The general market was up strongly early in the week to fade over the last two days. The XAO was up +2.57% on the week. Thursday saw a remarkable reversal day to the downside and this weakness carried through to Friday.
The XAO is above a rising 13-Day Exponential Moving Average. All ten SP Industry Sectors were up.
Best Three Sectors: Information Technology: +6.26% Materials: +4.04% Consumer Discretionary: +3.61%
Among the sub-sectors: Property Trusts up strongly, 4.24%; Metals and Mining, +4.09%; and Small Ordinaries, +3.53%. The 50 Leaders under performed the XAO at +2.3% and performed less well than the Small Ordinaries. Risk Aversion/Risk Inclination was weighted to Risk Inclination on that measure. Gold Mining was up at +2.4%.
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.
CONCLUSION: LONG TERM INDICATORS ARE GIVING A “HOLD” SIGNAL.
MEDIUM TERM INDICATORS
Chart Three – XAO with Positive Daily MACD, Williams %R, RSI.
I’ve said previously that the following is a simple indicator system for the medium term trader/investor:
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.
This indicator gave a “buy” signal on 13/11/09. The Daily MACD is currently at +2.628, above the Zero line. Williams %R and RSI are above their signal lines.
However, I don’t intend taking this signal. If you look at the last time the MACD went positive in mid-July, it was preceded by positive divergence on the MACD histogram and a break of the downtrend line on the RSI. This time there is no positive divergence on the MACD histogram and the RSI is below its down trend line. There is no way to know for sure, but the main indicators may be setting up a ‘bull-trap’. If things don’t look right in the market – it’s better to stay out.
This judgement is reinforced by the XAO 8/21 Force Index Chart.
Chart Four – XAO: 8/21 FORCE INDEX
The green line must be clearly above the blue line for a “buy” signal. I’d also be looking for a divergence on the orange line (as occurs in the two previous major retracements) before being confident of a “buy” signal. Preferred Investment Vehicle: STW – tracking stock for the XJO Accumulation Index.
CONCLUSION: MEDIUM TERM INDICATORS ARE GIVING CONFLICTING SIGNALS. STAY OUT OF THE MARKET.
INTERNATIONAL CHARTS
This week I want to look at three charts from the American market. The first chart shows the Dow Jones Industrial Average which has hit a new market high. The other two charts throw doubt on the strength of this rally.
Chart FIVE – Dow Jones Industrial Average
The Dow is clearly at a new high. Of interest is the fall off in volume as the most recent rally rose. This is a very sharp divergence in volume from the Index. We like to see increasing volume to sustain a rally not fall volume. (Corey Rosenbloom from “Afraid to Trade” recently had some interesting charts which showed how volume fell off at the tops of all significant rallies in 1973, 1987, 1999, 2007.)
Below, (Middle Panel) is a chart of the New York Summation Index. Ultimately this is derived from the numbers of advancing and declining stocks. A drop in the Summation Index shows that the broad market is declining, which usually precedes an actual decline in the main Index.
This loss of breadth is reinforced by the chart of the Russell 2000 Small Caps Chart (Below). This is the American equivalent of the Australian Small Ordinaries Index. While tracking the Dow until October, the Russell 2000 has now lost momentum and clearly diverging from the Dow.
Conclusion. The Dow is at a new market high. Volume is dropping and breadth is decreasing. These usually precede a drop in the Index. The Australian market would not be immune from a fall in the American market.
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. Information Technology continues to gyrate. Financials are weakening while the Materials strengthen. Nothing in these figures suggests we are in a bear market, thus confirming the long-term trend chart (above).
For many weeks I’ve been saying: This market won’t start to drop until we see the Ozzie Dollar start to weaken. The Ozzie Dollar is now range trading between about 90 Cents and 93 Cents. A decisive break from the current range should see a similar move in the stock market. The following chart is a bit “messy”, but shows the major consolidations of the Ozzie, the Rising Wedge and Moving Averages. A decisive drop below 90 Cents would be bearish for the stock market.
Chart Six – AUD/US$
50 Leaders
Last 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%).
This week: No. of Stocks above 10-Day SMA: 35 (70%) No. Of Stocks above 50-Day SMA: 26 (52%). No. Of Stocks above 150-Day SMA: 43 (86%).
The % of stocks above the 10-Day SMA reached 92% on Wednesday. So the sell-off on Thursday and Friday came as no surprise. Further weakening is likely in the next few days.
ADVANCES AND DECLINES
The Advance/Decline Line strengthened this week and is once again looking positive and is congruent with the broad market chart (XAO).
Chart Six – Advance/Decline Line
On the surface this chart looks strong. But a closer look at the data reveals some chinks. Here’s a chart just of the daily advancing issues.
Chart Seven – Advancing Issues
The 21-Day MA of Advancing Issues has been dropping since mid-September. Thus, while the A/D Line has maintained a positive bias the underlying strength of the Advances/Declines has been slowly weakening. Not enough to overwhelm the cumulative total, but only a small increase in selling would cause such a result.
CONCLUSIONS
After a heavy fall last week, the market recovered strongly early in the week to weaken a little on Thursday and Friday.
Some Medium term buy signals have been triggered, but are conflicted by others.
The long-term trend is still up. This is confirmed by the currency, which is still in an uptrend but currently range trading.
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 of the monthly RSI and MACD.
The American market is showing strength but volume and breadth studies suggest internal weakness.
Our market is range trading without a clear medium term direction.
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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