Comment: Fifth day in a row up. Just looking at the chart, one doesn’t have to be Einstein to see that momentum is slowing. Volume was low (although higher than yesterday, but yesterday was low-volume Monday) and 85.8% of the 10-Day Volume. That doesn’t look to be an accident due to exogenous factors – buying conviction appears low. Breadth, however, was good. Small Ords up +1.3% when the market was up +0.6%. Yesterday the market was up +0.9%, while the Small Ords was up +1%. While the main index (XJO) is getting the wobbles, rarely does a wholesale slaughter ensue unless confidence evaporates from the Small Ords. But – that might happen tomorrow. You never, never know. :)
INDICATORS: RSI.9: 66.6. Above 50. Positive. Devil’s Number. :) On a more serious note, that’s about as high as the RSI has risen in the past 100 Days before a pull back ensues. MACD (zero-lag) Histogram. Above Zero. Positive. MACD (zero-lag). Above Zero. Positive. Stochastic: 95.3. Overbought and getting a nose-bleed. 8-DSMA just below the 34-DSMA. Neutral. Directional Movement Histogram – Above zero. Positive. CCI.14: +178.3. Overbought and stalling The chart is above both the 8-Day and 34-Day MA. Positive. And above the 50-DMA. All good.
The XJO closed at 4227.6. That’s now taken it marginally above the next line of resistance which was around 4200.
The move up for five days has been strong, the past two days have shown a few wobbles, particularly with low volume – and indicators are becoming overbought. CCI.14 and Stochastic are looking particularly stretched to the upside.
The Z-Score for the XJO is about 1.6. The Z-Score is a statistical measure of how far the index is away from the mean. Since March, the Z-Score has only reached this level twice before now – and each time it took a dive. The two previous times were early April (that started this bear market) and late July (which started the waterfall into early August).
Now – that doesn’t mean that the Four Horsemen of the Apocalypse are about to descend on the market.
The Z-Score in a bull market frequently gets above a reading of 2 and since the end of the GFC it has been as high as 2.8.
Lowish Z-Scores (and lowish RSIs) are typical of bear markets. Highish Z-Scores are typical of bull markets.
So we come back to my thesis. I’m expecting a pull-back. The extent and duration of the pullback will determine whether the bear is back, or the bulls are ascendant. The next week or so look to me to be critical in deciding the outcome.
Which way do I think? Well – here’s some evidence.
1. The Advance/Decline Line is at a 2011 high. HUH? Yep. That’s a highly bullish positive divergence.
2. In my most recent weekly report, I showed the clear switching of big money out of defensives and into risk assets. That’s what we see at major turning points in the market.
I think the probabilities are now on the side of the bulls. Of course, I could be wrong. At this stage my view is speculation – the market might decide otherwise. Watch what happens to the market the next few days.
For the long term, 4300 needs to be overcome and a positive 8/34MA x-over are needed.
(20min delay)