XJO 0.96% 6,168.7 s&p/asx 200

redback report, week ended 23/7/2010

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    The Weekly Slow Stochastic shows a reading now at 53.5. Above its signal line, heading up. Positive.


    This week the XAO rose 0.86% on the week. Volume continued to show improvement for the second week with Friday almost up to the 50-Day Average.

    The week was relatively subdued but considerable variation occurred between sectors. 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)

    The previous week, Financials were up while Materials were down. This week, Materials are up (3.2%) and Financials are down marginally. Consolidation in the Financials? Two defensives (Utilities and Health) were up while two (Telecoms and Consumer Staples were down). The previous week, the big winner was the Industrials Sector (up 2.8%). This week, Industrials is down marginally. Consolidation in the Industrials?

    Small Ordinaries were up on the week, +1.66%, while the 50-Leaders were up 0.68%. Appetite for Risk returned to the market, at least in the Materials sector. Gold miners were down 1.36%. Well soon be coming back into a seasonally favourable period for Gold, so we could see some strength coming back into the Goldies in the next couple of weeks.

    Chart Two Volume on XAO


    The 13/150DSMAs remain bearish. Until the 13DSMA crosses back above the 150DSMA Ill maintain a bearish stance. That may mean giving up part of a solid rise. So be it.

    Chart Three XAO Monthly

    On the above monthly chart we note the following:

    o The 10-Month SMA effectively supported the bull market that ended in 2007, formed resistance for the bear market that ended in 09, and supported the most recent bull market which appears to have finished in May 2010 when the XAO crossed below the 10-Month SMA. (Long-term investors could well use this for investment purposes, simply putting money into and out of STW, the tracking stock for the XJO, on the basis of these signals. Simple, clear and cost effective.)
    o The Monthly MACD Histogram has turned down bearish.
    o The Monthly RSI is below its mid-line (50) bearish.
    o The Monthly Slow Stochastic is below 50 and headed down.

    Together, these signals make a powerful case that the bull market from March, 2009 has ended. Of course, the market may decide to do something else. But the probabilities in the long term lie with the downside.

    Of note is the action of the RSI. During the bull market which ended in 2007, the RSI continually poked up above 80. Since the end of 2007, the RSI has not managed to get above 55. A rise by the RSI above 55 could signal a new bull market, although that signal will be a little late. I think, however, the possibility of that is still some months away, if not a couple of years. 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.


    Chart Four Weekly XAO.

    Comments on the Weekly XAO Chart:
    o The Weekly RSI.4 is above the mid-line indicating a possible change in trend.
    o The MACD Histogram is showing a mild positive divergence from the index.
    o The MACD (not shown on this chart) remains below the Zero line bearish.
    o The StochasticRSI.30 is above 0.2 indicating that the medium term downtrend may be changing to the upside. A move above the mid-line, while the RSI.4 is also above its mid-line, is needed to confirm a medium trend change.

    The positive divergences on the MACD Histogram and the RSI.4 increase the possibility of such a swing higher. Historically, the American market has a summer rally (albeit weak) from July into August, so that upswing may be in the nascent stage.


    Chart Five XAO, Daily Candle Stick Chart

    Key resistance levels are shown by the horizontal and diagonal lines. Diagonal resistance was broken to the upside on Friday. The 4500 area, once again, is showing its importance. A break above that area would be bullish and suggest an uptrend of medium-term duration is in place. The RSI.4 is above 50 and StochasticRSI.30 is above 0.8. This indicates a strong short-term uptrend is in place. Given the momentum on Friday, a break above 4500 seems probable.


    The Ozzie is now at the 200-Day Moving Average resistance and close to horizontal resistance at 90. Negative divergences from price exist on the RSI.4 and MACD Histogram. The chart is in an upsloping wedge suggesting a down move may occur in the near future. RSI.4 and StochRSI.30 confirm a strong uptrend is in place. This scenario is menacing but lets wait and see how it plays out. A break below the supporting uptrend line on the wedge would be a negative for the Ozzie and how stock market.

    Chart Six Australian Dollar Daily Candle Stick Chart


    This week the Sector Analysis showed some change. Defensives now only hold the three of the top four places where previously they were consistently the top four. Of most significance is the move of Materials up into second place the first time in many weeks that a cyclical sector has been in the top two. The bearish profile has weakened from its very strong character of a couple of weeks ago but is still not bullish.

    1. XTJ (Telecoms): +5.7% (+5%) TLS
    2. XMJ (Materials): +0.2% (0.7%) RIO
    3. XSJ (Consumer Staples): -1.4% (+1.1%) WES
    4. XUJ (Utilities): -2% (-1%) AGK
    5. XEJ (Energy): -3.2% (-0.8%) WPL
    6. XHJ (Health): -4.8% (-5.9%) CSL
    7. XDJ (Consumer Discretionary): -6.5% (-5.8%) NWS
    8. XFJ (Financials): -7.2% (-6.2%) CBA
    9. XNJ (Industrials): -8.6% (-9.3%) LEI
    10. XIJ (Information Technology): -10.6% (-8.9%) NIL

    This list also shows the highest price stock from the 50-Leaders in each Industry Sector.

    50 LEADERS

    Previous weeks reading as of Friday 16/7/10.
    No. Stocks above 10-Day SMA: 37 (74%)
    No. Stocks above 50-Day SMA: 24 (48%).
    No. Stocks above 150-Day SMA: 13 (26%)

    Fridays reading 16/7/10:
    No. Stocks above 10-Day SMA: 37 (74%)
    No. Stocks above 50-Day SMA: 32 (64%).
    No. Stocks above 150-Day SMA: 13 (26%)

    This week shows an improvement in the stocks above the 50-Day SMA at 64%. The other figures remain static. Theres still plenty of room for upward movement and a good base for further improvement appears to be building.


    Chart Eight Advancers and Decliners

    The A/D Line, like the XAO, is at significant resistance; but at a much higher level - a positive divergence from the index. The A/D Line is close to the June high and the 150-Day SMA. The XAO is well below those levels.


    Charts Nine-Twelve: VIX, S&P500, Shanghai, Copper

    VIX (Volatility Index) also sometimes referred to as the fear index is in a descending triangle pattern. This pattern normally breaks to the down-side. (Down is good, or bullish for the general market.) But positive divergences on some indicators suggest the next move will be up. (Up would be bearish for the general market.) An answer should be coming soon, and help in deciding which way the market will move bearish or bullish. (Go to www.investopedia.com if you want more general information about Vix).

    The SPX had a better week than the XAO, up four days out of five (+2.7%).

    (The above chart is very messy - I like to keep them cleaner than that, but there just happens to be a lot to comment on.)

    Note the following:
    o SPX has broken above the down-trend line from April
    o It is now at an important overhead horizontal resistance with the 200-Day MA just above.
    o Another line of resistance lies a little above that.
    o The RSI.4 and StochRSI.30 confirm a strong uptrend is in place
    o Negative divergences exist on the RSI.4 and the MACD Histogram
    o MACD (not shown on the chart) is now above the Zero line which is bullish.

    In general, this chart is bullish with the main negatives being the bearish divergences on two indicators and the overhead resistance. Neither of these necessarily mean the market will reverse, but momentum seems to be slowing which sometimes comes before a market drop.

    The daily Shanghai chart is also in a strong uptrend (RSI.4 and StochRSI.30 confirming). The Index has now moved above the 50-Day MA, but an important line of resistance lies just overhead. The MACD (not shown) is just shy of the the Zero line.

    Last week I pointed out the symmetrical triangle in play for Copper. That pattern broke to the upside this week. The chart is now in a strong uptrend (RSI.4 and StochRSI.30 confirm). The standard measure rule for breaks from symmetrical triangles suggests that Copper is headed for the region of the April highs. Short term strong resistance is offered by the 200-Day MA and horizontal resistance in the 320 area.

    Traders Narrative provides regular information on American sentiment a diffuse concept often used by contrarians to go the opposite way in the market from the majority. Here are a couple of snippets:

    CEO Confidence
    According to the quarterly Business Roundtables CEO Economic Outlook Survey, the heads of the largest US corporations are very confident of the business outlook in the next six months. Looking ahead, 79% of CEOs surveyed expect sales to increase - the highest since the second quarter of 2006 - and only 4% expect a decrease. When it comes to capex, CEOs are continuing to spend with 42% projecting an increase and 50% saying capital expenditures will be the same

    Consumer Confidence
    According to Gallup, the average US consumer is very worried about the future economic outlook. The recent decline in economic confidence began in late June, as a response to the sharp drop in the equities market.

    Gallups Economic Confidence Index is about to fall to its largest one-month drop since October 2008

    So who would you back? The CEOs, the rationalists? Or the Consumers, the emotives? To be more particular, whos opinion about the medium term future of the world economy would you trust, Marius Kloppers (CEO of BHP) or Joe Bloggs doing a stand-up interview with Channel 9 in the Queen Street Mall? I think Ill back Marius over Joe.


    Ill try to sum all of the above with just a word or two on each section.

    Domestic Market:

    Long term: bearish
    Medium term: neutral swinging to bullish, must overcome overhead resistance
    Short term: bullish must overcome overhead resistance.


    VIX (Daily): Bullish descending triangle needs to break lower to remain bullish.
    SPX Daily: bullish overhead resistance, momentum slowing.
    Shanghai (Daily): Bullish ascending triangle needs to break higher to confirm
    Copper: Break out from Symmetrical triangle bullish

    Advance/Decline Line: Positive Divergence from XAO - bullish

    50-Leaders: Bullish

    Sector Analysis: Neutral leaning to positive

    Ozzie Dollar: Bullish technicals suggest a reversal may occur.

    Im particularly taken by the leading upward divergence on the Advance/Decline Line and the break-put in Copper.

    The Australian market had an OK week, with Friday clinching it for the bulls. Internationally, the picture is strongly to the upside.

    Generally, the chart patterns are supportive of a medium term up-trend. Downtrend lines from April have been broken to the upside. MACDs are either above or only a little below their Zero lines.

    An American Summer Rally appears to be in place and may have another couple of weeks to run. For that to happen, serious overhead resistance has to be overcome but thats the nature of rallies until they finally break-out into blue sky. Our market, although not as strong as some of the key overseas markets, is following suit.

    Reporting Season remains in place in America. Unexpectedly good or poor results can quickly skew the market. The skittish nature of this market was shown on Thursday and Friday. A pessimistic report from Bernanke sent the market down on Thursday. Good company reports on Friday sent the market up. A couple of strong days, one way or the other, could have a profound effect on market direction.

    When I reflect on all of that, I fell quite comfortable with the conclusions. And I'm looking to further upward movement in the medium term (two weeks or longer).

    And that makes me wary. :)

    All those divergences, aligned with some key resistance areas could impact this market. But - price is king - until the up-trend lines get broken to the down-side, I'll stay with the trend, which currently as far as I can see, is up.


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