The complexion of the Australian market changed in the past...

The complexion of the Australian market changed in the past week. We had a strong bull market where even monkeys picking stocks were making money, now we have a market where everything (almost) has gone to hell in a hand-basket.

Trading was complicated this week by a short week, only three days of trading. Does that count as a week, or only three days. The calendar says it is a week, and charts show that. 

The other complication was low volume - an artefact of the holiday season where lots of traders are away from their desks, and the cleaners try their luck on the traders' computers. Volume is often a good guide to how the "big boys" are pitching in the market, which they control. With low volumes - that metric goes out the window - not much use at all.

Is this the start of a new bear market, or the pull-back we had to have? Well, as usual, it depends. Let's have a look at a few charts and review the context and the future - as far as crystal balls will allow.

STW Daily Chart. (STW - ETF for XJO)

Candle Volume Charts are useful as they allow us to visualize changes in price and volume in the one candle. The wider the candle - the more volume on that day. Narrow candles indicate low volumes - and the candles tend to bunch together. That's what happened this week. Typical of the first week of the year. 

Other indicators are less affected by reduced volumes.

How is the trend?

The trend became bullish early in November, 2023 - indicated on the above graph by the three Supertrend lines turning yellow from blue (bullish from bearish). The trend turned to consolidation in late November to early December when the three Supertrend lines returned mixed colours (mixed blue and yellow). In early December they returned to all yellow - bullish.

That changed on Thursday this week when the Supertrend lines were all blue - bearish. So the trend is now down. (Stay with the trend.)

That is supported by most indicators. RSI has broken below its 34 Day MA for the first time since early November. DZ Stochastic is below its lower band, and MACD Histogram has broken below zero.

B%B is in a neutral position at about 50. That's the only indicator not on a sell signal. But it is trending down.

've discounted the Force Index because of the poor quality of the volume data.

Point of Control on the Daily Chart has now been broken to the downside. POC is the level at which the most volume has occurred over the past 50 trading days on this chart. The fact that it has broken to the downside on very low volume may just be an artefact of the holiday season.

If the chart drops further as volume returns to normal in the coming week, the STW will face the prospect of a volume void, i.e., a zone where there virtually no trades occurred. A volume void on a down trending market can often result in an accelerating down-side move. That could easily happen in the coming week.

STW Weekly Chart.

The Weekly Chart remains bullish with three yellow Supertrend lines.

Comparing the Daily Chart with the Weekly Chart, we can say that the current move is a pull-back in an ongoing bull-maket.

ComparingCyclical with Defensive Sector.

Morningstar divides the stock market sectors into three: Cyclical, Sensitive and Defensive.

1. Sectors in the Cyclical group: Materials (XMJ), Discretionary (XDJ), Financial (XXJ), Real Estate (XPJ).

2. Sectors in the Sensitive Group: Communications (XTJ), Energy (XEJ), Industrials (XNJ), Technology (XIJ).

3. Sectors in the Defensive Group: Staples (XSJ), Health (XHJ), Utilities (XUJ).

This is playing out much as expected during a pull-back. 

Cyclical group has three out or four Sectors in negative territory with an average improvement of -0.13

Sensitive group has two out of four Sectors in negative territory with an average improvement of 0.01, i.e., flat.

Defensive group has no Sectors in negative territory, all three are positive with an average improvement of 0.14.

(MFI, Mansfield Relative Strength, compares the movement of a stock or index with another instrument, e.g., the XJO. This allows for easy comparison across instruments. RSI, Relative Strength Index, indicates the momentum of an instrument and shows the momentum within a specified time period. MFI compares the stock/index against the XJO. RSI compares the stock/index against itself x time periods ago. Comparing RSI's is not necessarily a valid measurement.)

Is it a Pull-back or a Reversal?

A pull-back is a normal part of a bull market. The market tends to get a bit ahead of itself, becomes overbought according to standard indicators (e.g., RSI and Stochastic).

A reversal is a change in the direction of the trend, from a bull market to a bear market.

In the beginning of a reversal, the movement will look like a pull-back.

How can we tell the difference?

A reversal is usually caused by a fundamental change in market conditions, i.e., severe economic problems. Such changes as an increase in interest rates e.g., Federal Reserve raised interest rates; or a currency crisis, e.g., 1998 Thailand unpegged the Thai baht from the U.S. Dollar causing the Asian financial crisis; a debt default by a large economy, e.g., 1998 Russia defaulted on its debts. (A double whammy for markets, a currency crisis and a debt default.)

Is there a change in the past week in the fundamentals affecting the market or severe economic conditions? There's no clear sign of anything happening. There are worries, e.g., the worry that the Israel/Hamas War will widen into a much bigger Middle Eastern conflagration, but that appears to be a concern without, as yet, any basis in fact.

In fact, fundamentals appear to be improving with inflation falling and interest rates pulling back - those conditions should be conducive to further stock market gains.

On that basis - I think we can conclude that the current pull-back is a result of overbought conditions in the market. After a settling back and reversion to the mean - we should see more upside - barring black swans.

Good luck

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