Weekend Charting and Chat XJO, page-16

Breaking News:

POTUS, Donald Trump, has escalated the Trade War with China by lifting tariffs on Chinese goods. The Chinese and Hong Kong stock markets are currently down strongly, and the U.S. stock market looks likely to follow suit. (Australia is currently closed for Labor Day.)

Last week I noted that our market was expecting a fall in interest rates, shown by big improvements in interest rate sensitive sectors (XUJ, XPJ), each rising strongly. It was probably a factor in the XJO's strong rise, +2.01%.

This week, the market changed its mind. XUJ (-2.79%) and XPJ (-4.23%) both down strongly. Interest rate falls are off the agenda. That may also have been a factor in the fall of the XJO, -0.78%.

ASX.com.au has an RBA interest rate indicator. On 24 April, the indicator showed a 68% expectation of a decrease to 1.25% from 1.5%. On 3 May, that expectation had dropped to 39%. So, don't expect an interest rate fall when the RBA meets this week on Tuesday. (Bad news, as well, for the housing market.).

The leading sectors in our market on a Relative Strength basis over the past 52 days remain the same as the previous week: Information Technology (XIJ) and Consumer Staples (XSJ). Look to stocks in those sectors.

The big shift that I noted the past couple of weeks has continued this week, with another fall from favour of Materials, down -1.67%. It was joined by the other big resource sector, Energy (XEJ), down a whopping -3.33%.

XJO:

XJO is bullish on all three time-frames.

It is currently in a tight sideways consolidation. Watch to see which way this breaks from the consolidation.

XJO can't be traded directly, but can be traded using tracking ETFs such as STW and IOZ.

As a broad, general guide to what's happening in our market, XJO is useful. Just remember that leadership (as shown above) changes from time to time, and one can't expect particular stocks or sector etfs to follow the pattern of the XJO.

Sectors:

The above dissection shows a market which is strong, but a little weaker than the previous week. Three sectors are neutral in the short-term, XMJ, XEJ and XPJ. (Neutral suggests investors should hedge or go to cash.) In the medium and long-term, all sectors are bullish , so we may be seeing a short-term pull-back in three sectors.

Gold Miners (XGD) is an industry group in the Materials (XMJ). It has a correlation of close to zero to the All Ordinaries, so it can often act as a hedge against falls in the XJO. That's why I include it in the above synopsis. It is currently performing much worse than any sector in the above synopsis.

Sectors currently doing better than the XJO are: Consumer Discretionary, Telecoms, Information Technology, Consumer Staples, Industrials and Financials.

Here's the chart for XMJ:

XMJ is currently oversold. Wait for the Dynamic Zone Slow Stochastic to break above its 7-Day MA and back above its lower Dynamic Band before looking to re-enter. Remain cautious until we see a re-entry signal.

XEJ

Dynamic Slow Stochastic for XEJ paints a similar picture to the XMJ. Similar caveats about trading apply to XEJ. Remain cautious.s

ETFs:

I use ETFs as a mechancial trading system based on Relative Strength and whether or not the short-term trend is bearish or bullish.

At the beginning of a month I hold the three strongest ETFs. Any one of those can be dropped during the month if it turns short-term bearish. At the end of each month I review the ETFs and, if necessary, sell out of any which have weakened out of the top three and buy any which have moved into the top three.

At the beginning of May, the three strongest ETFs are IEM (Emerging Markets), IOO (International Large Caps) and VSO (Australian Small Caps).

Performance in April:

IEM gain +3.15%

IOO gain +4.14%

OZR, sold on close 18/4/19. Loss -0.34%

XJO was up 2.34% in April. That represents a sizeable gain to the ETF Strategy over a theoretical long position in the XJO.