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

redback report, week ended 8/10/10

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    The Weekly Slow Stochastic (5,5) shows a reading now at 82. Above its signal line (81.5), Overbought. A couple of down days would take the Weekly SlowStoch below both its signal line and the 80 line ? Caution Required.


    This week the XAO was up solidly (+2.3%). Most of that was due to a big rise on Wednesday with Thursday and Friday consolidating near the highs of Wednesday. Volume on Wednesday was above the 50-Day Average confirming the bullishness on that day. Monday?s volume (also an up day) was anaemic ? as it often is on Mondays.

    (Do lots of traders consistently have long weekends? Or are large trading firms now so bureaucratic that traders are not at their desks on Mondays but bogged down in the usual bureaucratic meetings which stultify large businesses? Or are they waiting on directions from the Big Bosses in America who are still on their weekends? Maybe a combination of these and many other factors? I dunno.)

    All S&P Industry Sectors were up. Materials was the big winner, up +4.04%. Health was barely positive at +0.11%. CSL is the biggest component of this sector and has a poor correlation to the XAO/XJO

    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, +2.93%, while the 50-Leaders was up, +2.23%. The Risk Appetite remains 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.

    Gold Miners (XGD) had another good week +4.41% on the back of another record for Gold measured in US$. For the second week in a row, Gold in Ozzie Dollars was down marginally, -0.1%, kept down by the strong Ozzie Dollar.

    The XAO finished at 4740.5. That?s well above the August high (4616) and the 150-Day Moving Average (4612). On Friday the previous week, 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

    The Monthly XAO broke marginally above the 10-Month SMA at the end of September. It has confirmed that break this week by increasing its margin above the 10MSMA.

    The Monthly RSI is now marginally above its mid-line, while the W%R is headed north and well above its mid-line.

    The MACD Histogram is ticking up and above Zero.

    The only further indication we need is a break by the MACD above Zero. That would be an uber-bullish signal.


    Chart Three ? Weekly XAO.

    The RSI.4 (above 70) and StochasticRSI.30 (above its mid-line) are both confirming the uptrend. No divergences are showing up on my main indicators which might suggest a reversion to the down-side. We may be at the start of a long bull rally which could last into April next year.

    The SlowStochastic (5,5) is now overbought at 82 just above its signal line at 81.5. It can remain overbought for sometime before giving a sell signal by crossing below its signal line and the 80 level. At this stage, a couple of solid down days would tilt the scales in the favour of the bears.

    Chart Four ? Weekly XAO, Cycles.

    Since the GFC began, the Australian market has tended to follow a four-month cycle. The only time it got out of kilter was in the start of the February-April run-up which started about three weeks early. The retrace to the late June re-established the order. We?re now about three weeks from a cycle bottom. So long as any retrace holds above the late August bottom, I think we can say we?re in a bull market.


    Chart Five ? XAO, Daily Candle Stick Chart

    The above Daily Chart of the XAO shows the following:
    o The RSI.4 above the overbought level of 70 suggesting a short term dip could be on the cards.
    o The MACD Histogram shows a negative divergence from price warning of a trend change but has now started ticking up and is above the Zero line.
    o StochRSI.30 is above the 80 level ? indicating a strong uptrend is in place.
    o Plenty of support lies between the Index and the 4600 area.
    o The Index is now well above the 150-Day SMA.

    So ? a short term dip could be on the cards ? but will probably provide another buying opportunity. A substantial break below the 150-Day SMA would probably indicate a return to the bearish side. This scenario of a short term dip fits with the cycle scenario above.


    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

    This chart looks like an accident waiting to happen.

    o With an RSI knocking on the door of 80, the Dollar is way overbought.
    o The ADX rose above 40 and has now flattened out. A fall below 40 would mean the end of this trend.
    o The end of the trend will also be signalled by a fall by the Dollar below both the PSAR and the 13-Day SMA. It fell below the PSAR four days ago, but not the 13-Day SMA, so the strength of this trend is already looking shakey

    Remember the calls in the media when oil was trending strongly that oil would go to $200 and even $250. We?re still waiting.

    We?re now hearing calls in the media for the Ozzie to go to $1.20, and even $1.50. I think we?ll be waiting a long time to see it happen. When the media starts pushing extravangant claims for stocks, currencies, bonds, commodities ... well ... we'll wait and see. :)


    Chart Seven - Nasdaq and NAMO

    (Chart courtesy of Decision Point.)

    "The Nasdaq McClellan Oscillator is a breadth-based indicator that measures the difference between a 39 and 19 day exponential moving average of the net differential of NASDAQ advancing issues minus declining issues. ? Generally, the oscillator moves between +50 (overbought) and -50 (oversold). Buy signals come when the oscillator is in oversold territory and makes a series of higher lows while price makes a series of lower lows, while sells come when the oscillator is in overbought territory and proceeds to make a series of lower highs while price manages higher highs."

    The above is the standard interpretation given for the NaMO (from http://www.stockmarkettimer.com/examples/NasdaqBreadthExample.html).

    The Nasdaq is currently meeting the requirements for a ?sell?.

    Chart Eight ? Shanghai Weekly

    On the other side of the world, Shanghai has broken above its sideways shuffle. The index broke above its upper resistance at 2700 on Friday and now sits at 2738.7. So ? choose your poison ? the sell signal on the Nasdaq or the breakout signal on the Shanghai Index?

    Chart Nine ? Commodities ? Renko Chart

    A Renko chart deletes reference to time and volume, and reduces all price movement to equal sized ?bricks?. This facilitates the discovery of support/resistance levels and clarifies chart patterns.

    In the above chart we can see that the Commodities Index broke above a clear Head and Shoulders pattern in September and is getting close to height of the expected breakout range.

    The chart is currently at the high set back in January, 2010. The Commodities Index, which has a high correlation with the Australian Dollar and a major factor in moving the Australian stock market, could be nearing the end of its run. If it can break above the January, 2010 high, then it could be going much higher and confirm the view that our market is at the beginning of a major bull market.

    50 LEADERS

    One Week ago:

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

    This Week:

    No. Stocks above 10-Day SMA: 31 (62%)
    No. Stocks above 50-Day SMA: 36 (72%).
    No. Stocks above 150-Day SMA: 31 (62%)

    These readings strengthened this week without becoming overbought. They leave some room above for further upward movement. The key line to watch is the 50-Day SMA ? if it gets up around the 90% region, that almost guarantees a reversal. The 150DSMA line is strong, above 62%, and confirms the bullish readings in the monthly chart.

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


    If it looks like a bull, walks like a bull and roars like a bull, then it?s a bull. Such truisms leave no room for greyness. So if this is a bull market ? leaving room for a bit of a grey area, then maybe it?s a Murray Grey Bull. ☺ Okay, you lot in the back row, that?s enough hooting. :)

    The Monthly Chart has confirmed the bullish break this week. The Weekly Chart is also supportive of that view.

    Last week I said:

    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.

    Those three conditions have now been met. On Friday, the MACD Histogram ticked above the Zero line, thus completing the trio of conditions.

    As always, there?s plenty to be concerned about. The weekly Slow Stochastic is oversold. The Nasdaq McClellan Oscillator has given a sell signal. The Ozzie Dollar and Commodities are looking stretched to the upper side and a period of consolidation or short retracement would be healthy to work off overbought conditions. The negative divergence on the daily MACD Histogram from the XAO Index chart is also of some concern.

    On the plus side, the Shanghai Index, often a lead indicator for Australia, has broken to the upside.

    A break back below the August high and the 150-Day SMA would be of concern and negate the above analysis. That level is around the 4610 area.

    If this is the start of a major bull market which will continue on for some months, there?s plenty of time to get on board. I?ll be easing into it and looking to add to positions as time goes on.

    Unless you?re a died-in-the-wool buy-n-hold investor (I hope not), then any decision to enter or leave a market is always an act of faith. All we can do is look at the probabilities, assess them, make a judgement, then leap into the void. No matter how much analysis or synthesis we do, unless we take that leap, take the risk, nothing can be gained. If the decision turns out to be a failure in investment terms (but not in decision making terms), then we must have an exit plan in place. What I?ve tried to do in the above is to cover those scenarios.

    Good luck. And let?s hope we can count some big dollars next April.

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


    Good luck

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