XJO 1.88% 6,037.6 s&p/asx 200

redback report, week ended 24/9/2010

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    If you don't want to trawl through all the detail, the guts of the report are down the end in the "Summary and Conclusion".

    The Weekly Slow Stochastic (5,5) shows a reading now at 88.15. Above its signal line (64.8), Overbought ? Caution Required.


    This week the XAO was down a little (-0.72%). Most of that fall came on Friday ? the other days, while a bit up and down, were relatively narrow range days. Friday?s movement was an attempted downside breakout but the market finished more or less even with the support set the previous Thursday (about 4650). Volume was low (below the 50-Day Average on all five days).

    Two S&P Industry Sectors were up, Health and Consumer Staples. Health, up +2.74%, was the only big gainer mainly on the back of a surging CSL price. The weakest sector was Telecoms, down -3.1%, and Consumer Discretionaries, down -1.5%.

    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 down, -1.2%, while the 50-Leaders was down, -0.6%. Punter?s Appetite for Risk has started to weaken, but not to any great extent. The small differential may be bringing some equilibrium into the relationships after a big surge in the Small Ordinaries the previous week.

    Despite the surging gold price (in US$), Gold Miners (XGD) was down -2.8%. Gold in Ozzie Dollars was down marginally.

    The XAO finished at 4652. That?s well above the August high (4616) and the 150-Day Moving Average (4613). This week looks like a consolidation week after an upside break-out the previous week.


    Chart Two ? XAO Monthly

    With a consolidation week, this chart shows no change. The MACD is close to the Zero line and the MACD Histogram has ticked up. The RSI is at its mid-line and the W%R is above its mid-line. The 10-Month SMA is a good long-term indicator. 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.


    Chart Three ? 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 above 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 (see circles on the chart above), the chart fell. The previous couple of times, the price kept surging. We may be at the start of a long bull rally. The next week will probably be telling. The chart needs to fall below the mid-line of the Bollinger Band set to confirm the existence of a new medium-term down-trend.

    The SlowStochastic (5,5) is now overbought at 88.15. It can remain overbought for sometime before giving a sell signal by crossing below its signal line now sitting at 64.8. Last week I said: I?ll wait for a pullback on the daily chart, perhaps a successful test of the current support line (4650), before entering. That?s where the chart is now. A break above 4710.5 (also tested this week and failed) would be a buy signal. That should coincide with a major buy signal on the monthly chart.


    Chart Four ? 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 formed a broad H&S top. RSI.9 often leads the market up and down.
    o The Upper Bollinger Band (13,2) 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 showed a negative divergence from price warning of a trend change and is now dipping down towards the Zero line.
    o StochRSI.30 has dipped below the 80 level ? warning of a possible trend change to the downside. It needs to break below its mid-line to confirm.

    At the moment, however, these are all cautionary signs. The coming week looks like being a critical break-out week, one way or the other.


    Below is a 5-Year comparative chart of the Australian Dollar and the All Ordinaries Index.

    Chart Five ? 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 late2008/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. In the past, the currency usually falls.

    Watch this space.


    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 Six ? 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. The Yield clearly led Stocks lower in 2007 and higher in early 2009.

    Since July 2010, the SPX has been making higher highs, while the 5-Y T-Bill Yield is making lower lows. Like the divergence between the Ozzie Dollar and the XAO, there are three possibilities. Which will it be?

    Looking at this graph, it seems that when the Yield makes lower lows, it is stocks which follow on down.

    Which will it be this time?

    If the above chart doesn?t scare the pants off you, then have a look at the next two. They show bonds/stocks in two periods, both over about two years. 2009/2010. 1986/1987. The bond graphs have an eerie similarity. Stocks in the current period haven?t gone on to extreme heights as in 1987, so that may save the market from a crash scenario, but a severe retracement looks to be on the cards. But ? as we all know, past performance does not guarantee future performance, but caution, at least in my mind, should be to the forefront. If, however, we see a run-up in stocks to above the April highs, while the Bond Yield remains low, then we might be faced with a crash scenario.

    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 Seven ? Shanghai

    Shanghai continues in its sideways shuffle and now consolidating at recent lows. It is finding support from the 65-Day Moving Average and horizontal support from the August low. Upper resistance is at 2700. This can go either way, but if it falls through support, then negative repercussions may occur for the Australian market.

    Chart Eight ? Copper

    If copper is to reverse, then this looks a likely spot. The chart is showing a bearish wedge pattern. The RSI.9 is overbought (above 70) and the commodity is knocking up against horizontal and diagonal resistance. The MACD Histogram is showing a negative divergence from price ? suggesting the next move will be down.

    If it heads up through resistance then much higher prices are likely to be seen.

    Chart Nine ? Goldman Sachs

    There?s an old traders? saying: ?Whither Goldman Sachs, there goes the market.?

    Looking at the above chart, it?s easy to see that GS habitually tops out before the market does. (And it bottomed out before the market at the end of the GFC.) Currently the SPX has made a new higher high, while GS didn?t. Since its most recent high, GS has been heading south. If history repeats, ??? I?ll leave that with you.
    50 LEADERS

    One Week ago:
    No. Stocks above 10-Day SMA: 35 (70%)
    No. Stocks above 50-Day SMA: 39 (78%).
    No. Stocks above 150-Day SMA: 27 (54%)

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

    The sideways consolidation is working off the overbought readings we were seeing in this data. That leaves open the possibility for further upward movement ? also the possibility of further downward movement. (Fence sitting is not a Commonwealth Games sport, but if it becomes one, I think I?ll have a good crack at a gold medal.)

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

    The Stocks above 10-DSMA and 50-DSMA are both in down-trends. If the stocks above the 150-DSMA also reverse, then we?ve probably seen the end of the current rally.


    This week the market consolidated. This consolidation has worn away some of the overbought indicators.

    Last week I said: The odds now are, however, favouring at least a short term pull-back. We?ve had a short-term pull-back ? whether it is complete or not is still to be seen. A break below support (XAO-4650) would be bearish and a break above resistance (XAO-4710) would be bullish. That?s a narrow sixty point gap. Not much in it.

    The Weekly (medium-term) and Monthly (long-term) are both looking healthy.

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

    Plenty of cautionary signals are being displayed and the run-up in Copper looks like a possible end move.

    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 is to follow the historical pattern (down in September and into October), look for:

    o a break by the Index below 4650
    o a break by the MACD Histogram below its Zero line
    o a break by the RSI below its mid-line.

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

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