The market was relatively flat this week although it did sneak over the 4500 benchmark on Friday and eked out a gain of 0.99%. The XAO finished at 4517 on Friday after hitting 4506 on Thursday 3 June. That, to me, is not a convincing break. Volume was below the 50-Day average every day this week. And thats not what you want to see on a breakout. We now have a long weekend for the market to digest the weeks proceedings and decide whether to go up or down.
Heres a chart of relevant movements in S&P Industry Sectors and Sub-Sectors for the past Five Days:
The two best performing sectors were both defensives (Telecoms and Utilities), but the major cyclical sectors (Energy, Materials and Financials) all performed solidly. So the best two were defensives that, for me, rings warning bells.
But, to me, the most important story in the above data lies in the sub-sectors. Small Ordinaries were down on the week (-0.47%) while the 50 Leaders were up on the week (+1.58%). A difference of around two percent. Last week I mentioned that there seemed to be a shift out of risky assets and into the safe haven of the large caps. That shift continued this week.
Gold miners, once again, had a bonanza week another sign that all is not well with this market.
At the moment the internal strength of the market, as shown by the above weeks sector performance, is not supportive of a return to a bull market. But the market can turn on sixpence (showing my age there), and sentiment can change very quickly.
LONG TERM TREND
Critical resistance at 4500 is under threat with a small break above that area on Friday. The 13/150DSMAs remain bearish. Until the 13DSMA crosses back above the 150DSMA Ill maintain a bearish stance. That may mean giving up part of a solid rise. So be it.
Chart TWO Long Term Trend
Lets look at another view of the Long Term Trend Using a Monthly Chart of the XAO with a 10-Month SMA, and three indicators: Monthly MACD, Monthly RSI and Monthly Slow Stochastic.
Chart Three XAO Monthly.
Consider the following:
o The 10-Month SMA effectively supported the bull market that ended in 2007, formed resistance for the bear market that ended in 09, and supported the most recent bull market which appears to have finished in May 2010 when the XAO crossed below the 10-Month SMA. (Long-term investors could well use this for investment purposes, simply putting money into and out of STW, the tracking stock for the XJO, on the basis of these signals. Simple, clear and cost effective.)
o The Monthly MACD Histogram has turned down bearish.
o The Monthly RSI is below its mid-line (50) bearish.
o The Monthly Slow Stochastic is below its signal line and below 50 bearish.
Together, these signals make a powerful case that the bull market from March, 2009 has ended. Of course, the market may decide to do something else. But the probabilities lie with the downside. We shall see. The market is always dynamic and one shouldnt be locked into a particular position, but be willing to change with the market. If whipsaws occur so be it. Thats part and parcel of investing/trading.
What is important is the psychology of the market seems to have changed. Personally, now, rather than looking to buying dips Ill be looking to sell into rallies. Ill be systematically reducing long term holdings. MEDIUM TERM INDICATORS Chart Four Weekly XAO. Comments on the Weekly XAO Chart (see below):
o The Weekly RSI.2 has risen above 50 indicating that the short-term trend has changed to the upside. o The MACD Histogram is turned up confirming the RSI.2 signal. The Histogram is in a downward channel. While it remains in that channel, any rally should be considered a medium term counter-trend rally o The MACD (not shown on this chart) remains below the Zero line bearish. o The StochasticRSI.30 is above 0.2 warning that a trend change could be occurring. A move above the mid-line, while the RSI.2 remains above its mid-line, is needed to confirm a trend change.
SHORT TERM INDICATORS
Chart Five XAO, Point and Figure Chart.
Below is a Point and Figure Chart of the XAO. Point and Figure Charts have a long history and are notable for focussing on price action and de-emphasising time as a feature.
Unlike our usual charts which are a bit fuzzy about whether or not over-head resistance (the 4500 area) has been broken to the upside, this chart is clear. The XAO is at resistance signified by the row of three Os. Overhead resistance has not yet been broken.
Chart Six XAO Daily Candle Stick Chart
The possibility of the new short-term uptrend in the XAO was signalled back in May by the positive divergences on several momentum indicators. Those were similar to the divergences on the charts back in early February which led to the good rally up into mid-April.
Is it different this time? Perhaps. What makes the difference is the 200-DSMA. The XAO was well above that key benchmark back in February; in early May it was below. So although we had similar positive divergences, the first occurred while the market was still technically in a bullish phase. This time the divergence occurs while the market is technically in a bearish phase. Quite a different context.
The DMI+ is still below the DMI-. While the ADX has moved down, signalling a weakening of the trend, it is still a strond 41.9. So these indicators are still not signalling a switch from bear to bull. Under those circumstances we can ignore the switch in the PSAR from down to up as signalling a counter-trend rally.
Looking at other evidence, the StochasticRSI.30 is now above 0.8 signalling a strong up-trend.
The on-field referee is now asking the video referee for a decision. It flashes up on the scoreboard: No Try, benefit of the doubt to the Bears.
THE OZZIE DOLLAR
The previous couple of weeks in the report Ive shown a Renko chart for the Ozzie. This week Ive reverted to the normal candlestick chart. This shows the AUD is in a trading range approx. 81-85. A decisive break one-way or the other is needed for direction.
Although the chart has broken above the diagonal down trend line, it still needs to break above the horizontal resistance line.
The DMI+ is still below the DMI- (bearish) although the trend is weakening (ADX headed down).
StochasticRSI.30 is above its mid-line indicating an uptrend. This is in opposition to the DMI indicators which still havent crossed over positively.
So until the Ozzie breaks decisively upwards, caution is called for.
Chart Seven Australian Dollar Daily Chart
SECTOR ANALYSIS
This week the Sector Analysis show little change. Defensives hold the top three rankings, while last week they held the top four rankings. All sectors except Telecoms are negative.
The previous weeks ranking is shown in brackets.
Positive: o XTJ (Telecoms): +4.3% (1) Negative: o XSJ (Consumer Staples): -3.5% (2) o XUJ (Utilities): -4.5% (3) o XEJ (Energy): -5.9% (5) o XHJ (Health): -7.7% (4) o XDJ (Consumer Discretionary): -8% (6) o XFJ (Financials): -9.1% (7) o XMJ (Materials): -9.8% (8) o XIJ (Information Technology): -10.4% (9) o XNJ (Industrials): -15.1% (10) 50 LEADERS
Last weeks reading as of Friday 4/6/10. No. Stocks above 10-Day SMA: 37 (74%) No. Stocks above 50-Day SMA: 7 (14%). No. Stocks above 150-Day SMA: 11 (22%).
The % of the 50 Leaders above the 10-Day SMA hit 80% on Thursday. 80% represents the over-bought level. The other two indicators are in no-mans land but headed in the right direction - upwards. The three graph lines are all in the right order blue, red, yellow.
Chart Eight 50-Leaders
Advancers and Decliners
Chart Nine Advancers and Decliners
The Advance/Decline Line did not confirm the bearish break below critical support by the XAO. The chart is now forming a bullish ascending triangle which is a fairly reliable indicator. But, (the old story), until it actually breaks higher, patience is required.
INTERNATIONAL
Charts Ten-Twelve: America, Hong Kong, Industrial Metals
The American chart (S&P500), in relation to two key MAs, is exhibiting bearish behaviour. After the top in late April, it fell heavily and then rallied. That rally was halted by the 50DSMA. The market again fell heavily. The counter trend rally was halted by the 200DSMA.
The chart may now be exhibiting a rare phenomenon described by Constance Brown as a negative reversal (Technical Analysis for the Trading Professional). A negative reversal occurs when the RSI.14 makes a new high but the stock or index makes a lower high. The new lower high hasnt yet been confirmed by the index moving lower but it is an alert.
The StochRSI.30 is indicating that a trend reversal may be occurring. A move above the mid-line is needed to confirm.
The index has now reached gap resistance (blue rectangle). The black candle at that point looks ominous. The HSI might struggle to get through that barrier.
On Thursday and Friday 3/4 June, the Industrial Metals (dominated by copper) took a big hit and broke below the February low. Since then, the Industrial Metals chart shows five white candles. Despite that positive showing, the Index has only just reached the high of Friday, 4 June. It is now at overhead horizontal resistance. Five days to recoup one days loss? This looks to me like the bears are still well in control.
StochasticRSI.30 indicates a trend change could be in the offing but, until that overhead resistance is broken, I think Industrial Metals will continue to struggle. .
In May and early June, the MACD Histogram showed a positive divergence from the chart so the rally this week was not unexpected. It was, however, a poor effort. Five days up to regain one day down doesnt suggest much strength.
SUMMARY AND CONCLUSION Lets try to summarise all of the above and get some perspective on how the market is travelling.
XAO Charts Long Term: 13/150 MAs crossed negatively. Indicators on Monthly chart negative. Medium Term: Mixed signals neutral Short Term: Mixed signals neutral Volume this week below average every day negative.
Ozzie Dollar (Daily): In a wide trading range at the lows of a downtrend.
Sector Analysis: Profile Dominated by Defensive Sectors bearish Small-Ordinaries/50-Leaders Ratio Risk Averse bearish
50-Leaders: Stocks above the 10-DaySMA: 80%. Overbought Stocks above 50DSMA and 150Day SMA Neutral
A/D Line: Still above the February Low Positive Right-angled Triangle possibly bullish In a trading range at the lows of a downtrend
International SPX Short-term uptrend. Overall negative. Hang Seng Short-term uptrend. Overall - negative Industrial Metals. Short term up trend. Overall negative.
Seasonality: June is the second worst month of the year. (The first week is usually positive)
All of the above describes what is, not what might be. The overall picture is, however, bearish. Until the trends turn decisively upwards, we must presume that the current trend remains in place which is bearish.
That doesnt mean the market cant turn up, too many charts are hitting up against resistance to discount that possibility. If overhead resistance is broken, that only means a continuation of this counter-trend rally in the short to medium term. Long term, the picture is still bearish, until proven otherwise.
(20min delay)