Trading Day

The S&P/ASX 200 Index closed 55 points or 1.3% lower to 4298 points after popping above positive territory at lunch. In after hours trading, the index is down another 15 points, with Euro and US markets pointing to similar losses.

Asian markets experienced similar losses, with Japan’s Nikkei 225 down 0.16% at 9036 points, the Hang Seng losing 1% to 19791. The Shanghai Composite is also slipping at currently down 0.49% to 2613 points.

In other risk assets, the AUD was sold off heavily, breaking below 1.06, currently at 105.31 cents USD coming into the interest rates decision by the RBA tomorrow, whilst WTI crude slipped 1%, now at $92.50 USD a barrel.

Gold lost almost 2% during the Asian session and is currently at $1715 USD an ounce or $1627 AUD an ounce.

Movers and Shakers
A red board on the ASX today, with all sectors down, materials the worst losing 2.1% and utilities/IT fearing the best, slipping slightly.

The banks all finished in negative territory, with ANZ losing 1.8%, Commonwealth (CBA) 1.4%, National Australia Bank (NAB) a little over 1% and Westpac (WBC) down 1.6%.

Macquarie (MQG) faired better, only losing 1%, whilst healthcare standouts Cochlear (COH) slipped 0.4%, its “twin” CSL fell 0.8%. Telstra (TLS) also took a hit, down 0.3%

BHP Billiton (BHP) was a big contributor to falls today, down some 2.3% whilst Rio Tinto (RIO) only lost 1.4%, gold miner Newcrest Mining (NCM) lost 2% as gold fell during the Asian session, even though the fall in AUD/USD offset some of this.

Fortescue (FMG) finished down 3% and Woodside Petroleum (WPL) was the lucky “House and Hole” stock to finish up for the day – over 1.5%

Woolworths (WOW) was steady, but shaky at its multi-year low. Maybe an interest rate cut will have the punters deciding to add that deck or do some landscaping?

The Charts
No philosophical wand waving today, let’s get into it:

Last week I explained that the conclusion of the downtrend from the April high to the October low either means we are seeing the start of a new bull market, or the continuation of a bear market rally, or perhaps a bull trap.

Today’s action on the ASX and indeed overseas markets could rightly be construed as a “dip” and that the bulls would urge you to buy this dip, as they successfully advised all to do so during the QE2 crack up rally in August last year.

Apart from the myriad macro and fundamental problems behind this advice, the technicals are not yet confirmed. The daily chart below shows the ASX200 has now dropped below the 4300 resistance line, and is heading for the small uptrend line (marked in green). A breach of this line will see support at 4100 points tested next.

The “snare” of the bull trap is more easily seen on the weekly chart as the current price is barely above the downtrend and some distance away from the congestion area that would confirm a sustained rally:

The current short term trend is still intact, and indeed savvy and risk taking investors would make excellent returns adding to their longs from there, but the market has still not broken through to the upside congestion area above 4450 points on a weekly basis which increases the risk of another downturn.

Hedged (i.e those who want to protect their portfolio vs hoping for protection) medium to longer term “long” equity investors should still be “NOT LONG” in this environment.

Watch my “Chart of the Day” posts for continued analysis of US, Euro and Asian markets which will lead the way.

www.twitter.com/ThePrinceMB

Comments

  1. I am curious what happened during the adjustment period after 4pm. The market fell by over 0.6% from the 4pm close to the 4:10pm adjustment. I’ve never seen such a drop.

    • That does seem a large move..last trade @ 4325.55, close @ 4298.10

      On the face of it it just means that there’s a lot of volume in the order book for tomorrow at the lower price. A quick scan of the top stocks confirms this. Why? No idea.

    • Profit taking is generally a huge myth.

      Everybody buys shares with the intention of making money.

      Something like 90% of stock trades/investments end with a loss.

      Maybe you took some profits today GB, but I reckon most of the sellers bought waaaay above current levels, and got scared that they wouldn’t get a better chance to get out, and sold.

      • Ac i dont know where yo get some of this stuff but its gold! ‘Profit taking is generally a huge myth” i assure you it is not a myth its kept me busy for the past 2 days.

        “Something like 90% of stock trades/investments end with a loss.” on comsec or etrade that would not suprise me.

        profit taking its bull market behaviour. what you are describing above is bear market behaviour. there were buyers lower down, for every seller there was a buyer. the people that bought above current levels were not the sellers over the last few days which is why this is intersting. my veiw is there havent been natural sellers of any significance in this market for months not even at 4300, just short sellers and now profit takers.

        as price says, does this now become a “buy the dips” scenario ie bull market, rather than sell the rallys, ie bear market?

        have to wait and see but the profit takers with a new spring in their step and some extra $ in their trading accounts will be looking to reload. i reckon 4100 – 4200 is the real support.

      • GB hopefully we can agree on a couple of things….

        1) disagreement is necessary, without it there could be no market.
        2) disagreement is healthy, as it is an opportunity to challenge your own ideas.

        No offence, and you’d probably say the same to me, but I haven’t yet seen anything so far from you that would make me change my outlook. As a chartist, by definition it is only the charts that could make me change my outlook, and occasionally sentiment extremes.

        That said, no doubt at some point in the future I’ll have an “a-ha/lightbulb moment” when reading one of your comments, so I’ll keep reading them.

  2. “medium to longer term “long” equity investors should still be “NOT LONG” in this environment.”

    always like the comentary and sumary prince but i reckon this is risky advice. stock dividend yeilds are high, balance sheets are strong and earnings have already been masivly downgraded so the visibility is high. by saying be “not long” you are effectively saying stay in cash and accept the lower and lower returns cash id offering. as we have seen this month there are also big risks in staying in cash.

    also it seems everytime a major trendline gets taken out you raise the bar to the next level without much talk of the significance of the level thats just been breached. first it was 4000, then it became 4300 and now its 4450. seems you and many other chartist dont really trust this rally? i sometimes turn charts upside down and look at them that way to make sure my bullish or bearish bias isnt getting in the way of what the chart is really saying. The market has finally had a decent downday to give the beaten up bears a glimmer of hope for their suicidal shorts but this still looks pretty bullish to me.

    • GB, I understand where you’re coming from.

      I’ve been swinging back on forth on this myself (specifically regarding super, currently 100% cash and waiting for the right time for re-entry). But I believe that The Prince’s ‘advice’ (caveat emptor, etc.) is well placed. There are great unexplored realms of risk in this market, far beyond the ken of “missed growth opportunity”. Even Avid is cautious around the technical (and Avid’s track record is good).

      It looks bullish, yes, but I’m looking over at the driver, and I can smell the beer and see the bloodshot eyes, so I’m checking my seat belt and happy to ‘miss out’ for now…

    • GB, there is a time to be in the market, and out of the market.

      I would rather watch the monkey’s pick the bottoms and on balance, miss about half of the “bargain” times, whilst keeping almost all my upside, instead of exposing my capital to ALL of the downside.

      I use a simple hedge with market timing signals to stay “NOT LONG” for my super fund. This system is strong – no, it doesn’t capture the bottoms – it avoids getting your bottom kicked.

      e.g the system said exit in Dec 2007, re-enter in May 2009. Again, exit May 2010, enter Sept 2010. Exit May 2011, still NOT LONG. Do the math if that protects your downside… (and yes, there is a variation of this system where I short the market using a CFD whilst holding the long ETF)

      I would rather make money from my totally preserved capital than trying to recover lost money – opportunity cost is far more deadly a cost to long term investing than missing a bottom. Every bear market in history has had a rally that sucked in the great unwashed who were fearful of “missing out”.

      So technically, yes, this is NOT LONG for medium/long term investors. For short term traders there are some great opportunities here. I’m long but my stops are tight (around 4200 for those keeping score)

      Yes I keep raising the bar technically – the final bar of course is a close past 5000 points which is the absolute definition of a bull market. This is how it is – as each technical level is surpassed, the bullish probability increases (i.e short covering rally then bear market rally then a new bull market).

      Fundamentally your metrics are correct – but as I have explained (repeatedly) – this has also been the case during long, long sideways and bearish markets which happen one third to 40% of the time.

      PE compression is here – i.e around 10-11 times earnings is normal – and likely to stay. As I keep saying an average PE of 15 is the average of THE LONGEST SUSTAINED BULL MARKET IN HISTORY, driven by THE LONGEST CREDIT BOOM IN HISTORY. The last 30 years were different – we are now returning to normality.

      Macro wise, i.e looking past the corporate fundamentals and into the local and global economy and households, almost every single factor driving a bull market condition is absent. Credit growth slowing down (and in absolute historic low territory), household savings up the wazoo, lazy corporate balance sheets contracting, not expanding (i.e buying back shares, deleveraging is 30 year low) etc etc ad nauseam.

      And we haven’t even talked about the risks in Europe, China, Japan, USA, NZ…

      So I input those 3 analyses into my model – technicals, fundamentals and macro – and the risk is too high to go “all in”.

      I’m sorry that doesn’t paint a bullish picture. I am bullish certain stocks – particularly for dividend yields (as I think the capital gain will be limited, if not zero in real terms). So I am in agreement with you there, somewhat. And I don’t necessarily mean cash either – there are other fixed asset investments. Corporate bonds, government bonds (and maybe one day, research bonds) and other notes that provide better returns than cash. And other strategies of course…

      This methodology and investment style has served me well (although I admit even better since I joined MacroBusiness and became part of a team of risk-minded big picture macro guys), and I can’t remember the last time I had less than double digit annual returns in super with very limited drawdown.

      Sorry for the sermon.

      • Prince, thank you very much for taking the time to write what you just did. It was much appreciated. I have been getting acquainted with trend following (a la Livemore and Covel)over the past few months, and I find it fascinating. When our family eventually feels ready to get back to the stock market, I’d like to find someone with trend following principles behind their strategy. Your thoughts?

      • dont apologise, great post prince and all questions covered in detail so thanks. agree on the PE compression too.

        in terms of making money in this market though i dont think investors can wait for confirmation of bull markets before getting in or of bear markets before you getting out. you just end up getting in at the top or getting out at the bottom. Its a low growth, zombie like economic environment where nothing really changes except sentiment about recoveies and downturns. when the fact is there is no recovery or downturn just big and prolonged sentiment shifts that drive markets higher and lower and make it feel like one or the other.

        so you have to buy when everyone is selling and you have to sell when everyone is buying. thats the sort of non trending market we are in.

        so on that basis agree with you that if investors dont have the stomach to go against the crowd and are trend based they shouldt be in at all as they will get carted out as both bulls and bears.

        But if you can see through the noise and recognise deep value when it presents this market continues to throw up the best buying opportunities of your life, early 09 and late 2011. Thats 2 in 3 years and i reckon they are worth being in the market for.

        keep up the good work

      • sorry prince, off on tangents and forgot to mention this which was how this started.

        “I’m sorry that doesn’t paint a bullish picture”

        so its fair to say you are interpreting what are bullish charts with a bearish bias.

      • Please explain HOW and WHY they are bullish charts?

        Oscillators, Support/Resistance, Fibonacci, Pivot Points, Bollinger, Ikomuchu, Candlesticks etc etc, fire away…I’m looking forward to it.

      • ill keep it simple velociraptor. multiple downtrends have been taken out and the market hit new 3 month highs. that is bullish no matter which way you look at it. just like it would be bearsish if mutiple uptrend lines were broken and the market was trading at 3 month lows. by the way, how are those OOTM puts working out for you?

      • The Dec ones are waffling a bit (like posters who are clueless on technical analysis?). But to win every trade would make me conceited no?

        I’m short AUD from 1.65 and any trader not under a rock knows that AUDUSD and equity markets are highly correlated. Risk on/off siamese twins.