The Weekly Slow Stochastic (5,5) shows a reading now at 75.74. Below its signal line (80.09). The Weekly SlowStoch is below both its signal line and the 80 line. Bearish.
As usual, if you don't want to plough through all the detail, a short summary and conclusion is provided at the end of the report.
WEEKLY MARKET SUMMARY I was tempted to say at the beginning of this report, What a Week. But I decided not to. That?s just too clich?d for words. Ooops. I just said it. ☺
American Elections, Fed Statement, American Jobs Report, plus the Canadian government crushing the bid by BHP for the Canadian Potash Company.
BHP surged and the market ended much higher this week.
XAO was up, +2.95%, in line with the Dow, +2.93%. On a 20-Day (Monthly) basis, the XAO is up +2.79%. The only day the volume was above average was Friday, the day of the biggest surge. The market rose on all five days. All judges gave the bulls a perfect 10 for their performance and a 1 to the bears. ☺
All ten S&P Industry Sectors were up. The big winners were Materials, +6.5% and Energy, +5.3%. The worst relative performers were the perennial dog with fleas (Telecommunications), +0.63%, and Consumer Discretionary, +0.85%. Once again the Financials performed relatively poorly, +1%, despite Westpac announcing a $6billion profit. CBA remains in a down-trend and closed below the $49 level again on Friday.
Now we get to the kicker. Small Ordinaries was up, +1.6%, while the 50-Leaders was up, +2.9%. That?s a significant differential. Risk Appetite, which was low the previous week, was again relatively weak. That?s particularly significant when the Materials sector is robust ? that?s where a lot of the more volatile Small Stocks are located. Such a dislocation doesn?t bode well in the short-term.
Gold Miners (XGD) was up strongly, 7%. Gold usually has a good seasonal period from late August to mid-0ctober, then has a rest into mid-November, before making another big run up to the end of January and Chinese New Year. Gold began its third-quarter run-up a little earlier than usual this year; but turned down according to the seasonal timetable right on the dot. However, the Golds have turned up early for its fourth-quarter run-up, just as it did for its third-quarter run-up. Gold measured in Ozzie Dollars was down, 0.2% and U.S. Dollars up +2.84%. Gold in Ozzie Dollars has been trending sideways since mid-August held down by the strong Ozzie Dollar.
The XAO finished at 4873. That?s well above the August high (4616) and the 150-Day Moving Average (4595). It?s also well above the 50-Day Moving Average at 4686. Any pull back will have solid support underneath. Any notion of a major correction in the medium term seems unlikely.
LONG TERM TREND
Chart Two ? XAO Monthly
The Monthly XAO broke above the 10-Month SMA at the end of September. Since then the Index has risen solidly above that important benchmark.
The Monthly RSI is clearly above its mid-line, while the W%R is headed north and well above its mid-line.
The MACD Histogram is ticking up and above Zero.
The only further bullish indication we need is a break by the MACD above Zero.
MEDIUM TERM INDICATORS
Chart Three ? Weekly XAO.
The RSI.4 is back above 70 while the StochasticRSI.30 is above 0.8 ? confirmation of a strong uptrend. The MACD Histogram ticked up this week and still shows no sign of a negative divergence..
The SlowStochastic (5,5) is no longer overbought, below both the 80 and and its signal line. That?s usually a sign that the market will weaken. Solid support still remains in the 4600 area, so any sell-off might be held at that level. Interestingly, the uptrend line from March comes in about that area. A break below the 4600 area would be bearish in the medium term.
The XAO is now headed into an area of solid resistance. It?s about level with the October, 2009 high, while the January, 2010 and April, 2010 highs lie just above. If the market is to take a backward step this area looks like the logical place to do that. The psychologically important level of 5000 is also around the April high. If the market convincingly breaks above 5000 ? Xmas and New Year would be looking extra good.
SHORT TERM INDICATORS
Chart Four ? XAO, Daily Candle Stick Chart
RSI.4 is now at a level not seen in the past six months. That?s a short-term overbought signal.
On Friday, the chart broke above the top restraining line of the up-sloping wedge. That?s a bullish signal unless it proves to be a false break.
Let?s keep it simple ? the chart is trending up, so the trend is up until proven otherwise.
However, given the extreme nature of the RSI.4 reading. It might be wise to take profits, I would think, the next time a big red candle (down) appears on the chart. This market is under the influence of a strong uptrend, which could continue for some time ? even into a ?blow off? top. But all such trends finish sooner or later. That doesn?t mean to say we?ll get a major correction ? that could happen ? but certainly a sizeable pullback is on the cards.
THE OZZIE DOLLAR
Chart Five ? AUD/US$
The Ozzie Dollar is also clearly in a strong uptrend. On Thursday, the chart candle finished completely outside the upper Bollinger Band. That?s an unusually strong move. Given that it?s occurring at the top of a long uptrend (from June), that?s a warning signal that this may be developing into a blow-off top. The next big red candle would be a sell signal.
The strength of the current short-term move is registered by the CCI. On Thursday it reached close to the +250 area, generally considered a danger zone for a retracement to occur. Sometimes the CCI can get to 300 without a retracement occurring, but those times are particularly rare. Another warning signal is the divergence on the MACD Histogram. A move by the Histograms below Zero would be a sell signal. It?s not currently far above that level. Given the fundamental importance of the AUD Index to the Australian stock market, this bears close watching.
INTERNATIONAL ? BullishPercentOEX, SHANGHAI, COMMODITIES.
Chart Six ? BullishPercentOEX
I?ve shown this chart for the past couple of weeks, so I?ll stick with it for the sake of consistency. The Bullish Percent Graph is a breadth indicator determined by the percentage of stocks on the OEX (S&P100) which have given ?buy? signals on Point and Figure Charts. Overbought/oversold levels are usually considered to be 70/30.
This chart is now a perfect example of ?irrational exuberance? (Greenspan). The chart line has been in up mode since late August. A break above the upper Bollinger Band early in the trend is a bullish signal. A break above the Bollinger late in the trend is a sign of ?irrational exuberance?. That?s confirmed by the CCI hitting an extreme high in excess of 300. The negative divergence on the MACD Histogram is a warning sign that all is not well.
Keynes is famous for having said, ?The market can stay irrational for longer than you can stay solvent.? That was no idle comment from an ivory tower academic. Although Keynes is often depicted as an ivory tower academic, the comment came from bitter personal experience. Anybody familiar with Keynes? history knows he became insolvent after betting on foreign currencies which he thought should fall but didn?t. He had the fundamentals right ? but he didn?t reckon with ?irrational exuberance? and got his timing wrong.
A crossover of the BPOEX below the 10-Day SMA is a fairly reliable ?sell? signal. That hasn?t happened yet. But it will. Caution required.
Chart Seven ? French CAC 40 Index
About a month ago, I noted that the French CAC, often a leading indicator for world stock markets, had formed a H&S top ? a reliable chart pattern. Well, it failed.
Now we?re looking at a text-book pattern. An upsloping wedge (bearish) with a clear ABCDE pattern. Such patterns usually result in a downside break. Well ? it can break upwards.
I often say ? don?t pre-empt the market. That advice is once again pertinent. But ? with a 75% chance of a down-side break, I?d take notice of such an event. Caution required.
Chart Eight ? Commodities
Same old, same old. Correlated markets. The CRB chart on Thursday reached above the Upper Bollinger Band. The CCI is at an over-extended level. MACD Histogram is showing a negative divergence. I don?t need to spell it out any more. This looks like a recipe for a retracement.
SECTOR ANALYSIS
I want to point out just one important inter-sector relationship, which I find quite disturbing for the bulls.
This chart doesn?t mean that the Small Ordinaries (XSO) is in a down-trend. It isn?t. But it shows that relative to the blue chips, the Small Ordinaries are doing less well. In a bullish market we expect the Small Ordinaries to outperform the 50-Leaders, and, since early July, that?s what they?ve done, until we?ve come to the month of October. Now, into early November, that trend of relative under-performance is accelerating to the down side. The performance of the Small Ordinaries is a good barometer for the Risk Appetite in the market. Without an appetite for risk, the market cannot advance. That appetite, looking at this chart, now appears to be waning. A pre-cursor to a general market down-turn? Probably.
SUMMARY AND CONCLUSION
Last week I said: I?m expecting this week to be negative. I couldn?t have been more wrong.
I also said: Expect surprises. Well, we got those in spades.
Last week showed some Indicator weakness, which suggested that the market could fall. Markets are now showing extreme strength. So ? following the corollary from last week, extreme strength this week must mean weakness next week.
Not so fast, Tonto. That does not compute.
Don?t pre-empt the markets.
But, given the extreme state of the current markets, one good solid down day should bring in further short-term weakness. Risk Appetite as measured by the XSO/XFL ratio is steadily waning.
Medium and long-term prospects still appear bullish. Let?s invest as the charts show us how to invest. Currently, the longer term charts are bullish. Any retrace should (might) provide a buying opportunity, unless 4600 is crossed decisively to the downside.
I?m glad we?ve got the past week out of the way. A lot of uncertainty is now gone. Markets can now do what they do best. Trending up or down on fundamental supply and demand factors, and not worrying about major News events - Elections, Fed statements, RBA Interest Rate Decisions, G20 Meetings, Jobs Reports, Ben Bernanke, and so on.
Be careful. Be cautious. But obey the trend.
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