A mild down week with the market clearly on the defensive. Gold Index (Miners) had another poor week, down four out of the past five. It’s now down close to the bottom of its range. It could turn here in the near future
MONTHLY CHART – XJO
Last month’s candle closed marginally above the 10MEMA. The gap was a mere 20.12 points. This week the gap narrowed slightly to just 3.1 points.
The chart is currently at 4319.6. The monthly 10EMA is at 4316.5. Nothing in it.
Even though the 10MEMA has been broken to the upside, the chart still needs to break above the oblique down trend line from the 2007 high (4427.6) and above the October, 2011 high of 4417.6.
Long term investors could cautiously enter long positions but keep a stop at horizontal support of 4310 and exit the market if the Index falls below that level. If a position is taken, you might do so only in the light of concerns expressed later in this report.
WEEKLY CHART – XJO
Looking at this chart, I wouldn’t want to bet the house on it going higher.
It’s been grinding higher, but not by much. That’s produced a bearish rising wedge.
The 20WMA (red dashed line) is flat. MACD Histogram is also flat.
Stochastic and CCI.14 are both overbought but can remain overbought for weeks at a time.
The chart is close to the upper Bollinger Band, the first time since 11 April, 2011. (Do one-year anniversaries mean anything?)
The week prior to the past week the chart hit a “double whammy” resistance level – an old oblique down trend line and a short term restraining oblique line. The chart finished below that confluence point this week. Volatility dropped off.
Next higher resistance level: October 2011 high of 4417.6. Near term support: 4310
A break above near term resistances (4360, 4420 – round numbers) could see us target the fabled XJO 5000 level. But let’s not get ahead of ourselves. Mountains to climb. And a lot of negatives exist in this chart.
DAILY CHART – XJO
The 4310 area appeared to be crucial for the index. It now seems that the zone or resistance between 4310 and 4365 was crucial. The boundaries of that area were the highs in Jan/Feb//Mar 2012 and the highs back inSept/Oct/Nov 2011. The market has stalled in that zone and now appears likely to fall back below 4310.
Stalling? Perhaps teetering is a better analogy. The recent closing high was Wed. 28 March at 4343.5. The closing figure for the next six days was between the open and the close of 28 March. That’s a most unusual condition. Bulls have not been able to make head-way, on a close basis, since then.
On the plus side, the market remains within a large ascending trianble. Even if the uptrend line from October, 2011 is broken to the downside, plenty of support lies below. That uptrend line has already been broken to the down side once with a quick recovery.
Small Ordinaries and On Balance Volume aren’t confirming the break-out. These two have broken down, OBV severely. See later charts.
XJO – COINCIDENCE?
Five legendary traders who did ground breaking work in technical analysis in the early 20th Century were Charles H. Dow, Jesse Livermore, Richard D. Wyckoff, Ralph Nelson Elliott and W.D. Gann. Almost all writing on technical analysis since their activities have been mere foot-notes to their work.
At one time or another, I’ve spent many hours poring over their writings – always best to go back to original sources.
I don’t profess to be a Gann expert, probably the most abstruse of those five writers, but I have taken away some important generalised learnings.
These can be summed in two words: time, retracements.
Consider:
1. Time from April 2011 high to 4 Oct 2011 low is exactly the same as the time (trading days) from 4 October 2011 low to 28 March, 2012 closing high.
2. The 50% retracement from the 11 April, 2011 high to the 9 August, 2011 low was hit on 1/2 April, 2012. This gives us a time/price coincidence around the current level.
Coincidence? Meaningful? Are we looking at an important turning point in the market? We’ll have to wait on confirmation.
XSO/XJO – DAILY
XSO (Small Ordinaries) provides an insight into the sentiment of smart investors. Usually, XSO outperforms in bullish markets and underperforms in bearish markets.
XSO didn’t break upwards at the same time as the XJO (late March). That’s a negative
It has since broken below the uptrend line from Dec. 2011. Another negative.
A negative divergence on the Ratio XSO/XJO in a bull market suggests that smart investors aren’t convinced about a bullish move. Vice versa in bear markets. At the end of the GFC (late2008/early2009) the XSO/XJO Ratio showed a positive divergence, indicating that the bear market of the GFC was probably ending.
The XSO/XJO Relative Strength Ratio (bottom pane) topped in mid-March and is now in a down trend. That suggests that a lot of smart investors are not convinced by the current break-out on the benchmark index, the XJO.
XAO – OBV – DAILY
The On Balance Volume Chart is a way of showing buying/selling pressure in an index or stock. It’s a cumulative total of volume/price. If the stock/index is up, volume is added. If the stock/index is down volume is subtracted. It reflects demand/supply for a stock/index.
Normally OBV trends up and down with price. A positive divergence while the stock/index is falling suggests that smart investors are buying from not so smart investors. A negative divergence suggests that smart investors are selling to not so smart investors.
The OBV chart shows action since November when the current bull rally started. The chart speaks for itself. A big negative divergence.
Since mid-March, it has been in a steep downtrend while the market made new highs. This suggests smart investors have been bailing out in big numbers.
(OBV was developed by Woods and Vignolia in the mid-1940s and popularised by Joe Granville in the 1960’s.)
AUD/JPY – DAILY
AUD/JPY has completed a Head’n’Shoulders Top. Further downward movement is likely.
The standard measure move takes the currency back into the zone of support shown on the chart.
The currency is now oversold and positive divergences are appearing. So there is some chance that the measured move might not occur.
A break back above the neckline of the H’n’S pattern would be bullish. These patterns can fail, but don’t bet on it.
The AUD/JPY is watched carefully overseas as it provides insight into the “risk on” risk off” speculative trade – and flows of liquidity. While the AUD/JPY is falling, “risk off” dominates. That’s a negative for stock markets.
DOW 30 – DAILY
The Dow 30 remains in a sideways consolidation since 13 March.
These usually, but not always, break in the direction of the trend, which is upwards.
The 1300 area remains an important level. Momentum indicators are showing negative divergences.
The Jobs Report came out on Good Friday in America. It wasn’t good – to say the least.
The Dow 30 seems certain to gap down below 13000 support on Monday night. That will be the first major break of support since this rally began in Nov.2011. That’s bearish. Unless a resurrection occurs on Monday night, I think we’re going much lower. (Pardon the pun.)
OZ MATERIALS WEEKLY
Although the Materials Sector was down this week, no clear change occurred in the chart. Short term the Index is in a short term sideways movement (last three weeks) within a much longer sideways consolidation. The Index remains within the triangle formation shown on the chart.
The Sector needs to break above the 30Week MA. A break above that would be a bullish tick.
It is currently at a shallow oblique support line from late Dec.2011. A break lower here should see a test of the major horizontal support line around 10470. A break above the oblique down trend line might see a test of the recent top around 11750.
The bottom pane of the chart is a Relative Strength Indicator of Materials:ConsumerStaples. Consumer Staples is a defensive sector and Materials is a cyclical sector. Risk appetite for the sector is poor. A turn up in this indicator would be bullish for the broad Australian market. No sign of that yet.
It’s difficult to imagine a bullish Australian stock market without participation of the Materials Sector. Currently it is acting as a drag on the broad market.
DAX (GERMAN) WEEKLY
The long term up trend line on the DAX has now broken to the downside. The negative divergence on the CCI is playing out. Momentum Indicators can turn down further before registering oversold.
There’s not much in that to commend it.
Of course, it could turn around – but there’s no sign of that yet.
SHANGHAI – WEEKLY
China is Australia’s largest biggest trading partner. What happens in China is important to Australia’s economy and stock market, particularly the Materials Sector.
Shanghai had a better week this week after a good PMI figure.
It is now back to horizontal resistance. With the MACD below its signal line and the chart below its 30WEMA, odds favour a fall. It may, of course, be in the process of forming a skewed inverse Head and Shoulders bottom. A break above horizontal resistance would be an important step towards realising that scenario.
OZ GOLD WEEKLY
I stopped showing the Oz Gold chart a few weeks ago because the strong inverse correlation between Oz Gold and the XJO was breaking down a little.
In the wider scheme of things, however, the relationship still holds, more or less. Oz Gold has been in a down trend since the XJO completed its waterfall in July/August 2011. Oz Gold may now be bottoming out, although it still has work to do to turn around the current trend. If that is happening, then the broad stock market may be topping.
This week Oz Gold retreated but remains in the triangle. A break upwards would be negative for the broad Oz stock market.
Gold in US$ tends to perform positively when American Bond Yields drop and the US$ drops. As a result of the NFP report on Friday, Bond Yields fell sharply and, naturally, US$ dropped. That may or may not produce a reversal of the current down trend in US$ Gold. But I would expect that to happen when the Gold markets reopen. Oz Gold gets a double whammy when the Oz currency drops against the US$ and the Gold price rises. We’ll have to wait and see how the Oz currency is faring. If, however, the Oz Dollar rises while the US$ gold price rises, the rise in the US$ gold price may be nullified for Australian investors.
For a pure buy’n’hold investor, some exposure to Oz Gold has much to commend it, particularly as a hedge against falls in the general market. Plus the long term performance has been positive. (Usual caveat – past performance is no guarantee of future performance.
Price earnings ratio is based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio), Shiller PE Ratio, or PE 10Price earnings ratio is based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio), Shiller PE Ratio, or PE 10
(Source: http://www.multpl.com/)
By historical standards, current P/Es are not cheap. They are in a range where reversals in the market do occur. They are not at historical highs, but are close to the top 10%. That’s something to keep in mind.
SUMMARY & CONCLUSION
I’ve made no secret of the fact in the last couple of weeks that I’ve had a bearish bias. Last week I said: “I think we’ll be lower in the next week or so.” I gave a wide range of reasons why I had that bias. Confirmation was needed by a drop by the Australian stock market and the American market below support. Some of the reasons I gave last week have not improved
* Germany is already in a down trend. * AUD/JPY (Yen) has now completed a Head’n’Shoulders top formation. * Shanghai has been in a strong down trend. Had a good week this week but is back to resistance. Probabilities are to the downside. * XMJ is in a down trend and weak relative to the Consumer Staples Index. * On Balance Volume (XAO) entered a steep down trend this week after showing a strong negative divergence from XAO since December 2011. * Small Ordinaries continued to weaken this week. * Best performing sectors in the Australian market were, once again this week, three Defensive Sectors.
Friday, when stock markets were closed, the American Jobs Report (Non-Farm Payrolls) came out and the result was below expectations. That could be a game changer. The bond market, which was open for a shortened session on Good Friday, rose sharply, I.e., yields dropped sharply. The U.S. stock market tends to trade inversely to Bonds, so that suggests the stock market will be down sharply when it re-opens on Monday. Stock futures were also down. It looks like the American market will break below significant support on Monday. The first such break since this rally began back in December, 2011. That looks like an end game for this rally. But … you never know. Let’s see how Monday goes. At this stage I’m confident it will be a poor result.
Buy’n’Hold investors might consider an investment in Oz Gold as a hedge against falls in the broad Australian market. Oz Gold may be bottoming out. It still has work to do to break the current down trend from July/Aug 2011, but if the broad Australian market does fall, as seems likely, then Oz Gold will likely spike upwards.
Finally, we’re approaching the one year anniversary of the top in the Australian market, 11 April, 2011. October is well known as the month for market crashes (think October, 1987 and October 1929). Less well remembered is the anniversary of the Dot.Com Bubble bursting which began on 5 April, 2000. The following week the SP500 fell 10.87% and the Nasdaq was worse. As Mark Twain wrote: “October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.” Sleep well this week.
I think we’ll be lower by the end of the coming week. (Always a bit of a guess. Anything can happen.)
Here’s a scenario: next week could be the start of something bigger. If we are down, however, the “Buy the Dip” Mob will probably come in and take the market up to test resistance around 4300/4310. That’s when the real fun will start. A fall back from 4300/4310 would be very bearish. A break back above 4310 and we could see a resumption of the bull rally. It’s just a scenario – we’ll see how it goes.
Remember: do your own research. Make your own decisions. I hope that the information I show might help you just a little.
For daily updates – check http://redbackmarketreport.wordpress.com/
WEEKLY STW
STW is the tracking stock for the ASX200.
This week the chart moved up to resistance at 41.38 and backed off. The stock finished at 40.80. That’s almost exactly in the middle of the body of the previous candle.
The ascending triangle pattern on the chart is a bullish pattern, tending to break to the upside. But if it breaks lower – watch out.
Take buy/sell signals from the XJO chart.
Dividend Yield: 4.3%. Next ex-dividend date will be late June. Dividends are paid half-yearly.
(STW is the Exchange Traded Fund which tracks the performance of the ASX200.)
(20min delay)