XJO 1.76% 6,110.2 s&p/asx 200

redback report, week ended 1/10/10

  1. 8,801 Posts.
    lightbulb Created with Sketch. 2231
    The Weekly Slow Stochastic (5,5) shows a reading now at 81.51. Above its signal line (74.05), Overbought ? Caution Required.


    This week the XAO was down a little (-0.36%). The market was down four days in a row after a big up day on Monday. Thursday?s movement was a marginal downside breakout but not enough to be convincing. Volume on Wednesday and Thursday (the biggest down days) were above the 50-Day Average ? suggesting some conviction by traders that the sideways consolidation in place for three weeks may be breaking to the down side.

    Three S&P Industry Sectors were up, Materials, Utilities and Industrials. Materials was up +0.81, just shading Utilities, +0.74. That?s a mixed bag. The weakest sector wasn?t Telecoms ☺, but Health, -1.6%, with Financials and Consumer Staples down about -1.29%

    Chart One ? 5-Day % Change

    XAO (All Ordinaries), XUJ (Utilities), XTJ (Telecommunications), XSO (Small Ordinaries), XPJ (Property Trusts), XMJ (Materials), XMM (Metals and Miners), XIJ (Information Technology), XNJ (Industrials), XHJ (Health), XGD (Gold Miners), XXJ (Financials less Property Trusts), XFJ (Financials including Property Trusts), XEJ (Energy), XSJ (Consumer Staples), XDJ (Consumer Discretionary), XFL (Fifty Leaders)

    Small Ordinaries was up, +0.48%, while the 50-Leaders was down, -0.55%. Despite the volumes rising on Wednesday and Thursday, the Appetite for Risk remained positive ? that?s mainly because of the strength in the Materials sector where many of the small- and mid-caps are the play-things of short term traders.

    Despite the surging gold price (in US$), Gold Miners (XGD) was down -0.55%. That?s the second week in a row that GDX has been down while the price of gold in US$ has been up. Gold in Ozzie Dollars was down marginally, -0.1%.

    The XAO finished at 4635. That?s marginally above the August high (4616) and the 150-Day Moving Average (4614). On Friday, the XAO hit 4616 and then bounced. So the 150-Day MA and the August high look like providing a significant support area.


    Chart Two ? XAO Monthly

    Here?s what I said last week: If the monthly candle is above the 10-MSMA at the end of September, that will be a major signal that the market is a long-term buy.

    Well, the monthly candle finished above the 10-Month SMA at the end of September.

    You know the old story about the president who wanted a one-handed economist? Technical analysts can be a bit like that too.

    The 10-Month SMA is a proxy for the 200-Day SMA on a daily chart. The 200DSMA is often taken by large institutional investors as the dividing line between a bull and bear market. There are approximately 20 trading days per month, so for ten months there are approximately 200 trading days ? that?s why I use the 10MSMA on the monthly chart.
    Where did the daily XAO finish in relation to the 200-DSMA at the end of the month. Check, just below it. So ? on the other hand, maybe we should wait a little? Let?s see how the next week pans out.

    Chart Three ? XAO Daily with 200DSMA


    Chart Four ? Weekly XAO.

    The slight weakness this week has resulted in warnings from the RSI.4 and StochRSI.30 that the trend could be changing to the down side. RSI.4 has fallen below the 70 level, and StochRSI.30 has ticked down and marginally below its mid-line. Both need to fall below their mid-lines to confirm a medium-term down trend.

    The chart of the XAO is now tagging the upper Bollinger Band. The last two times it did that the market fell. The previous couple of times, the price kept surging. We may be at the start of a long bull rally.

    The SlowStochastic (5,5) is now overbought at 81.5 but falling close to the 80 level. It can remain overbought for sometime before giving a sell signal by crossing below its signal line now sitting at 74.05.

    On the weekly chart, the market is still very much in the balance.


    Chart Five ? XAO, Daily Candle Stick Chart

    The above Daily Chart of the XAO provides a case for caution.

    o The RSI.9 hit the overbought level of 70 and has now dropped below its mid-line
    o The Upper Bollinger Band (20,2) has also dipped. The last two times the RSI.9 was at or near 70 and the Upper BB dipped, the market went into a medium-term down trend.
    o The MACD Histogram shows a negative divergence from price warning of a trend change and has now dipped below the Zero line.
    o StochRSI.30 is below the 80 level ? warning of a possible trend change to the downside. It needs to break below its mid-line to confirm.
    o The chart finished the week right in the support area bounded by the June and August highs. A break lower would be negative.

    Most of the above signs are negative. The probabilities are weighting to the bearish side. But the chart needs to break below that support area and StochRSI.30 needs to break below its mid-line.


    Last week I showed a five-year chart of the Ozzie Dollar and All Ords. This week I?m showing a one-year chart and the clear disconnect between the two, particularly in the past week.

    Chart Six ? AUD/XAO

    A clear correlation exists between the two. When one is going up, the other is going up, when one is going down the other is going down.

    Occasionally, they get out of kilter.

    One such instance is in late2007/early2008. The XAO was making lower lows, while the currency was making higher highs. Another instance, not quite as dramatic, was late 2008/early2009. The currency made a higher low while the XAO made a lower low. Eventually the two get back into sync.

    We?ve got a situation now where the two are out of kilter. The current high on the XAO is well below the April high; i.e., a lower high. With the currency, the current high is well above the April high; i.e., a higher high.

    If the past is any guide, then this divergence must end.

    One of three things will happen. The currency has to fall and start making lower highs. Or, the XAO has to rise and start making higher highs. Or ? the currency will fall while the XAO rises until an equilibrium is reached. A rising currency is usually supportive of the stock market. So the current disconnect is of concern.

    Most pundits are tipping an interest rise next week from the RBA. The present odds are about 2/1. If interest rates do go up, then the currency will likely continue to rise ? perhaps past parity with the USD. But the impact on the stock market, given the recent disconnect is somewhat uncertain.


    I was recently asked a question about the relationship between bonds and the stock market. Below is an Eight Year comparative chart of the S&P500 and the 5-Year Bond Rate.

    Chart Seven ? SPX and 5Y T-Bill Yield

    The correlation between Yield and the Stock Market is generally good. When they get out of kilter something has to give. Stock traders and bond traders clearly have different perceptions about economic conditions. The 5-Year Bond Yield is now down to levels last seen at the depths of the GFC. Usually the bond traders get it right and the stock market eventually follows the bond market. It doesn?t have to be that way, but it usually is.

    These correlational studies are not great timing devices. They tend for their validity on underlying fundamental conditions. It?s the old FA/TA problem. Use Fundamental Analysis for your view on the market. Use Technical Analysis for timing the market.

    Chart Eight ? Shanghai Weekly

    Chart Nine ? Commodities

    This chart of commodities shows another reason why the Ozzie Dollar has been doing well. With a rising interest rate regime and rising commodity prices, the Ozzie will tend to do well. One can only wonder why these twins haven?t had a similar effect on the Australian stock market.

    The chart and MACD Histogram are showing a marked negative divergence. The chart can resist such a negative divergence for some time, but usually the chart will rarely resist a third lower ?hump? if one forms.

    This divergence does, however, provide an alert. The RSI.4 has also dipped marginally below the 70 level, another alert that a retracement might occur.

    50 LEADERS

    One Week ago:
    No. Stocks above 10-Day SMA: 26 (52%)
    No. Stocks above 50-Day SMA: 34 (68%).
    No. Stocks above 150-Day SMA: 28 (56%).

    This Week:
    No. Stocks above 10-Day SMA: 15 (30%)
    No. Stocks above 50-Day SMA: 32 (64%).
    No. Stocks above 150-Day SMA: 22 (44%)

    These readings continued to weaken this week. Of particular note is the fact that all three chart lines are now in down trends and have further room to move below.

    Chart Ten ? 50-Leaders ? % of Stocks above 10/50/150 Day SMAs


    This week the market fell marginally below the recent consolidation level but still remains within an area of strong support between the June and August highs. The probabilities are now tilting a little to the bearish side.

    On Monday, the market had what appeared to be a break upwards, but on my blog on Tuesday I gave some good reasons why it could be ignored (e.g., low volume), and the rest of the week confirmed that opinion.
    The Weekly (medium-term) was not quite has healthy as it was last week, but is still in the balance. The Monthly (long-term) remains healthy but still no conclusive signal.

    Some concerning divergences have been set up between XAO/AUD and SPX/T-Bills. Those will be resolved ? but which way is unknown.

    The run-up in Commodities (a positive for our dollar) continues strongly, though momentum as measured by the MACD Histogram is warning of a possible retracement.

    This market may be under the influence of a strong long-term momentum movement similar to the July/Sept.09 period. We never know until we can look backwards sometime in the future. But, the relationship between bonds/stocks on the American market suggests that we won?t see a similar up-move to the mid-2009 period. In fact, it is suggesting the opposite.

    If this market is to weaken considerably in October look for:
    o a break by the Index below the support area of the June/August highs,
    o a break by the MACD Histogram below its Zero line ? that has occurred,
    o a break by the RSI.9 below its mid-line ? that has occurred.

    This market is hanging on by the slimmest of margins.

    If this market is to strengthen considerably in October look for:
    o a break by the Index above 4710 on higher volume,
    o a break by the MACD Histogram above its Zero line,
    o a break by the RSI.9 above its mid-line.

    Watch the blog for daily updates (Monday to Thursday):



    Here are a couple of volume study charts that I don't normally show. Both are giving "sell" signals.

    I don?t normally show the first chart as it is so messy. It?s my own adaptation of Elder?s Force Index. The raw data is left out of the chart and three simple moving averages are shown: 5/13/21.

    The 13-Day SMA (blue line) has crossed below the Zero line. That?s a medium term sell signal.

    The XAO is showing a small broadening top formation. Bulkowski notes that this formation is reasonably reliable if volume shows a U-shape pattern. Volume on the XAO shows such a pattern. This shows up particularly clearly on the weakening pattern of the On Balance Volume for the XAO which has broken well below support.

    Be careful

arrow-down-2 Created with Sketch. arrow-down-2 Created with Sketch.