Introduction: For some, reading this post is tedious and a challenge to their span of attention. I can assure you, writing it was tedious and a challenge to my span of attention. (I might quote Brendan Behan: I'm a drinker with a writing problem.) If you'd like to get to the gist of the matter, simply skip down to the section "Summary and Conclusion".
Introduction: For some, reading this post is tedious and a challenge to their span of attention. I can assure you, writing it was tedious and a challenge to my span of attention. (I might quote Brendan Behan: I’m a drinker with a writing problem.) If you’d like to get to the gist of the matter, simply skip down to the section “Summary and Conclusion”.
CONTENTS
1.Australian Market. Indices: One-Week Performance. (The Week That Was.) 2.Australian Market. XJO – Monthly Chart (for the long-term investor) 3.Australian Market. XJO – Weekly Chart 4.Australian Market. XJO – Daily Chart 5.Currencies AUD/USD – DAILY 6.Market Sentiment Guide: Small Ordinaries (XSO) – Weekly 7.International Markets: SP500 – Weekly 8.International Markets: SP500 – Daily 9.International Markets: Nasdaq100 – Weekly 10.International Markets: Global Dow – Daily 11.International Markets: U.S. XIV – Daily 12.International Markets: IBM – Bell Wether – Weekly 13.Summary and Conclusion 14.SLF – Weekly 15.STW – Weekly 16.Oz Gold – Weekly
AUSTRALIAN MARKET: THE WEEK THAT WAS. INDICES ONE-WEEK PERFORMANCE
•Info.Tech. was the best performer this weak. It can be a wild card because of its small size, but it often acts like a Defensive. Telecoms, also a Defensive was amongst the best performers. Small Ords performed a little worse than the 50 Leaders. In a strong market, Small Ords because of its higher beta, should outperform. It didn’t. Overall, despite the strong rise, the sector structure this week doesn’t inspire confidence.
AUSTRALIAN MARKET: MONTHLY CHART – XJO
•The chart is currently at 4571.1. The Index is above the 20-Month Exponential Moving Average. •The Index is above horizontal support at 4450. The current price level is still up against significant resistance. •MACD, MACD Histogram, RSI, Stochastic and CCI have kicked up. All are now reading positive. CCI and Stochastic are now in overbought territory. They can stay there for months in a bull market. Of some concern is the CCI which is now at its highest level in 10 years. Pull backs are usually signalled by divergences in the CCI (the two-humped camel or the three-humped camel). But the contrarian in me is getting nervous with a reading at a 10-Year high. •This chart has a lot of positives. The chart suggests we’re looking at a move up to XJO 5000. Not a bad move. But now in the fifth month up, this market could be getting tired. •If we get a pause here, or short term pull back, then November and December, historically good months, will probably be positive.
AUSTRALIAN MARKET: WEEKLY CHART – XJO
•This week was a wide range week. The Index continues to knock against resistance. (The so-called Wall of Worry.) Resistance levels are not Berlin Walls, but areas where a pause or fall back can be expected. Sometimes, indices just slice through them as if they didn’t exist •Indicators are flashing warning signals. Stochastic (97.2) and RSI (77.8) are both registering overbought conditions. RSI is now at a level not seen since the reversal in March, 2009. That’s more than a warning signal, that’s an Air Raid Siren going off. MACD Histogram is marginally above the zero level but showing a negative divergence. CCI is also registering a negative divergence •The contrarian in me is getting twitchy looking at that RSI.
AUSTRALIAN MARKET: DAILY CHART – XJO
•The Index finished up this week +1.85%. •The Standard Error Channel (three parallel lines) has done a good job of containing this rally and provide points where reversals might occur. Whenever the Index has hit or been close to the upper line of the SEC, it has reversed either to the mid line or the lower line. (The Standard Error Channel is made up of three lines – the mid-line is a linear regression line. The two parallel lines either side are 2 Standard Deviations away from the Linear Regression Line.) •The Indicators are all clearly overbought. The RSI has now reached into my “official” Cloud Cuckoo Land – above 80. The RSI is now at 82.1. This is “blow-off territory”. It can continue up for some time – but rather than a simple pull-back, it usually ends badly. And traders/investors late to the party, are seen staggering around with their mouths open, looking like stunned mullet.
CURRENCY: AUD/USD- DAILY
•AUD/USD was up strongly early in the week, paused on Thursday, then fell heavily on Friday. It was up 0.95% on the week. The chart is showing a three-candle reversal pattern. •This reversal mid-range (between two parallel horizontal lines) suggests that the next move will be a test of the lower line. A falling currency is a negative for Ozzie stocks as money flows out of the country.
MARKET SENTIMENT GUIDE: XSO – Daily
•The Small Ordinaries remain in a medium tern uptrend but under the influence of a long term down trend (from early 2011.) •Relative Strength Chart XSO/XJO(lowest pane) is still languishing at a low level. •If we are entering a new bullish phase in the general market, then we’d expect the Small Ords to be looking specially bullish. They aren’t. Until that down trend line is broken to the upside, and the Small Ords outperform the ASX200 by a significant margin, it’s best to remain on the pessimistic side. Some improvement by the XSO relative to the ASX200 occurred in August. Since the middle of September, the XSO has once again been underperforming the ASX200. •XSO was up this week, +1.62%. •The chart is in a medium term rising wedge pattern. These typically break to the downside. A break of the lower support line of the wedge would be bearish. •This is in a long term down trend. That doesn’t inspire confidence in this market.
INTERNATIONAL MARKETS: SP500 – WEEKLY
•The SP500 was up early in the week but came under heavy selling pressure on Friday. Up on the week +0.32% •This chart looks like it has further to fall. Indicators are in sell positions and have plenty of room to move on down. The MACD shows a clear negative divergence. The recent tops are at an important oblique resistance line. •Markets don’t go down or up in straight lines. Tops in the market are usually ragged affairs. •This looks like falling further – in the medium term. For the short term outlook see the next chart. •A break of the long term up trend line from October, 2011 would be very bearish.
INTERNATIONAL MARKETS: SP500 – DAILY
•The poor performance of the SP500 on Friday is clear in this chart -2.21%. •Tops in markets are usually much more sloppy affairs than bottoms in markets. Retests of highs often occur before down trends can assert themselves. We’ve now had a test of the highs set in mid-September. The chart has fallen away from those levels which is bearish. •Last week I said: “The Indicators are at low oversold levels suggesting a short term bounce is possible. The previous analysis of the weekly SP500 suggests than any bounce would be a relief bounce and likely to fail.” That’s what happened. The Index remains within the sideways channel where its been since early September. •On the 12 October, the chart dipped marginally below horizontal and medium term oblique support. After Friday’s big fall, the chart is back to a similar position – at horizontal but below oblique support. After such a big fall on such high volume (confirmed by high volume on the SPY), we can expect a couple of days of upside. A break of horizontal support would be negative. On Balance Volume (bottom pane) isn’t confirming the up trend. That’s a negative.
INTERNATIONAL MARKETS: NASDAQ100 – WEEKLY
•The Nasdaq100 topped a few days after the SP500 on 19 September (closing price). Since then it’s been on a down hill slide. The down trend was well signalled by a 3-Candle Reversal Pattern and bearish breaks by the indicators. •The NDX is more bearish than the SPX which is still in a sideways consolidation. The Index is now well below the May top, while the SPX is still a little above. •The chart is now at a confluence of two supports: the 30-WEMA and the up trend line from late May 2012. On a daily chart, the Index is oversold. On the weekly chart, indicators still have room to move lower. Best guess – the market will pause here, perhaps a little upside, before heading lower •It’s often said that the Nasdaq leads the market lower. If so, we can expect the benchmark indices, SP500 and Dow Industrials, to break the support of their May, 2012 tops. We shall see if conventional wisdom is borne out.
INTERNATIONAL MARKETS: GLOBAL DOW – DAILY
•The daily chart of the the Global Dow shows a classic three-candle reversal signal. These may or may not have great significance – but when they occur at major resistance levels – the significance should not be ignored. •Friday’s candle also broke back below a medium term rising trend line from July, 2012. Once again, that increases the significance of the 3-candel reversal. •Some of the momentum indicators are flashing warning signals. Stochastic still hasn’t joined the party – but it is often a lagging indicator. It needs to cross below either its signal line or the 80 level to flash amber. •Critical support is less than 3% away. It’s unlikely that will be broken in the next week, but not impossible. •At this stage, risk is to the down side.
INTERNATIONAL MARKET: U.S. XIV DAILY – INVERSE VIX SHORT
•Last week I noted: “When I’m doing the research for the Weekly Report, I nearly always surprise myself with at least one finding. This week it is the XIV – and American ETN which tracks the inverse of the VIX Volatility Index. VIX normally trends inversely to the market – so XIV tends to trend with the market. Surprisingly, the VIX is not as bearish as the SP500 which is in danger of breaking down into a correction. The XIV is showing a positive divergence from the SP500. The chart pattern looks like an ascending triangle which typically breaks upwards – but look out below if it breaks downwards.” •Well, Wednesday and Thursday, XIV made a false break (marginal) above resistance – then fell heavily in concert with the American market. •In doing so, we now have a failed Ascending Triangle Pattern. Look out below. That may be a bit alarmist. The chart still has plenty of support below it. But, at this stage, I think the a probability target lies with the congestion zone marked on the chart. That would represent a substantial jump in volatility. A break below that zone and we’re looking at a waterfall correction in equities.
INTERNATIONAL MARKET: IBM – BELL WETHER – WEEKLY
•IBM is the largest stock by price weight in the Dow Industrials, which is a price weighted index. •This week IBM had its worst week since its bull market began in late 2008. This week’s fall was -6.95% •Note that IBM turned up in late 2008, well before the bench mark indices (SP500 and Dow Industrials) turned up in early March, 2009. As such, IBM is often seen as a bell wether stock – leading the market up and down. •IBM may be forming a large Double Top pattern which doesn’t complete until Critical Support is broken to the down side. •Momentum Indicators are all giving sell signals. •If America has two big comparative advantages in world terms, they would be in Technology and Financial Services. •Technology stocks, besides IBM, have been having a rough time in this reporting season. Besides IBM big falls have also been seen in Intel, Cisco, Microsoft and Google. On Friday, poor market action was also seen in McDonalds and General Electric, both components of the Dow Industrials. •If IBM is an exemplar for the Tech sector, then it’s difficult to see how the market can continue to hold up. But, you never know, horizontal support might just hold. •Apple Inc. reports next Thursday. If the market reaction is poor, I think we can kiss this market good bye. At least until Santa’s sleigh is seen in the sky.
COMMENTARY & CONCLUSION
International stock markets finished poorly on Friday after being up strongly earlier in the week. For example, German DAX down -0.76%, French CAC -0.87%, Nasdaq100 -2.19% and American SP500 down -1.66%. That went according to the script I laid out last week. I thought Australia might buck the trend by being flat or up modestly – but it continued to power ahead. It might be a different matter on Monday when our market is sure to be weak and form a three-candle reversal pattern – indicating further short term weakness.
Of most concern to me is the weakness in the major Tech stocks in America: IBM, Cisco, Intel, Google and Microsoft. The previous week I had highlighted the poor market performance of Alcoa, a Dow Industrials component and the biggest aluminium supplier in the world. The rot in the Tech stocks started to infect other areas of the market on Friday: McDonalds (-4.59%) and General Electric (-3.42%). IBM had its biggest weekly fall since its bull market began in late 2008, down -6.95%. IBM led the American market out of the GFC. It turned up in late 2008 while the major indices didn’t turn positive until early March. If IBM completes a double top I doubt that the American market can hold up. And nor will Australia.
I noted last week that the XIV (inverse to the VIX – Volatility Index) was showing a positive divergence from the SP500 and Dow Industrials. A good reason back then for the bulls to have some optimism. On Friday, the XIV (-6.24%) fell heavily in concert with the market. The ascending (bullish) triangle pattern that it was in, is now a busted pattern – that’s bearish.
The market is never easy. If it was – we’d all be multi-millionaires. So, Friday was a day of big falls on heavy volume. Almost invariably such days have a couple of reaction days higher. We could see some early strength next week, but I don’t expect it to be particularly strong. Apple Inc. reports on Thursday. If the market reacts negatively we could see a Black Friday next week. Well – probably not like 1987 – but more like last Friday. But that’s hypothetical.
Some indicators on the Australian market are at extra-ordinarily high levels, e.g., CCI on the monthly XJO chart is now at a 10-year high. Regression-to-the-Mean suggests we’ll see a significant pull back in the near future. The contrarian in me trembles at the knees when I see such readings. J
Watch for a break of critical supports that I’ve marked on multiple charts this week.
I’ve been fascinated by some analyst and broker reports this week. A couple of analysts have admitted to being too bearish and missing the current four month run-up in stocks. When the last analyst turns bullish – that’s a sure sign the market will fall. I’ve also been reading the five letter word “greed”. It’s time to be greedy. As Buffett, the most successful investor in history, has said, “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.” Aphorisms don’t make good timing mechanisms – but something to keep in the back of the head.
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
•Well – there we have it. SLF has hit its target – the 2009 high. And the weekly candle is a bearish reversal shooting star. That equates to selling pressure. Can it go higher – yes it can. But a pause is in order. If we get a solid down week next week, we could see some more weakness, down to the bottom of the channel and the 30-Week MA. •Indicators are suggesting a pull-back. But the overbought nature of those indicators can be relieved by a sideways movement like early 2012 when the chart also touched the restraining line of the up channel. •Long term investors won’t be too worried until the chart breaks below the support of the up trend channel and the 30-Week MA. The 30-Week SMA currently lies at about 8.16. •The Property Sector is an interest rate sensitive sector. It’s borrowing costs go down and investors seeking income will switch out of other instruments (e.g., bonds and bank accounts) and into Property Trusts seeking higher dividends. Any fall may be muted by those factors. •According to Comsec, SLF Dividend Yield is 5.4%. That remains good value. The stock went Ex-Dividend on Friday 28 September, 2012. Dividends are paid quarterly. Dividend for the September quarter was 8.2179 cents per unit. This is a fall on the comparable period last year when a dividend of 9.64 cents per unit was paid. •(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 has closed above the critical April 2012 high – but still in a resistance zone. •Momentum Indicators are stretched to the upside. Stochastic remains in the overbought region. That suggests the probabilities are to the downside. RSI is at an extreme overbought level and above 80. Rarely does that occur without a significant pull back. Negative divergence on the CCI suggests the next move will be down. Take buy/sell signals from the XJO chart. •Dividend Yield: 3.9%. 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.)
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. •AUD Gold was down strongly this week, -2.82%. Over the past two weeks, selling in AUD Gold has been unrelenting with just two minor upward blips in that time. •Momentum Indicators are Oversold. •On Friday, AUD Gold fell below horizontal support and the 40-Day MA. But it is opposite a congestion zone. So a pause in proceedings (downwards) is likely. If the Australian Dollar turns down, Oz Gold might take on its usual role as a counter trend play to falls in the currency and in stocks. Look for a break above the down trend line, and buy signals from the momentum indicators. •For a pure buy’n’hold investor, some exposure to OzGold 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.
AUD Gold is tradable on the Australian Stock Exchange – ticker symbol GOLD.
•(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.)
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