XJO 0.68% 6,042.2 s&p/asx 200

redback report. week ended 21/5/2010

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    This week saw the market continue sharply lower and is now deeply oversold. Friday was a solid reversal day confirmed by well above average volume. Next week may see the market higher, at least in the first few days. Heres a chart of relevant movements in S&P Industry Sectors and Sub-Sectors for the past Five Days:

    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)

    All ten S&P Industry Sectors were down. The general market represented by the XAO was down -6.8%. The three best performers in the 10 Industry Sectors were: Telecommunications (1.3%), Consumer Staples (-3.5%) and Utilities (-4.6%). The worst performer was the Industrial Sector (-8.2%). This was followed at the bottom of the table by Energy (-7.9%) and Financials (-7.2%).

    Among the sub-sectors: Property Trusts were down, -6.4%; Metals and Mining were down -6.9%; and Small Ordinaries, -8.4%. The 50-Leaders was down at -6.4%. Risk Aversion/Risk Appetite was weighted to the Risking Aversion side of the equation.

    The Gold Mining Sector was down, -8.3%, taken down by the general rush from risky stocks. (The Gold ETF on the Ozzie market, in contrast, had a good week, buoyed by the rise in the American dollar against the Ozzie Dollar.)


    The past week was a significant one for the long-term trend. It finally broke down from the long sideways consolidation. The 13-Day MA is below the 150-Day MA and critical support at 4500 was decisively broken.

    Below is a chart of the XAO.

    Critical support is shown by the red horizontal arrow. The area above can be described as a cloud bank (see Bulkowski, The Pattern Site). This pattern has taken nine months to develop. A break below the bottom of a cloud bank usually results in a rapid and large decline (average 56%).

    Chart TWO Long Term Trend.

    So, what does Out of Market mean? That depends . . . and will mean different things for different types of traders and investors. Many factors come into play depending on the time horizon the investor has, how long theyve held their stock for, and their appetite for risk. The very long term, buy-andhold investor might choose to ignore the signal and hope for the best. They might also consider moving some of their holdings into cash or sell some call options on stock theyve had for a long time to hedge their risk.

    What is important is the psychology of the market which seems to have changed. Personally, now, rather than looking to buying dips Ill be looking to sell into rallies. Ill be systematically reducing long term holdings.

    The usual market movement now is for a back test of the resistance level at 4500. If the move up is successfully rejected, and the market falls again, then the change in the market from bull to bear will be confirmed. Until that occurs, the call Out of the Market must remain provisional. If the market breaks decisively above 4500 then the call is negated. Given that June and July tend to be stronger seasonal months than May, that is quite possible.

    So we shall see. The market is always dynamic and one shouldnt be locked into a particular position, but be willing to change with the market. If whipsaws occur so be it. Thats part and parcel of investing/trading.

    Chart Three Weekly XAO.
    These were my chart comments from last week (in brackets) and annotations for this week:

    o (The Weekly RSI.2 has risen back above 30 indicating the possibility of a trend change upwards. A rise above 50 is needed to confirm.) Weekly RSI.2 didnt rise above 50 and is now back below 30 indicating a strong downtrend is in place.

    o (The Slow Stochastic (5,5) is signalling oversold (below 20) but it is a long way below its signal line at 47.9.) The Slow Stochastic (5.5) remains below 20 (oversold) and is remains below its signal at 33.05.

    o (Slow Stochastic shows a positive divergence from price, but until it crosses back above its signal line, any notion of a trend change must be viewed with suspicion.) The positive divergence from price still remains.

    o (The Weekly MACD Histogram is showing a positive divergence from price, but multiple divergences are often required before a trend change occurs.) The positive divergence from price has now been erased.

    Until the indicators turn up significantly, we must presume the medium term downtrend remains in force.


    On the daily chart (see below), the XAO had one of its worst weeks for some time.

    Friday was a reversal day on high volume. This may have been distorted somewhat by Index Expiration Settlements, but the volume was still very high. The candle formation on Friday was a takuri line. This is similar to a hammer, but the takuri line has a longer tail than the hammer. While the takuri line has a reasonable reliability as a reversal signal, dont expect it to last too long. In fact, the reversal will probably be about the same distance as the takuri line itself. This would take the XAO up to wait for it 4500 which is now overhead resistance.

    The RSI.2 is back below 30 indicating a strong down trend. The StochasticRSI.30 is below 0.2 indicating a strong downtrend but showing a positive divergence from price.

    Chart Four DAILY XAO

    Below is a Point and Figure Chart of the XAO. Point and Figure Charts have a long history and are notable for focussing on price action and de-emphasising time as a feature.

    I didnt know where to place this long-term, weekly, or daily. Not to worry. Here it is. And it also presents a worrying picture. The chart shows a triple bottom breakdown on 19 May and a price objective of 3700.

    Chart Five XAO Point and Figure Chart


    You dont have to be Einstein to see that the Ozzie Dollar has broken below a key support level and confirms the bearish breakdown in the XAO. The RSI.2 and StochasticRSI.30 both indicate a strong short-term downtrend.

    Chart Six Australian Dollar Weekly


    The following rankings show percentage changes in the Relative Strength Charts of the respective Indices (see below) compared to 50 Days ago. This puts changes in each ratio chart on a comparable basis. It also provides a medium term view of changes in the sectors. Last week, three sectors were positive. This week only one Sector (Telecommunications) is positive and that only sneaks across the line by a narrow margin. Rankings for this week are:

    1. XTJ (Telecoms): +0.6% (2)


    2. XUJ (Utilities): -4.9% (6)
    3. XSJ (Consumer Staples): -8.1% (9)
    4. XHJ (Health): -8.7% (4)
    5. XDJ (Consumer Discretionary): -9.1% (3)
    6. XIJ (Information Technology): -9.3% (7)
    7. XEJ (Energy): -10.3% (1)
    8. XFJ (Financials): -11% (8)
    9. XMJ (Materials): -12.4% (5)
    10. XNJ (Industrials): -14.3% (10)

    Note that the top four placings are held by the four big defensive sectors. And the bottom four placings are held by the powerhouses of the Australian economy. This profile is a bear market profile.

    50 LEADERS

    Last weeks reading as of Friday 14th May.

    No. Stocks above 10-Day SMA: 18 (36%)
    No. Stocks above 50-Day SMA: 8 (16%).
    No. Stocks above 150-Day SMA: 13 (26%).

    Fridays reading (21/5/10):

    No. Stocks above 10-Day SMA: 1 (2%)
    No. Stocks above 50-Day SMA: 2 (4%).
    No. Stocks above 150-Day SMA: 1 (2%).

    Forty-five out of the 50 Leaders recorded 20-Day lows (intra-day) on Friday.
    No stocks in the 50 Leaders recorded 20-Day highs (intra-day) on Friday.

    The readings for this week are extremely low. The market is oversold. We can expect a bounce this week. How long it will last is the question. Such readings are bear market readings, suggesting that any bounce should be sold into not bought on the expectation that the bull market will now be continued.

    Advancers and Decliners

    Chart Seven Advancers and Decliners

    The Advance/Decline Line is not confirming the bearish break below critical support by the XAO. The A/D Line is now testing the lows set in Oct./Nov. 09 and Feb. 10. Id expect the A/D Line to lead the major Index, not follow if this was a bear market set-up. The 13-Day SMA has, however, broken below the 150-Day SMA. Not a good omen.


    Charts Eight-Twelve: America, Germany, Hong Kong, London, Industrial Metals

    None of the above charts confirm the bearish breakdown in the Australian market.

    While the Australian market has passed the hurdle between bull/bear, some key international markets havent yet done so. That poses the question:

    o Is Australia leading the way? (Unlikely)

    o Are special conditions (e.g., Resource Super Tax) impacting the Australian market? (Likely)

    o Will those special conditions continue to de-couple the Australian market from world markets? (Unknown)

    o Will international markets succumb to bearish sentiment and imitate the Australian markets fall? (Possible but dont bet on it.)

    If that leaves you in confusion welcome to the club. ☺


    This week was a significant week for the Australian market - clearly breaching the line between bull and bear market. Analysis of the past weeks action suggests a bounce is highly probable this week with a failure at the 4500 resistance level highly likely.

    The big conundrum is that the bull/bear demarcation breakdown in the Australian market hasnt been confirmed by some major international markets nor by the Advance/Decline Line.

    What happens next for Australia will be determined by action at the 4500 resistance level. A decisive break back above that negates the bear market signal. The next week may well prove the most important for the Australian market for its direction in the next couple of months.

    If youre trading this week its a case of Jack be nimble, Jack be quick.

    Medium to long-term investors will watch with great interest the events of the coming week.


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