’s neutral. * Copper is consolidating at the lower end of a long down trend. It is usually correlated to the stock market and, often, a leading indicator. Its current stagnant performance is bearish for the economy and stocks.
Using inter-market analysis there’s enough evidence there to suggest a bullish case, but also enough evidence to say, at this stage, be cautious, wait and see. A break by the Gold/CRB Ratio lower and a solid break higher in copper would just about seal the case.
Short term, I’d like to see the XJO break above 4300 and the American Bank Index break above its near-term resistance level.
Seven weeks ago I said: "Perhaps I’m being too optimistic, but the scene seems to be set for growth in equity markets sometime in the next couple of months." The past couple of weeks have been very positive and suggest my optimism was well-founded. I still might be out by a week or two. We shall see.
A reminder: Strong October = Weak November.
Monday is the anniversary of Black Monday, 1987.
The market is due for a bit of profit taking. So after being up early in the week, our market might sit back a bit, and 4300 will still wait as a tantalising lure.
Don’t pre-empt the market. Remember: do your own research. Make your own decisions. I hope that the information I show might help you just a little.
DAILY STW
STW remains stalled above oblique support and slightly below horizontal support.
Critical resistance around 41.20 still has to be overcome.
Momentum Indicators have now moved into sell configurations.
More consolidation or a pull back seems likely. Given American action on Friday, Monday seems likely to be up. We’ll have to see what happens after that, but the probabilities still lie lower. If we’re in a bull market, anything could happen after Monday.
Dividend Yield: 4.5%.
Read in conjunction with the general market commentary above.
(STW is the Exchange Traded Fund which tracks the performance of the ASX200)
(20min delay)