After a big rise yesterday, the general market (XAO) was still down -0.91% for the week. Friday saw a remarkable reversal day to the upside.
The XAO is below a falling 13-Day Exponential Moving Average. Eight out of ten SP Industry Sectors were down for the week. The only two sectors up were Materials and Energy. It may be significant that the only two sectors up were in the cyclical/export oriented sectors and not the defensive sectors
Best Three Sectors: Materials: +0.25% Energy: +0.22% Industrials: -0.19%
Worst Three: Telecommunications: -3.4% Consumer Staples: -3.9% Information Technology: -4.84%
Big institutions seem to have positioned themselves in the latter part of the week for a rebound in the market with defensive sectors selling off and more risky sectors being brought up.
Among the sub-sectors: Property Trusts down, -1.46%; Metals and Mining, +0.91%%; and Small Ordinaries, -0.49%. The 50 Leaders was line ball with the XAO at -0.99% but performed less well than the Small Ordinaries. Risk Aversion/Risk Inclination was weighted slightly to Risk Inclination on that measure. Gold Mining was up at +6.38%, completely reversing the drop of the previous week.
The long-term trend is determined by the 13-Day SMA and the 150-Day SMA. It is currently positive.
Chart Two – XAO with 13/150-Day Moving Average Cross-overs.
Long Term Strategy:
Entry: 1. 13-Day Simple Moving Average must be above the 150-Day Simple Moving Average. 2. The Index Chart must be above both the 13-Day and 150-Day SMAs. 3. The Weekly MACD must be positive (above its Signal Line).
Exit: 1. The 13-Day Simple Moving Average must be below the 150-Day Simple Moving Average. 2. The Index Chart must be below both the 13-Day and 150-Day SMAs. 3. The Weekly MACD must be negative (below its Signal Line).
Preferred Investment Vehicle: STW – tracking stock for the XJO Accumulation Index.
Using this strategy an investor would have been out of the market from December, 2007 until April, 2009. They would still be in the market. With any Moving Average strategy, you won’t pick tops and bottoms of markets – but you will get most of the meat between the extremes. Whipsaws can occur – but shouldn’t be a big problem.
CONCLUSION: LONG TERM INDICATORS ARE GIVING A “HOLD” SIGNAL.
MEDIUM TERM INDICATORS
Chart Three – XAO with Negative Daily MACD, Williams %R, RSI.
This simple system is readily used by anybody with access to a free chart site such as www.bigcharts.com.
Strategy (Long Only):
Entry when all three indicators agree: 1. Daily MACD above the Zero line. 2. Williams %R above -50. 3. RSI above 50.
Exit: 1. Daily MACD below the Zero line 2. Williams %R below -50. 3. RSI below 50.
Preferred Investment Vehicle: STW – tracking stock for the XJO Accumulation Index.
This indicator gave a “sell” signal on 02/11/09. The Daily MACD is currently at -34.46, below the Zero line. Williams %R and RSI are below their signal lines.
The following system is more complex and requires either access to my charts or personal charting skills. It is based on Alexander Elder’s Force Index, but on my chart the primary chart line is eliminated and replaced with an 8-Day and a 21-Day Moving Average.
Chart Three – XAO: 8/21 FORCE INDEX
Strategy (Long Only):
Entry:
1. Buy when the green (21-Day MA) line moves above Zero if the orange line (8-Day SMA) is also above Zero. 2. Sell when the green (21-Day MA) line moves below Zero.
Preferred Investment Vehicle: STW – tracking stock for the XJO Accumulation Index.
Even shorter term, earlier signals can be generated by using medium term trend lines on the green line.
CONCLUSION: MEDIUM TERM INDICATORS ARE GIVING “SELL” SIGNALS.
VOLUME
Last week, the On Balance Volume Chart developed a clear double top with a break below the middle ‘valley”. It remains below that level. The negative bias was confirmed by the 13-Day SMA breaking below the 34-Day SMA.
Chart Four – On Balance Volume
Friday’s move up on the index was impressive; but volume came in at 1,240 million shares traded - well below the 50-Day Average of 1,545 million. We want to see above average volume to sustain a solid move up. That didn’t happen on Friday.
To Summarise: Volume studies have suggested a possible retrenchment or correction for some weeks. A clear SELL signal has been given by the OBV chart of the XAO and confirms the medium-term signals. This doesn’t mean the market can’t move up from here. The market can do anything it wants. But on the basis of medium term indicator action and volume action the probabilities now lie to the down side.
SECTOR ANALYSIS
Here’s how the 10 S&P Industry Sectors fared, ranked from top to bottom for the past week. The ratings are in order of magnitude with the previous week’s ratings in brackets. Apart from Information Technology, minor changes occurred in Materials, Energy and Health. Nothing in these figures suggests we are in a bear market, thus confirming the long-term trend chart (above).
Significant changes have been occurring slowly, ever so slowly, in the Fifty Leaders and the Small Ordinaries.
50 Leaders: -50. Four weeks ago: -100 Small Ordinaries: +45. Four weeks ago: +90
This is an indication of risk aversion is entering the market. Still not enough to swing the readings into their polar opposites (negative to positive, positive to negative), but some indication that nervousness about the direction of the market is occurring.
CURRENCY
For many weeks I’ve been saying: This market won’t start to drop until we see the Ozzie Dollar start to weaken. Two weeks ago, the Ozzie was stubbornly above 92 cents. This week it dropped down to its supporting trend line and then recovered. Until we get a decisive break below the lower supporting trend line on the following chart, we have a non-confirmation of the bearish trend in the stock markets. This warrants some caution on the part of the bears. The following chart is a bit “messy”, but shows the major consolidations of the Ozzie, the Rising Wedge and Moving Averages.
50 LEADERS
Last week:
No. of Stocks above 10-Day SMA: 6 (12%) No. Of Stocks above 50-Day SMA: 20 (40%). No. Of Stocks above 150-Day SMA: 48 (96%).
This week:
No. of Stocks above 10-Day SMA: 13 (26%) No. Of Stocks above 50-Day SMA: 11 (22%). No. Of Stocks above 150-Day SMA: 40 (80%).
These figures show how, in the short-term, the market is recovering from its grossly oversold readings. These readings allow for more upward movement in this counter-trend (short-term) rally.
ADVANCERS AND DECLINERS.
The Advance/Decline Line weakened two weeks ago and broke decisively downwards. It needs to break back above the yellow 13-Day Moving Average to indicate the resumption of the up-trend. That could happen in a couple of days.
Chart Six – Advance/Decline Line
In the past two weeks, volatility in the Advance/Decline Ratio has been high. This is often seen at market tops. Conclusions
This week the market fell heavily but regained a lot of ground on Friday.
Medium term sell signals have been triggered.
The long-term trend is still up. This is confirmed by the currency, which is still in an uptrend.
The reading for “Number of Stocks above the 150Day SMA” is extraordinarily strong and as long as it remains above 50% the bull market remains intact. This was being supported by positive readings on a two-year monthly XAO chart with the monthly RSI and MACD. The monthly MACD is still positive; but the monthly RSI has again dipped below 50 with a reading of 49.85. Another cautionary sign.
The market may be on the cusp of a major trend change.
Sell signals are not etched in stone never to be erased. The market is dynamic and can reverse a trend quite quickly. One must be willing to go with the flow. Be prepared to re-enter the market if optimistic buy signals are triggered. That could be in the next few days, or the next few weeks.
I’m not on the side of the doom’n’gloomers predicting a catastrophic decline. This rally, on big volume, has been too strong to be predicting catastrophe.
We have seen, however, in the recent bear market how important it is to take signals when they occur. Preservation of capital is paramount. Being in cash is a safe position.
For the long-term investor they will continue to “hold” based on the above indications. The medium-term investor will now be out of the market waiting for an opportunity to re-enter. Short-term investors are having a field day trading the swings.
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