The market was flat this week with volume well below average. The weekly candle was a doji, signifying indecision. Last week I said: Now the market faces its first big hurdle if it is to resume a bullish stance thats the 4500 level on the XAO. On Thursday, the XAO closed at 4506.2 and then fell back a little on Friday. Given the events overnight in America with the Dow down -3.15% and the SP500 down -3.44% after a disappointing Jobs report, it seems inevitable that our market will have a big down day.
Our market is playing out in textbook fashion. Critical resistance (4500) was broken decisively to the downside on 19 May. Weve now had a test of the 4500 level which has failed. Expect more falls ahead. Of course, the market doesnt read the textbook the market can do whatever it likes. But the probabilities lie with more down side. June is also historically, the second worst performing month of the year. So seasonality doesnt hold a lot of hope for the bulls.
Heres a chart of relevant movements in S&P Industry Sectors and Sub-Sectors for the past Five Days:
All four defensive sectors were up (Utilities, Health, Telecoms, Consumer Staples), while major cyclical sectors (with the exception of Energy) were down. Again this is typical of bear market activity despite the fact that the market was flat. Major institutions seem to have shifted this week out of cyclicals and into defensives. Makes you wonder huh? Obama comes out early in the week and says: Expect a strong jobs number, and it was. Unemployment was down from 9.9% to 9.7%. But the fall was largely due to the people employed as census workers (a temporary effect) and others dropping out of the employment market. Did he know something and was trying to jaw-bone the market higher? But maybe the big American institutions and their Aussie mates knew a bit about the detail of the report. Who knows? Lets forget about all that speculation and watch the market.
The general market represented by the XAO was down just 0.15%. The three best performers in the 10 Industry Sectors were: Telecom (+4.7%), Health (+3.9%), and Information Technology (+3%). (In the Australian market, the IT Sector often acts in line with the traditional defensive stocks.) The worst performers were Materials (-1.5%), Industrials (-4%), and Financials (-0.79%).
Among the sub-sectors: Property Trusts continued to perform well, +1.5%; Metals and Mining was down -1.8%; and Small Ordinaries, -0.4%. The 50-Leaders was down -0.2%. Comparing those last two figures, Risk Aversion/Risk Appetite was relatively even.
The Gold Mining Sector was up, +0.8%. LONG TERM TREND Critical resistance at 4500 remains intact for now. The 13/150 SMAs remain bearish. The Chart has now tested the 4500 resistance from below and that test has resulted in a fall-back. Expect further falls.
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 Williams %R.
Chart Three XAO Monthly.
Consider the following:
o The 10-Month SMA had effectively supported the bull market that ended in 2007, formed resistance for the bear market that ended in 09, and supported the bull market which appears to have finished in May 2010 with the XAO crossing below the 10-Month SMA.
o The Monthly MACD Histogram has turned down bearish.
o The Monthly RSI is below its mid-line (50) bearish.
o The Monthly Williams %R is below its signal line 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 30 indicating the possibility of a trend change upwards. A rise above 50 is needed to confirm. o The MACD Histogram is still headed down. It is in a downward channel. A bounce here could be on the cards. A break below the bottom of the channel would be very bearish. o The MACD (not shown on this chart) has crossed below the Zero line a bearish development. o The StochasticRSI.30 is below 0.2 indicating that, medium-term, the market is still in a down trend.
The possibility of a bounce on the MACD Histogram and the RSI.2 alert give the bulls some hope. But the thought of a bounce here seems speculative at best. Other Indicators are still bearish. Probabilities lie with the downside.
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.
Since last week the row of Xs has moved up one box. The P&F Chart currently displays a Low Pole Reversal. This is a warning that the previous supply is being absorbed and a trend change may be occurring. Its an alert not a signal to switch from bearish to bullish. The Bearish Price Objective remains at 3700.
Chart Six XAO Daily Candle Stick Chart
The positive divergences on the daily indicators are very similar to those which occurred at the time of the early February reversal from bearish correction to bullish rally. The StochasticRSI.30 this week broke above 0.8 signifying a steep uptrend is in place. But the RSI.2, using a much shorter timeframe, indicates that the XAO may be in for a trend change. A break below 0.5 by the StochasticRSI.30 would confirm.
THE OZZIE DOLLAR
Below is a Weekly Renko Chart of the Ozzie Dollar. Renko Charts have the advantage of cutting out noise and concentrating data. The Ozzie has clearly broken below its long-term uptrend. The RSI.2 is below 30, indicating a steep downtrend. The StochasticRSI.30 is below the mid-line indicating a downtrend. The MACD Histogram has turned down. Nuff said.
I wouldnt use this as a trading mechanism for currencies, but as an adjunct to understanding fundamental forces acting on the Australian stock market, it is an invaluable aid. At this stage, the Ozzie Dollar Renko Chart supports the notion of a bear market. So, the trend is down, until proven otherwise.
Chart Seven Australian Dollar Weekly Renko Chart
SECTOR ANALYSIS
Once again this week the Sector Analysis shows a profile which equates to a strong bear market. Defensives hold the top four rankings. All sectors are negative. Although the market was flat this week, major change occurred in the profile indicating smart money was moving out of cyclicals and into defensives.
The previous weeks ranking is shown in brackets. I wonder what the future fund is now thinking about their decision to sell a proportion of their Telstra shares because they was under-performing. Telecoms (largely Telstra) have been performing consistently well on a relative basis in recent weeks. Industrials have now taken on the mantle of perennial flea-bag.
Negative: o XTJ (Telecoms): -1.3% (=1) o XSJ (Consumer Staples): -5.2% (4) o XUJ (Utilities): -5.8% (6) o XHJ (Health): -6.5% (9) o XEJ (Energy): -7.3% (=1) o XDJ (Consumer Discretionary): -7.4% (3) o XFJ (Financials): -9.8% (7) o XMJ (Materials): -10.1% (5) o XIJ (Information Technology): -13.4% (8) o XNJ (Industrials): -14.2% (10)
50 LEADERS
Last weeks reading as of Friday 28/5/10. No. Stocks above 10-Day SMA: 29 (58%) No. Stocks above 50-Day SMA: 4 (8%). No. Stocks above 150-Day SMA: 5 (10%).
The % of the 50 Leaders above the 10-Day SMA hit a high of 84% on Thursday. 80% represents the over-bought level. It then fell back below that level on Friday indicating that a retracement could be starting.
The number of stocks below the 50-Day SMA is still registering a deeply oversold reading a reading below the 20% level has occurred ever since I came back from Turkey a month ago. Oversold can remain oversold for long periods of time during a bear market but perhaps this period has stretched the pessimism just a little too long? Or is this the new normal?
Advancers and Decliners
Chart Eight Advancers and Decliners
The Advance/Decline Line has not confirmed the bearish break below critical support by the XAO. The line has now stalled at horizontal resistance but is above the 13-DSMA.
Chart Nine Advance/Decline Line RSI
The A/D Line RSI, after being deeply oversold in early May has struggled to regain the 50 area. This contrasts with the situation in early February when it was also deeply oversold. At that time the RSI formed a small double bottom then surged quickly back above 50.
The RSI may also be forming a negative divergence from the A/D Line which would suggest further falls ahead but it may be too early to form that conclusion.
INTERNATIONAL
Charts Ten-Twelve: America, Hong Kong, Industrial Metals
The American chart (S&P500) is not as bearish as the Australian XAO (despite the big drop on Friday). The closing low back in early February still hasnt been broken to the down side. The MACD Histogram shows a positive divergence from the Index.
Although relatively flat this week, the Hang Seng is also looking more optimistic than the XAO. After breaking below the February low for three days, the Hang Seng rose back above that bench-mark. This week, it tested the former resistance level as support and bounced higher. Both the RSI.2 and StochasticRSI.30 are suggesting a new up trend. A break above the previous Fridays high is needed to consolidate this new uptrend.
On Thursday and Friday (American time), the Industrial Metals (dominated by copper) took a big hit and broke below the February low. The RSI.2 and StochasticRSI.30 both indicate a strong downtrend is in place. The MACD Histogram is showing a positive divergence from the chart so there is some grounds for thinking that a rebound may occur and a rise above the February low may be possible. But, until it happens, it is mere speculation.
Given the big fall in the Metals on Thursday, Im surprised our market didnt take a bigger hit on Friday.
SUMMARY AND CONCLUSION
This week the Australian market was flat, but internals suggest a more bearish outlook. The long-term outlook is, in my opinion, bleak. After the American fall on Friday night, our Monday looks very bleak.
We may now be looking at a test of the 4300 area as support. The market has a range of about 200 points within which it can move without changing sentiment. Up above 4500. Down below 4300.
The bull/bear demarcation breakdown in the Australian market hasnt been confirmed by some major international markets nor by the Advance/Decline Line. That still gives the bulls some hope.
Until the XAO can regain the 150-Day SMA and technical indicators are favourable, Ill keep my money in my pocket. Short-term traders will have great fun (and profit) trading the counter-trend moves.
(20min delay)