The Weekly Slow Stochastic (5,5) shows a reading now at 61.01. Below its signal line (68.46), heading down. Bearish.
WEEKLY MARKET SUMMARY This week the XAO was down marginally, -0.4%. The week was held in a relatively narrow range. That sometimes happens when the boyos have got the indices where they want them the week prior to options expiry. Or, perhaps, it has something to do with a minor event occurring in Australia on Saturday 21/8/2010. Or maybe it had nothing at all to do with that at all. Volume continued its upward rise and the 13-Day SMA is now well above the 50-Day Average. Options expiry week usually has increased volume, and that happened this week compared to recent weeks. Volume was, however, lighter than most recent opex weeks.
As one would expect on a relatively flat week, movements up and down amongst the ten S&P Industry Sectors were mixed. Health and Materials were the hardest hit, both down around -3%. The best industry sector was Consumer Staples (+2/4%), with Wesfarmers continuing its surge and Woolworths coming off a recent low. Thats the second week in a row that Consumer Staples has been the best performer.
Small Ordinaries were up marginally, +0.2%%, while the 50-Leaders were down, -0.7%. Despite the slow week, some appetite for risk remained. Thats a healthy sign for the market. Gold miners were up +2.9%. Were now into the most seasonally favourable period of the year for Gold. (September is seasonally the best month.) So further upside in the miners can be expected.
The XAO finished at 4462. It has now been oscillating around the 4500 level for four months. Somethings gonna break in a big way soon. Up or Down? The market will let us know. The Weekly Slow Stochastic (see above) is suggesting the next big move will be down.
LONG TERM TREND
Until the 13DSMA crosses back above the 150DSMA Ill maintain a long-term bearish stance. That may mean giving up part of a solid rise. So be it.
Chart Two XAO Monthly
The Monthly chart continues to consolidate below the 10-Month Moving Average. The MACD remains below the zero line. The RSI and Slow Stochastic remain in bearish territory. The long-term trend remains bearish; but could easily kick into bullish territory.
MEDIUM TERM INDICATORS
Chart Three Weekly XAO.
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The Weekly XAO is in a trading range, in very round numbers, 4200-4650. A weekly close outside that range should determine future direction.
o The Weekly RSI.4 is below the mid line (just), indicating a downtrend. o The MACD Histogram continues to rise and is close to the zero low. A weekly close above zero would be positive for the market. o The StochasticRSI.30 is above 0.2 but turned down below the 0.5 line, confirming the downtrend indicated by the RSI.4. o The XAO has been oscillating around the 4500 area for many weeks. o The 13/65-Week SMAs are in confluence mode and flatlining. This can go either way. o The Weekly Slow Stochastic (see comments at the beginning of the report) is bearish.
For some weeks now, Ive been saying this market is in the balance based on the weekly chart. That remains the case.
SHORT TERM INDICATORS
Chart Four XAO, Daily Candle Stick Chart
This chart with Fridays big move down is looking increasingly bearish. On Wednesday the XAO made a back test of the 38.2 Fibonacci level (April-May fall) and that level coincided with the 65-Day Moving Average. Thats confirmation of the importance of that level.
The XAO this week was bracketed by the 13/65 Day Moving Averages. A move either way from those should decided near term direction. Thats a much tighter range than on the weekly chart. A break below 4400 will probably see a test of the May low.
The RSI.4 and StochasticRSI.30 both confirm a short-term down trend. Plenty of room lies below. The odds lie to the downside.
The Federal election may be the tipping point. Strategists have been suggesting a win for the coalition would be positive for mining stocks. MarketWatch quotes a senior advisor at Bell Potter Securities as saying: If Tony Abbott gets in, there will be no mining tax at all, so the whole mining sector will get a kick out of that. Given that the mining sector was largely responsible for weakness in the XAO this week, a further decline in that sector following a Gillard win will almost certainly take the whole market with it. In the longer term, global conditions will determine direction. But the election result will be another straw either added to or taken away from the camels back.
(The above paragraph was written on Saturday. It is now Sunday morning and we have the spectre of a hung parliament. The stock market does not like uncertainty. Id expect the current state of the market to have a bias to the negative side.)
THE OZZIE DOLLAR
The Ozzie on Friday night opened below the neckline of a Head and Shoulders top, but managed to claw back above that to marginally finish above the critical horizontal support.
RSI.4 indicates a short-term down trend is in place. StochRSI.30 is below 0.2 confirming the down-trend. The election may have a bearing on the Ozzie dollar.
Australias dollar may extend its world-beating gains this quarter if voters go for Abbott, David Forrester, a currency economist in Singapore at Barclays Capital, said Aug. 19. (Bloomberg).
So whatever happens, watch the reaction to the election news on Mondays market. (Forget what the strategists say, theyre often wrong.) The reaction on Monday, no matter who wins, will probably be decisive for near term direction.
Chart Five Australian Dollar Daily Candle Stick Chart
SECTOR ANALYSIS
This week the Sector Analysis showed some change. Defensives now only hold one of the top four places; but it is the top place. The profile is now somewhat more weighted to cyclicals than defensives.
Isnt it amazing when you dig down and do some research? Although the market was down marginally on the week, the %age of 50-Leaders above key Moving Averages has improved on the week. The 50-Leaders (-0.7%) was down more than the XAO (-0.4%). So, we have a positive divergence on breadth. Thats a positive for the market. Clearly the drain of BHP has pulled the XFL lower, while strength remains in the sector.
The chart of 20-Day Cumulative NewHighs/NewLows on the Fifty Leaders is also higher now than a week ago. Breadth is good at least in the 50-Leaders.
ADVANCERS AND DECLINERS
Chart Eight Advancers and Decliners
The Advance/Decline Line is also higher now than last Friday. Last week I said: A back-test of the recent high seems likely. That back-test is now occurring.
INTERNATIONAL
Charts Nine-Twelve - S&P500, Shanghai, Copper, TN
SPX was marginally down on the week. RSI.4 and StochRSI.30 confirm a strong short-term down trend. Some indicators suggest the down-trend is ending. The chart is in a descending wedge, which is bullish. The RSI.4 is showing a positive divergence from price, as is the MACD Histogram. Thats bullish. The risk is to the upside. A break below the supporting trend line would be very bearish.
Shanghai is forming a possible (somewhat sloppy) inverse Head and Shoulders formation. A break above 2700 would confirm this bullish formation. The MACD Histogram is showing a strong negative divergence from price. This is often a reliable indicator. This chart is in the balance. StochRSI.30 is still bullish, while the RSI.4 is alerting to a possible down move.
The weekly chart of Copper may be forming an Eve and Adam top. A break below the middle valley is needed to confirm. Plenty of negative divergences exist to say the next move down will confirm. We shall see what happens.
Its been a long time since I visited this chart in the report. Above is a weekly chart of the 10-Year American Treasuries Yield. It has been in a steep downtrend since April. Lower bond yields mean higher prices for bonds which are negative for the stock market. The weekly MACD Histogram is showing a negative divergence from the chart which hints at a reversal in the chart. Until it happens, however, the trend is down, bearish for the stock market. But it could be getting to an inflexion point. The weekly candle was a doji reflecting indecision after a long down trend. It may be getting ready to reverse.
Privately (not in this report) Ive been commenting for some time that bonds may be developing a bubble. One never knows whether it is a bubble until it has burst and then the chart reverses. If bonds are in a bubble it could have far reaching ramifications for world stock markets. Usually if the yields on bonds start to rise, at least for the medium term, thats a positive for the stock market. However, one of the main reasons for the fall in the bond rate has been the desertion by American retail investors from the stock market to the bond market. If the capital value of bonds starts to fall, those investors are unlikely to fly back to the stock market, their fear of stocks is too recent to be overcome. And when a bubble in an asset class as large as bonds (10 times the size of the stock market) starts to deflate, I think it will have catastrophic effects. Remember, bonds have been in a bull market since 1982. One of the longest bull markets in history. The uncertainty it will cause will see a massive flight to safe havens; i.e., the US$ and Gold. And we will see GFC2 unfold. The much foretold stock catastrophe will occur. Sheesh now Ive joined the doomngloom mob. Never mind, Super Ben will save us. Oh Yeaaaah.
SUMMARY AND CONCLUSION
The XAO this week is in a state of limbo. A/D Line is still positive but could be at a stage where it declines sharply. Breadth in the 50-Leaders is also stronger than shown by the chart of that sector. Sector analysis has also improved slightly to a bullish bias. Those factors would normally bias me to the bullish side.
Copper and Shanghai look more likely to reverse than move up. But thats speculative we have to wait and see.
The current election results wont give the market much confidence.
Ill wait to see which way the market breaks short-term. That should occur early next week. The markets reaction will be all important and show the way.
Longer term, the trend is down. Bonds are looking dangerously like a bubble.
Were coming into the worst seasonal period of the year. September doesnt have to be bad, but it usually is.
Ill be getting ready for a fall.
As I see it, the one light on the horizon is Gold. The Gold Miners are moving into a favourable seasonal time and the trend for them is currently up.
Watch the blog for daily updates (Monday to Thursday): http://redbackmarketreport.blogspot.com/
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