The market had the expected counter trend rally during the past week, coming off a deeply oversold market. Now the market faces its first big hurdle if it is to resume a bullish stance thats the 4500 level on the XAO. Which way? Hmmmm.
I am eternally entranced by the moves the market makes. It makes an excellent mistress always alluring, tantalising, concealing, revealing. She never throws temper tantrums. She just is. The last thing you can expect from her is kindness and generosity. Any favours won from her embrace are hard earned.
Enough eulogising back to business. Heres a chart of relevant movements in S&P Industry Sectors and Sub-Sectors for the past Five Days:
Three out of the four defensive sectors were down (Utilities, Health, Telecoms), while all other sectors were up. The general market represented by the XAO was up 3.5%. Thats a good performance but failed to eclipse the fall the previous week of -6.8%. The three best performers in the 10 Industry Sectors were: Materials (5.9%), Energy (+4.6%) and Financials (+4%). Those are the three most important sectors in the market. The worst performer was the Utilities (-2%). This was followed at the bottom of the table by Health (-0.9%) and Telecoms (-0.4%).
Among the sub-sectors: Property Trusts had a solid rise on the back of a good report from Westfield, +5.9%; Metals and Mining was up +6.4%; and Small Ordinaries, +3.1%. The 50-Leaders was up at +3.7%. Risk Aversion/Risk Appetite was weighted to the Risk Aversion side of the equation.
The Gold Mining Sector was up, +4.7%.
The overall result was solid but the switch out of defensives into cyclicals wasnt mirrored in Risk Taking behaviour, where Risk Aversion had the edge. So it looks like the switch from defensives to cyclicals was mainly dominated by a switch into the big-cap side of the market. Thats not a particularly bullish scenario.
LONG TERM TREND
Im sure youre all familiar now with my usual Long Term Trend Chart. Critical resistance at 4500 remains intact for now. The 13/150 SMAs remain bearish. The Chart is now testing the 4500 resistance from below.
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 TWO Long Term Trend.
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 then supported the bull market which appears to have finished in May 2010 with a cross below the 10-Month SMA.
o The Monthly MACD Histogram has turned down.
o The Monthly RSI has turned below its mid-line (50) this is bearish.
o The Monthly Slow Stochastic has crossed below its signal line after a very significant negative divergence from the Index Chart.
o The last three monthly candles (large white candle, an evening star, and a large black candle) show a reversal pattern which has proved reasonably reliable in the past.
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. The market doesnt read the technical analysis being put forward. But the probabilities lie with the downside.
What is important is the psychology of the market which 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.
The usual market movement now is for a back test of the resistance level at 4500. If the move up is successfully rejected, and the market falls again, then the change in the market from bull to bear will be confirmed. If the market breaks decisively above 4500 then the call is negated, for the time being. Given that June and July tend to be stronger seasonal months than May, that is quite possible.
So 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.
MEDIUM TERM INDICATORS
Chart Three Weekly XAO.
Comments on the Weekly XAO Chart (see below):
o The Weekly RSI.2 has risen back 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. o The MACD has crossed below the Zero line a bearish development. o The StochasticRSI.30 has once again crept above 0.2 suggesting a trend change could be occurring. A rise above 0.5 is needed to confirm. o The Index Chart is now in a down-sloping channel. A break above immediate horizontal resistance and the top of the channel would be medium term bullish with the next resistance level at about 4680.
The Weekly Chart is giving a mixed picture, indicative of a counter-trend rally. The combination of two resistance levels (horizontal and the top of the channel) will prove difficult to overcome. Given that the medium-term trend is down, probabilities lie with the down-side, but the picture is somewhat muddier than the long-term Monthly Chart.
SHORT TERM INDICATORS
Chart Four 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.
The Point and Figure 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 Five XAO Daily Candle Stick Chart
The Daily XAO Chart confirms the picture in the Weekly 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. However, The StochasticRSI.30 still hasnt broken above 0.5, establishing a new uptrend. But the RSI.2, using a much shorter timeframe, indicates that the XAO is in a steep uptrend. It needs confirmation from the StochasticRSI.30 to 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 CCi has broken below 100 which is a sell signal.
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 Six Australian Dollar Weekly Renko Chart
SECTOR ANALYSIS
Last week the Sector Analysis showed a profile which equated to a strong bear market. This week with the counter trend rally, the situation has changed. The defensives have generally weakened, but all sectors are negative; i.e., relative to 50-Days ago, they are all below the par level of 100. The Defensive Sectors, however, do not dominate the top of the rankings. Again, this is a muddy picture due to the counter trend rally. The fact, however, that all sectors are negative is a bearish trend indicator. Last weeks ranking is shown in brackets.
Negative: o XTJ (Telecoms): -5.5% (1) o XEJ (Energy): -5.5% (7) o XDJ (Consumer Discretionary): -5.9% (6) o XSJ (Consumer Staples): -6% (3) o XMJ (Materials): -6.5% (9) o XUJ (Utilities): -7% (2) o XFJ (Financials): -7.1% (8) o XIJ (Information Technology): -9.6% (7) o XHJ (Health): -10% (4) o XNJ (Industrials): -12.2% (10)
Despite the market rallying, more stocks in the 50-Leaders recorded new lows than new highs on every day this week. This is not a good sign for the strength of the market.
The number of stocks above the 10-Day SMA has reached up into the mid-range (30-70%) and is still comfortably away from reaching an oversold reading. The other readings are still oversold (below 20%).
Again, these are the types of readings expected in a counter-trend rally. We just have to wait to see how the market reacts in the next few days. With the oversold readings on the 50DSMA and 150DSMA, it wouldnt surprise to see more upside. The continuing imbalance of new lows over new highs, however, must be of concern to the bull camp.
ADVANCERS AND DECLINERS.
Chart Seven Advancers and Decliners
The Advance/Decline Line has not confirmed the bearish break below critical support by the XAO. Otherwise, it is presenting a similar picture to the XAO chart.
The A/D Line has now formed a double bottom but is confronted by overhead resistance: horizontally and from the 13-Day SMA.
INTERNATIONAL
Charts Eight-Ten: America, Hong Kong, Industrial Metals
Last week I showed five international charts. This week Im presenting three. Last week none of the charts confirmed the bearish break in the Australian market, surprising given the generally agreed strength of the Australian economy. The weakness in the Australian stock market was attributed to the proposed Resources Tax of the Australian Government.
The stock market is a marvellous discounting machine. This week, despite aggressive posturing by the Prime Minister and the Treasurer in the defending the Tax, it now seems assured that some adjustments will be made to it. Thats been reflected in the Australian stock market which has reacted positively this week in line with overseas markets. Those markets are also now facing severe overhead resistance in their moves upward.
This week the Hong Kong market broke below the February 2010 low in a bearish thrust, but recovered in spectacular fashion on Friday. It now faces horizontal resistance and is sitting at the 13-Day SMA.
The SPX (America) is showing troubling signs. A big rise of around 3% occurred on Thursday, but on anaemic volume. The RSI.2 is close to breaking below the 50 level and the StochasticRSI.30 broke back into steep downtrend area on Friday. The 13/150DSMAs have broken negatively. Much has been made of the Tuesday break below the SPX February low, but it was an intra-day break and not significant. The SPX still has to close lower than any closing price back in February. Thats a positive.
The Industrial Metals Index is in a bullish up-sloping triangle, but is now clearly below the 200-Day Moving Average often used by analysts and fund managers as the demarcation between bull and bear markets. Unless this Index can recover the 200-Day SMA quickly, more selling will probably take place.
SUMMARY AND CONCLUSION This week the Australian market, along with other overseas markets, staged a counter-trend rally. Significant overhead resistance is still to be broken (both horizontally and diagonally).
The bull/bear demarcation breakdown in the Australian market hasnt been confirmed by some major international markets nor by the Advance/Decline Line.
Those other markets, like the Australian market, now face significant overhead resistance.
Whats my hunch? June and July are seasonally favourable, even in the 0 year of the decade. So, I think well travel up a bit, but stodgily. Suck in all those bulls who think blue skies never end and then crunch. Probably around the 4680 level on the XAO. I doubt the market will break above the 150-Day SMA, just test it, and then reverse down. But thats just a hunch or a scenario. Lets see how it plays out.
In the meantime, the market must rise above significant resistance for this counter-trend rally to continue. If it cant then a severe downturn is the most likely case.
America has a national holiday, Memorial Day, similar in significance to Australias Anzac Day, on Monday. While America contemplates the significance of its war dead, the rest of the world continues its daily business. Given the power of the American stock market, we can expect world stock markets to take a holiday on Monday/Tuesday by trading sideways. After that we may see some definitive action, up or down.
For the lunatics, I walked out of my home last night at 6.30 p.m. and saw a wonderful golden orb rising above the horizon. A full moon. Often celebrated with irrational behaviour and overloaded emergency departments in hospitals. Perhaps a casualty awaits the stock market early next week. We shall see.
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)