Weekly Market Analysis: a close below 4800

Weekly Summary
Apologies for not posting my regular end-week summary, but this blogger is feeling the combined effects of moving house and re-valuing the avalanche of HY earnings reports. What follows is my analysis from last week but with notes on today’s correction and what it may mean looking ahead for the rest of this month and quarter.

The benchmark S&P/ASX200 index closed just below the psychologically important 4800 level today, falling 1.36 per cent to 4,797.9 points. Today’s move was across the board and some of it could have been attributed to many companies going ex-dividend (on this date, any new owner of stock is not entitled to the dividend, hence the “value” of the stock should go down by the amount of the dividend), including market heavyweight BHP Billiton (plus Monadelphous, Brambles and Toll).

The banks continue to take a heavy toll with CBA down approx. 10% since its early February high – with the remaining big banks also retracing their New Year rallies.

Ostensibly, the reason for today’s move is the ongoing unrest in the Gulf/Arabian states, but even though the 4800 level was breached, the medium term trend line from the August 2010 lows is still intact.

Trend is intact on daily chart, but...


Although worryingly, on the weekly chart, the trend appears broken. This is still intra-week however – and for longer cycle traders is not confirmation of an end of a trend (which differs from a correction).

...but intra-week looks ominous


Although markets are getting “quicker” by the decade (e.g HFT), most activity gravitates around weekly and quarterly cycles as the “big money” moves in and out of sectors, stocks and themes.

Support and Resistance

The 4800 point level remains as the significant support level whilst 5000 is the local and long term resistance. This has serious consequences on buyers and sellers behaviour, and for the more adept traders allows use of strategies that strangle this game of numbers.

Support and Resistance
But for long term investors who are relying upon future price increases, the 200’s continual headslam into the magical 5000 figure is an impatient waiting game. “Buy the Dip” is an oft-quoted reaction to today’s correction, but like property “investors”, too many months (and years) waiting for an eventual breakout (i.e more rainbows, less rain) may weigh on those investors who wish to participate in today’s highly engineered markets.

Short Term Rally is still high probability

The rah-rah crowd are almost all guns blazing in their combined belief that the market is undervalued and ready to tear away. This blogger is not a believer, but still “goes to church” to listen to the sermon (with a copy of Macrobusiness hidden between the covers of the hymn book).

If what they are reading from their scriptures (e.g dividend yield exceeds bond yield, forward P/E estimates are below historical averages, historically high planned capex, strong but lazy balance sheets, the miracle Gittins! economy, its only “uncertainty” not fundamentals) is what the market believes to be the truth, then this blogger – like most traders – will find religion quickly and ride that train. And stop mixing his metaphors.

Several technical factors still support a possible short term rally:

  • Volume build up: continues to rise from the January low
  • Corrections continue to respect the well-watched 50 day moving average: although 3 of the last 8 trading days have closed below this level
  • Resistance levels soon become support levels (see chart above) e.g 4600 to 4800, then 4700 to 4800, now 4800 to 5000
  • Price action still above the 260 day moving average (which indicates a bullish, but not full-blown bull market) since Sept 2010

But basic charting analysis suggests a more bearish stance: a classic head and shoulders pattern is developing, with a neckline at approx. 4750 points.

click to enlarge


Risks and Rewards ahoy
Bears need to watch for the index to close below 4800 for the week, with a correction underway if it cuts the 4750 neckline. Bulls need to see prices shrug off recent bad news and bounce off 4800, with a new rally confirmed on a breakout above 5000.

Disclosure: This blogger trades and may have underlying positions in all or any of the above mentioned companies and indices, both long and short. Like all endeavours, do your own research as none of the above constitutes investment or trading advice.

Comments

  1. Thanks – love your work, Prince.

    Hey, as a future note, it would be good to hear some more about how we might get an idea of when certain Aussie blue chips (particularly good dividend-yielding stocks) might be worth getting into.

    That is, with the assumption that there will probably be a significant stock market correction in the next 1-2 years…would be nice to be prepared with some decent theory, especially is one (like me!) is looking at getting out of such things as precious metals before they super-bubble and pop, and into some great Aussie yielding stocks (blue chip or otherwise), at genuinely decent prices.

    Cheers,

    • You answered your own question. If you are selling precious metals to buy stocks, you price them in ounces.

    • Thanks for the kind comments Stewart.

      @David – thanks for the link. That’s probably the best summary of what we think passes for good Aussie companies – not necessarily blue chips either (go to our Empire Index page to see a list of ASX50 stocks that ARE NOT worth investing in).

      I or Tim (Q Continuum) will post on this subject very shortly. As you may well know, the best time to invest in stocks (indeed whenever there is an abrupt change in value of any particular asset class) is when there is blood on the streets.

      FWIW, the final phase of a precious metals rout will be when central banks start lifting rates. And I mean by 100’s of basis points. See the Bullion Baron for excellent analysis with regard to this. (www.bullionbaron.com)

      • FWIW? Not much. Did you know the Reichsbank raised its overnight rate to 90% in September 1923?

        President Ebert declared a state of emergency a week later & a loaf of bread cost 200 billion marks a couple of months later.

        Gold? You could no longer buy it for marks.

        • Fair call Justin, but let us remember that in 1923 the world was effectively on a gold standard, whereas today – for better or worse (mainly worse) – we are on a US dollar standard.

          Money is still valued according to interest rates set by central banks – just as the value of gold was set by central bankers on a gold standard.

          But, unlike gold, as the US dollar is paper based and therefore so widespread, it has swamped financial and trading markets across the world, accordingly its value is very sensitive. It will not take a 90% cash rate to crash the dollar – try 3% or maybe 5%. i.e 100’s of basis points.

          The difference in debt levels between the Weimar Republic and the modern financial system is epic in scale – the mere thought of 100 basis points change would rock entire countries. Think Japan. Think Ireland. Think the typical Australian First Home Buyer.

          In the modern monetary era (i.e post Chairman Volcker and particularly post 2001 when the US equity bear market started (and hasn’t finished)) there is a high correlation between the market price of gold (in USD) and the central bank cash rate. The more the US dollar is devalued (i.e interest rate set artificially low below the real rate of inflation), the more valuable gold becomes. The inverse also applies.

          Precious metals are not immune to bubble characteristics, just like commodities, houses, iPads or even government bonds.

          Pointing this fact out seems to upset the property spruikers as much as the gold bugs. And I actually think gold is a viable alternative currency in the post-debt future (although water will probably end up being so).

          I trade gold quite often so I have no illusions that it is not unlike other “assets” that are actually highly engineered financial derivatives, even though it does have a calculable intrinsic value. I do not mistake gold as an “investment” – its actually a security asset.

          The yield doesn’t matter because its the security – the soundness – the solid “iron bar” that makes a security asset different from both a wealth accumulation or yielding investment and the full-blown speculative vehicles (like investment property, CDS, CFD’s, options and most mining shares).