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

redback report week ended 26/11/2010

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    The Weekly Slow Stochastic (5,5) shows a reading now at 34.33. Below its signal line (63.06). The Weekly SlowStoch is pointing down and below both its signal line and the 50 line. Bearish.

    As usual - if you don't want to plough through the detail, the final conclusion and summary is at the end of the report.

    I think this week, the section before that titled, "Pullback? What pull back?", is also worth a read. I keep looking at the charts there and simply wonder???


    We?ve now had three weeks of retracement. Enough? Maybe.

    XAO was down modestly this week, -0.58%. On a 20-Day (Monthly) basis, the XAO is down, -1.69%. Volume was well above average on the middle days of the week (Tues., Wed., Thurs.) and below average on Monday and Friday. (That?s usual.)

    Three out of ten S&P Industry Sectors were up. Telecommunications was up strongly, +7.5%. Health, once again was up, +2.02%. Information Technology was up marginally, +0.35%. Sentiment towards Telstra has changed for a variety of reasons, not the least its resolution to continue paying good dividends. The two worst performing sectors were Consumer Staples and Consumer Discretionary, down both about -2.5%. Consumer Staples tends to be defensive while Consumer Discretionary tends in the other direction. For both to be at the bottom of the barrel is unusual ? and a bit perplexing.

    A simple visual check of the weekly chart suggests that momentum to the downside is slowing.

    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)

    Risk Appetite was stronger than Risk Aversion with the Small Ordinaries down marginally, -0.11% while the 50-Leaders was down, -0.69%.

    Gold Miners (XGD) was down a little, -0.3%. Last week I said:

    Gold Miners has been erratic for the past eight weeks. In general terms it can be read as follows: pause week, up week, pause week, down week, pause week, up week, pause week, down week. If it follows true to form the next two weeks should be a pause week followed by an up week. If only the market was so predictable! ☺ Betting on such patterns is a sure way to go broke.

    Well ? it looks like this week ran according to the timetable. Soooo, next week should be an up-week. ☺. Bet on that! At your peril!

    The XAO finished at 4690.2. That?s only about 1.6% above the August high (4619) and the October low of 4615. On a particularly poor day, the market could challenge those levels. Interestingly, the market bounced right off the 200-Day Moving Average on Wednesday. That?s a big positive for the market. If we see a second test of that level and a close above the Friday high, we could then we looking at a new uptrend. Of course, the 4615 level could just as easily break to the down side ? then we?d be looking for a test of the 150-Day Moving Average, currently at 4574.

    Chart Two ? XAO Monthly

    The Monthly XAO remains above the 10-Month SMA. Indicators have flattened out suggesting a non-trending long-term market. A reversion to bear conditions is possible if the following occur:

    o A monthly close below the 10-Month Moving Average.
    o A cross by the MACD below its signal line.
    o A negative cross by both the RSI and Williams %R below their mid-lines.

    Chart Three ? Weekly XAO.

    This week the XAO chart fell below the second ray of the Fibonacci fan and then recovered. The RSI.4 continues below 50 while the StochasticRSI.30 has is below 0.8 ? both need to be below their mid-lines to confirm a change to a down trend. The MACD Histogram ticked down again this week but remains above the bullish Zero line.

    The third ray on the Fibonacci fan is currently about the level of the August high. If the market falls further that may provide good support.

    The Weekly Slow Stochastic (5,5) shows a reading now at 34.33. Below its signal line (63.06). The Weekly SlowStoch is pointing down and below both its signal line and the 50 line. Bearish. This is the most bearish of all the indicators I follow. No sign of a hook back up has yet appeared. A break back above its signal line is needed before resumption of a bull market can be signalled.

    Chart Four ? XAO, Daily Candle Stick Chart

    The Daily Chart of the XAO remains in a down trend. The RSI.4 and CCI.14 have both moved above oversold levels and are warning of a possible change to the upside. That possibility is reinforced by the positive divergences on these indicators.

    The Chart fell below the second ray of the Fibonacci Fan when the market fell heavily on Tuesday. It could now hang between the second and third rays with a test of the August high (4619) a distinct possibility.

    This chart is finely balanced. A break above the down trend line from early November (not shown) is needed to confirm a change back in trend to the upside.

    Chart Five ? AUD/US$

    International conditions (Irish bank debt crisis and Korean hostilities) worked to support the American Dollar and weaken most other international currencies. Glenn Stevens? comments at the end of the week suggesting that Ozzie interest rates were on hold did nothing to support the Ozzie Dollar.

    The Ozzie is now at a key support level. A break lower here would suggest a fall down to around the 94 level. A break of the current down trend might see another test of parity with the US$. Positive divergence on the MACD histogram gives a slight edge to the upside.

    Chart Six ? Dow Jones

    The Dow Jones is performing better than the Australian market and seems in no imminent danger. The StochasticRSI(30) needs to break above its mid-line to signal the resuption of the uptrend. A fall back below the 0.2 line would be a big negative.

    Despite all the negative press this week about the Irish bank debt crisis and the Korean crisis, if I look at the above chart ? I?d have to wonder, ?Crisis? What crisis??

    Chart Seven ? Shanghai

    The Shanghai chart has been respecting the 200-Day Moving Average. The chart is bracketed by the second and third rays of the Fibonacci Fan. A break out of that bracket should determine its future short term direction. More than likely we?ll see more trading within the bracket.

    Chart Eight ? Commodities Index

    The CRB Index (Commodities) was in a strong uptrend then a sharp fall occurred in the second week in November. The chart has now gone down to test the 50-Day Moving Average and the second ray of the Fibonacci Fan. The chart appears to be forming a bear flag which normally breaks to the downside. As Australia is seen as a ?commodity economy?, that would be bearish for our stock market. Let?s see which way it breaks. So far the 50-Day Moving Average has provided good support.

    It?s quite some time since I showed the Advance/Decline Line and even longer since I showed the Cumulative AdvancingVolume/DecliningVolume Line. Have a look below at the AdVol/DeclVol chart and ask yourself, ?Where?s the pull back??

    But first here?s a marked-up chart of the XAO showing the major pullbacks since the beginning of the year:

    Chart Nine ? XAO - Pullbacks

    And below is the AdvVol/DeclVol Line Chart:

    The AdvVol/DeclVol Line has a correspondence with the XAO on all the first four pullbacks this year, although never as pessimistic as the XAO appears. The low of each pull-back on the AdvVol/DeclVol has also been a higher low.

    But the current pull-back in the XAO simply has not appeared in the AdvVol/DeclVol Line.

    The natural reaction is to interpret that as a positive divergence. Let?s KISS (Keep It Simple Simon) and go with that. It?s a positive.

    Below is a table showing the ratings for the various S&P Sectors for the past week, month and three months:

    Suggested Use:
    o Assess at the first Monday of each month
    o Find the top three sectors
    o Buy the dips on the biggest stock in each of these three sectors; e.g.,
    Wait for
    o Break by MACD above its signal line
    o Break by stock above its down trend line.


    Looking at 20-Days ago, the three top sectors were: Telecoms, Information Technology and Materials. From that list, one trade would have been initiated: Telstra on 23/11/10. Closing price on that day was 2.74. Current price: 2.85.

    Have an exit plan. E.g., sell when stock closes below the 13-Day Moving Average.

    The theme of this week?s report can be summed up:

    The market has sold off for three weeks, the retracement may be at an end. But caution is still required.

    Despite the weakening of the market over the past three weeks, the medium/long term trend of the market remains positive. That doesn?t mean it can?t change. The market is dynamic. But, at the moment, while the medium/long term is still sound, we can adopt a ?buy the dips? policy. But don?t pre-empt the market ? wait for the hook-up from the downtrend before entering.

    The Dow Daily Chart has been performing better than the Australian market. The Ozzie Dollar is at a critical support level. Because of the global flows of capital, a positive Australian Dollar is crucial to the inflow of money to the Australian stock market. This is a fundamental that cannot, I believe, be ignored.

    Shanghai and Commodities are both looking weak and, like the AUD, are at critical support. Both are fundamental to the health of the Australian market.

    I?d still like to see a switch to the bullish side by the Weekly Slow Stochastic before jumping in with both feet.

    The best leading evidence I can find to support future increases in the market is the Cumulative AdvVol/DeclVol Line. No pullback is evident in November.

    After some early weakness, I?m expecting next week to finish positive.

    Watch the blog for daily updates (Monday to Thursday): http://redbackmarketreport.blogspot.com/

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