The All Ordinaries (XAO) had a down week this week, -0.94%.
Two out of ten S&P Indices were up. These were: Telecommunications (+2.49%), and Utilities (0.93%). Both of these are defensive sectors. I mentioned last week that I was puzzled by the relative underperformance of the Utilities sector while the other defensives (Telecoms, Health and Consumer Staples) were outperforming. Well, the final member of the defensives came good in the most recent week. The worst performers were Materials (-2.07%), Health (-2.11%), and Energy (-3.66%) .
The market continues to show an aversion to risk with the 50 Leaders (-0.81%) relatively stronger than the Small Ordinaries (-2.51%). The Small Ordinaries are generally considered to be riskier than the 50 Leaders and tend to under-perform in bearish markets and out-perform in bullish markets
The XAO on a monthly basis (20 Trading Days) was down, -6.67%. The winner for the month was Telecommunications (+2.93%). The worst performers were Materials (-14.31%) and Energy (-10.53%). The 50 Leaders (-6.27%) clearly outpointed the Small Ordinaries (-10.54%)
By Tuesday this week, the market was short-term oversold with a reading on the daily Slow Stochastic of 8.5. We then had two reversal days with a strong up day on Friday. The market looks ready for a small rally to the upside.
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GENERAL OBSERVATIONS
1. My comments tend to be directed at the medium term direction of the market. Compared to the nano-second time spans of some intra-day traders, events in my time scales tend to move at a glacial pace. I first mentioned the developing expanding wedge back in May. Now, two months later, a break down of that pattern is clear, and the general market (XAO/XJO) is in a down trend with a lower high and a lower low. The chart seems headed for the 3500 area – but not just yet. There’ll be more ups and downs along the way.
(Just something to watch – the XJO/XAO may be developing a downward sloping (bullish) wedge. There is some time yet for this to play out – but it is something to watch.)
2. The On-Balance Volume Chart of the XAO now seems likely to complete a large double top. If/when that occurs it should be the clincher in the argument for further falls in the general market.
3. The Bollinger Bands (50-SMA centre line, two standard deviations) continue to tighten. They are now 357 XAO points apart. Back at the beginning of the bear market in late 2007 they reached, at their narrowest, 432 XAO points apart. Before the big bear market cascading waterfall of Sept/Nov 08, they were a little tighter at 331 XAO points apart. Bollinger Bands don’t predict direction, only that a big move is coming. Given the recent direction of the general market downwards and the relatively weak seasonal time of the year, I am arguing for further falls ahead. That doesn’t mean the market can’t make a big move upwards. Careful watch needs to be kept on proceedings.
4. It’s some time since I visited the Baltic Dry Index in these notes. The BDI has also taken on a decidedly bearish tone and is headed down. This is often seen as a leading index for the stock market. It has already completed a clear double top.
Conclusion: The bearish themes I’ve been talking about for some weeks are all being confirmed. The market has come down a long way in the past six weeks. It hit an extreme oversold reading this week and seems overdue for a rally against the down trend that started in June.
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INDICATORS
THE ALL ORDINARIES INDEX (XAO):
Long Term (Monthly):
MACD: Negative, histogram is rising, Positive RSI: 32.3. Falling. Negative Slow Stochastic: 79.9. Falling and hitting its signal line. Negative DMI: negative. Trend: Down.
Medium Term (Weekly):
MACD: Positive. Histogram – heading down – Negative. RSI: 49.5. Neutral Slow Stochastic: 30.4. Below its signal line. Negative DMI: Flat. Trend: Flat
Short Term (Daily):
MACD: Negative. RSI: 44. Neutral. Slow Stochastic: 42.6. Above its signal line. Positive. DMI: Negative. Trend: Sideways.
These Indicators have become more negative this week. The fall of the monthly Slow Stochastic is particularly concerning. It still has to cross its signal line. The daily Slow Stochastic suggests the market is in short-term rally mode.
The ADVANCE/DECLINE RATIO was a very strong 1.75 on Friday, but still below a level of +2 where contrarians would expect a reversal. Volume on the stock market on Friday was a very modest 850million shares traded. This is an extremely low level compared to volumes in late May and early June when volumes were commonly in excess of 1,500million shares traded. So there appears room for more upward movement but there is not a lot of oomph behind it.
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50 LEADERS
No. Of Stocks above 50-Day SMA: 15 (30%). No. Of Stocks above 150-Day SMA: 24 (48%).
The number of stocks above the 50-Day SMA is below the 50% level and has the potential for further falls and the trend is negative.
Twenty-four stocks (48%) were above the 150-Day SMA. This is a neutral reading.
No. Of Stocks above 10-Day SMA: 15 (30%)
Another negative reading and the trend is bearish.
I’ve also done some additional figuring with the ADX. It is usually presumed that a stock is not trending if the ADX is below both the DMI+ and the DMI-. This week, the number of stocks in the non-trending category has dropped from forty to thirty. Only four stocks are trending positively. The number trending negatively has risen sharply from five to sixteen.
CONCLUSIONS
The Australian market was down this week. Most of the themes described in the past few weeks suggest that the market is looking at further downward movement over the medium to long term. The market is oversold this week on a short term basis, so some short-term upward movement can be expected. The volume on Friday suggests that this upward movement, if it occurs, will run out of puff very quickly. The medium term trend is down. Investors should, I believe, regard any upward movement with suspicion.
Cheers Red
(I take as much care as I possibly can in gathering the data for this report. I cannot guarantee, however, that they are completely accurate. I am, after all, a mere human being.)
(20min delay)