•Appetite for risk was positive but not particularly strong. The profile of the market structure is a bit odd. Info.Tech often acts like a Defensive so the best three sectors had a defensive quality despite the big rise. The two most important sectors (Materials and Financials) figured in the “worst” cluster. Financials have been the back bone of this market rally. This is not the sort of profile expected of a continuing bull market. It looks like the “smart money” is rotating out of risky assets into defensive assets.
AUSTRALIAN MARKET: MONTHLY CHART – XJO
•The chart is currently at 4370.1. The monthly 10EMA is at 4274.6. Very long term (red) oblique resistance line is at 4244.655. So, at this stage in the month, the Index is above resistance.
•The Index is marginally below horizontal resistance at 4450. That halted proceedings back in early May.
•MACD Histogram, RSI, Stochastic and CCI have kicked up. The Stochastic is flashing a “buy” signal. RSI is marginally below its mid-line of 50.
•At this stage the market is positive. I’ll wait till the end of the month for confirmation.
•May/June/July have formed a good three-month reversal pattern.
•Buy/sell signals are taken only at the end of each month. Action during the month is disregarded. Long term investors should be cautious, out of the market, or with reduced holdings, or hedged.
AUSTRALIAN MARKET: WEEKLY CHART – XJO
•The market was up strongly during the week.
•Momentum indicators are getting stretched to the upside. RSI.9 and CCI.14 are now at levels last seen in early 2011. We had to wait back then, as often happens, for negative diverences to appear on these indicators before a major fall occurred. That took about a month – but led into the strong bear market from April-August 2011. MACD Histogram has flattened out indicating a slowing of momentum. Momentum has to slow before a market can fall.
•This week’s candle closed above the 30-Week EMA. That’s positive.
•We’ve now had five weeks up in a row. Six up is about as far as it goes. Of course, the market can do anything it wants.
•This market remains in the long sideways trend where it’s been since July 2011. That’s a long time for an Index like the XJO. Until the Index can traverse the upper boundary of this sideways trend, it remains a traders’ market not an investment market. The upper boundary is 4450.
AUSTRALIAN MARKET: DAILY CHART – XJO
•The chart remains in an up trend which is now looking parabolic. Parabolic trends can continue for longer than we think – but always end badly.
•RSI.9 and CCI.14 are at extreme highs. The CCI.14 is at 214.9. Rarely does it get above 200 without a significant retracement. It can on very rare occasions get to 300 – and then it is definitely “ouch” time.
•The chart remains well above the 30-Day EMA (red dotted line). Any fall back could just be a pause in the medium term up trend. That up trend will, of course, come to an end at some time.
•The chart was displaying a bearish rising wedge. Friday’s action was a back test of that formation. A failure here would be negative.
•Thursday and Friday were both strong up days. Together they were up 2.06%. The XJO took on the role of pre-empting the Dow 30 on those days. But the Dow 30 on the corresponding days was up only 0.84%. Our benchmark might be getting ahead of itself.
•Our market seems to be displaying all the hallmarks of irrational euphoria. More on that later.
CURRENCY: AUD/USD – DAILY
•This is a comparative chart of the Dow 30 (top) and AUD/USD (bottom).
•The Dow 30 and the currency have had a remarkable correlation during this Bull Rally starting in early June. That correlation came to an abrupt halt in the Friday session with the Dow 30 up while the currency was down heavily. That fall completed a H/n/S top on the currency. That’s a fairly reliable pattern.
•Is this divergence significant? The last two major turning points on the charts (lateApril/earlyMay and early June) were lead by changes in the currency. So the fall on Friday might be significant.
•This fall brings the currency back to the 30-Day EMA which has provided support on each of the short term retracements during the current bull rally. So this fall might just be an aberration and the currency will come back into sync with the Dow 30. The flat finish this week correlates with the flat market in the U.S. this week.
•A concurrent fall in the Dow 30 along with the currency in the next couple of days is likely to be the start of a major move.
•If the Dow 30 changes direction, so will our market.
•Watch.
MARKET SENTIMENT GUIDE: XSO – WEEKLY
•Small caps often lead the market both up and down and their relative action against the 50 Leaders provides a clue to market sentiment – bullish or bearish. •XSO has two good weeks this, and it is looking promising, l.g., strong bounce off the Neckline of the H/n/S formation, Momentum Indicators all pointing up from low levels, strong positive divergence on the CCI, break above the recent down trend line.
•Relative Strength Chart XSO/XFL (lowest pane) has turned up but is still at a low level.
•Enough to call an end to the bearish sentiment? Not yet. We could be in a counter trend rally. But we need more evidence to say that sentiment has turned bullish.
•Watch.
MARKET SENTIMENT GUIDE: XMJ – WEEKLY
•The Materials Sector chart is showing a similar technical picture to the XSO chart – with one big difference – the Head/n/Shoulders pattern is complete. The chart has moved up for two weeks and off support, so we may be looking soon at a test of the Neckline. We won’t get too carried away until that is broken to the upside.
•Momentum Indicators are looking positive. We still need to see RSI get above 50 – it’s currently at 49.5, marginally below.
•The Relative Strength Chart of the Materials/Cons.Staples is already to levels last seen at the end of the GFC. XMJ did have a positive week this week – but underperformed the XSJ by a long way. So the Relative Strength XMJ/XSJ continues to languish at a low level.
•Like the XSO this chart is promising – but we may be looking at a counter-trend rally, nothing more. Too early to say.
INTERNATIONAL MARKETS: DOW 30 – DAILY
•Dow 30 was up 0.51% for the week and closed at 13275.2. That was a multi-year closing high (highest since late 2007). Before the cheering and flag waving begins – it wasn’t, however, an intra-day high. That still belongs to April 2012.
•The negatives: 1.The chart is at a major resistance level. 2.RSI.9 is above 70 – overbought. 3.Stochastic is at 93.9 – overbought. 4.Weekly Stochastic is at 93.4 – overbought. 5.CCI.14 is at 120.8 – overbought. 6.Chaiken Money Flow is showing a negative divergence from price – that’s serious when the market is in an overbought state. 7.The chart is in a rising wedge pattern – bearish.
•The positives: 1.August in the Presidential Election Year is the best month of the year. 2.The trend is up.
•Conclusion: The probabilities of a pull-back are high.
INTERNATIONAL MARKETS: GLOBAL DOW – WEEKLY
•The Global Dow Index is made up of 150 blue chip stocks from 25 countries with the biggest contributor being America. Two Australian companies make an appearance (BHP and NAB) and contribute 1.37% of the Index.
•The dominant long term pattern is a potential Head/n/Shoulders pattern – the neckline being the solid red horizontal line. XSO and XMJ are showing similar patterns with the XMJ now complete.
•For such a diverse index it is showing a remarkably symmetrical formation. A break lower below the major (red) horizontal support line would be very negative.
•The medium term trend from early June is up and the Index is above 30-Week EMA. That’s positive.
•This week’s movement was relatively subdued, up +0.73%.
•Stochastic and CCI.14 are overbought but still not showing negative divergences from the chart which often precede falls.
•If the Neckline is broken the probabilities then lie with the early 2009 lows (which marked the end of the GFC crisis).
•Watch.
COMMODITIES GOLD IN AUD – WEEKLY
•In the wider scheme of things Oz Gold (Gold priced in Australian dollars) has a long term upward bias and trends inversely to the broad Australian market (XJO). This is particularly evident in times of extreme stock market stress. See red arrow.
•AUD Gold bounced this week off a long term down trend line and horizontal support. Positive divergence on the MACD suggests further upward movement.
•Some Momentum Indicators are now kicking up from deep oversold positions. Stochastic is still relatively flat but above its signal line. It still needs to bet above 20 to confirm the strength of this move.
•A strong move up by AUD Gold would be negative for the Australian stock market.
•For a pure buy’n’hold investor, some exposure to Oz Gold has much to commend it, particularly as a hedge against falls in the general market. Plus, the long term performance has been positive. (Usual caveat – past performance is no guarantee of future performance.
•(Note. Gold priced in Oz Dollars is quite different from Gold priced in US$ – the figure usually quoted in the media. During the GFC – POG in US $ fell sharply along with other asset classes while the POG in AUD rose sharply.)
COMMODITIES: BASE METALS WEEKLY
•Base Metals (Aluminium, Zinc, Copper) moved down this week +1.13%. In the broad scheme of things, nothing much changed. The chart remains below medium term horizontal resistance and below the neckline of a huge H/n/S formation. More downside to GFC lows is probable.
•The chart is now close to “last gasp” horizontal support (dashed red line). A break below that level would mean the band is playing on the deck of the Titanic.
•The positive divergences on the MACD, Stochastic and CCI gives some hope that the Index can reverse to the upside and avoid the most pessimistic scenario. But – until it clearly moves up this chart is long term bearish.
FRIDAY EUPHORIA
•Now for something a little different.
•Since the beginning of July, Volume as a %age of the 20-Day Average has been steadily rising. (Note – this is not a volume chart but a chart of daily volume as a %age of the 20-Day Average.)
•The past three days have shown a cluster of high %age volume. We haven’t seen a cluster like this since mid-May – the middle of the waterfall down move in May when fear was beginning to grip the market. The opposite of fear is euphoria.
•This needs closer inspection.
•The highest of the three days in the current cluster was on Friday. Still not particularly high when viewed against other high days on this chart.
•Now, on any given day, some stocks move up and some move down (a bit obvious?). On Friday, the volume on Stocks moving up was the highest since mid-March. The highest in over five months. That’s extreme.
•Now – here’s the clincher. UpVol/(UpVol+DownVol) Ratio on Thursday was 63%. On Friday it was 81%. Thursday the XJO was up 1.1%. On Friday, up 0.9%. It looks to me like euphoria reached a peak on Friday . Despite the fire power being applied to stocks on Friday, much more than Thursday, the move up by the XJO was less than on Thursday. Who was selling to all those euphoric punters? I think the answer is obvious – some very smart investors.
•That doesn’t mean the market is going to begin a major retreat on Monday. But it certainly looks like the smart money was selling on Friday. Once they start selling, a turn is not far away.
U.S. MARKET PERFORMANCE – AUGUST
•Since 1928, August is the best performing month in the U.S in the year of a Presidential Election Year. 2012 is a Presidential Election Year.
•Now, statistically, the sample is relatively small – 20 observations. So the result is not highly reliable, but worth keeping in mind.
•(Chart courtesy of CXO Advisory Group: http://www.cxoadvisory.com/3724/calendar-effects/monthly-returns-during-presidential-election-years/).
COMMENTARY & CONCLUSION
In the past two reports I’ve been saying: “ … markets are betwixt and between. Too high to buy – not shaky enough to say this is going to reverse to the downside.”
Well – I think the market is now getting shaky. It still might take two-four weeks to turn around. Or it could be next week. But it is going to happen soon. Consider:
1.XJO and Dow 30 are both overbought (over 70 on the Daily RSI.9). 2.Dow 30 is at a major resistance level. 3.AUD/USD has turned down – it usually correlates well with the Dow 30 and is a leading indicator. 4.The weekly performance of ASX Sectors (despite a strong XJO performance) was dominated by Defensive Sectors. 5.Oz Gold, which tends to be inversely correlated with the XJO, moved up this week off supports. 6.The Oz Materials Sector (dominated by BHP and RIO) still can’t make any headway against the Consumer Staples Sector. 7.Euphoric trading was evident in our market last Friday. Smart Money selling?
Although momentum indicators are at overbought levels, we often need to see divergences on these indicators before a drop occurs. We’re not seeing that yet. So there could be more upside yet, after a short term pull back. If those conditions are met, then I think a major move down would occur. So it is possible for the XJO to once again tackle the 4500 region before a major drop.
In the longer term, there’s plenty of evidence to give concern. The Australian Materials Sector has completed a Head/n/Shoulders top. That’s also the case for Base Metals. Given the extent that the Australian Materials Sector is dominated by miners, that correlation shouldn’t be surprising. Of more concern is the well-developed Head/n/Shoulders pattern for the Global Dow Index. This is a broad based index from 25 countries and not dominated by miners. It still hasn’t completed – but it is close.
August, in the U.S. Presidential Year, has been historically strong. September has been poor. So the medium term uptrend may continue up for some time. But – watch the charts. It’s unwise to maintain a position on the basis of historical performance. That’s no guarantee of future performance.
Long term investors have, of course, been cautious for a long time.
Remember: do your own research. Make your own decisions. I hope that the information I show might help you just a little.
For daily updates – check http://redbackmarketreport.wordpress.com/
ETF: SLF – WEEKLY (PROPERTY)
•The tracking ETF (SLF) for the Property Sector was up on the week, +1.2%. The chart of SLF remains in a long term up trend.
•Momentum Indicators have been registering extreme overbought condtions, and negative divergences are suggesting the next move will be down.
•The range for the past two weeks has remained within the range of three weeks ago. A move out of that range should be significant.
•I’ve been concerned about the Property Sector for a couple of weeks. It’s run up has now stalled.
•A pull-back to the 30-Week EMA looks likely.
•SLF Dividend Yield: 4.7%. The stock went Ex-Dividend on 25th June (Monday). Dividend declared for the quarter was 13.09c per unit. That’s a small increase on the June dividends paid in the previous three years. Dividends are distributed on a quarterly basis, so next ex-dividend date should be in late September.
•(SLF is the Exchange Traded Fund which tracks the performance of the Property Sector on the Australian stock market.)
ETF: WEEKLY STW
•STW is the tracking stock for the ASX200.
•The stock this week finished up +2.4%. The stock has now had five weeks up in a row. Six up is rare.
•The stock has broken above its down trend line from early 2011. So we might see a test of horizontal resistance (red dashed line).
•Momentum Indicators are stretched to the upside. CCI.14 is above +200. It’s rare to see these heights before a pull-back.
•Take buy/sell signals from the XJO chart.
•Dividend Yield: 4.3%. The stock went ex-dividend on 25 June – dividend was 65c per unit. For the financial year, the dividend was 170.79c – the best since the the GFC. Dividends are paid half-yearly, so the next ex-dividend date is in late December.
•(STW is the Exchange Traded Fund which tracks the performance of the ASX200.)
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