Trading Day: Tom Jones rally

The S&P/ASX 200 Index closed up 69 points or 1.6% today to 4275 points following a strong finish to the week on US and Euro markets on Friday. In after hours trading, the index is down slightly, with Euro and US markets also pointing to modestly higher opens.

Asian markets experienced similar moves, with Japan’s Nikkei 225 up 1.72% at 8898 points, whilst the Hang Seng rose over 1.3% to 18749 points.

In other risk assets, the AUD is currently trading at 103.05 cents USD (a week ago it was 97 cents….), whilst WTI crude rose slightly to $87.11 USD a barrel.

Gold was steady during the Asian session, currently at $1681 USD an ounce or $1630 AUD an ounce.

Movers and Shakers
Another bright shiny green board on the ASX, with all sectors up, the biggest winners financials, energy and materials (as always it seems).

All of the banks were up strongly, with ANZ up 1.7%, Commonwealth (CBA) also up 1.7%, NAB up nearly 2% and WBC up 1.7%. Macquarie (MQG) was bid up strongly again, rising 2.6% for the day.

Cochlear (COH) continued its strong rally (almost 20% off its low) to close below $55 as investors await the AGM tomorrow, whilst CSL rose 0.7%.

BHP Billiton (BHP) had another good day – up 2% and Rio Tinto (RIO) was up 2.4%, whilst Newcrest Mining (NCM) went up 1%, Fortescue (FMG) up 4.5% and Woodside Petroleum (WPL) up about 1%.

The Charts
My guaranteed indicator of market volatility – a large event in the Prince’s Household – has worked again (it’s a girl). Last week I called this “the unreal undollar rally“. It’s more appropriate to call it the “Tom Jones” rally….it’s not unusual….

Sorry, but this is a typical bear market rally. In the absence of bad news or deadlines (except the G20 meeting coming up) or a spate of “good” data, coupled with exhausted and profit hungry bears, 5-20% rallies after a 10-20% correction have occurred many, many times in the past.

First, look at the 2001-03 bear market where after topping in May/June of 2002, the market corrected some 12.5%, the rallied 7%, although at no stage did it threaten the long term moving average (light blue line):

After the failed 7% rally in Aug 2002, the market fell a further 15% by March 2003

More recently, post the May 2010 Greece crisis, we saw a 15% correction, followed by an 8% rally. Then another correction wiping out all of these “gains”, before another rally. The market finally broke through, helped by a little “milkie wilkie“, surpassing its long term moving average in early September:

Although a daily chart, the weekly chart is a better use to gauge a "breakthrough" of the longer term moving average.

This pattern and price movement has been repeated across many types of markets (particularly the Nikkei 225) and is a clear characteristic of a bear market rally.

This provides some analysis to consider what we need to see for a continuation of this rally. As I said last week:

First, the ASX200 always follows Europe and US so watch for their leads.
Next
, the local market needs a weekly price close above the medium term moving average at the congestion area at 4100 points. (since completed)
Further support of the rally will come when very strong resistance at 4300 points is breached and therefore the road is clear to the long term moving average at around 4400-4500 points.

Daily chart of ASX200 shows clear resistance at 4300 points.


A weekly close above the last level is characteristic of a strong probability of a continued rally. Since this has not passed, I still consider this a high risk rally and not an entry point for investors of any timeframe except a period of weeks and months.

However, the ebullient US markets (particularly the NASDAQ) may change this view over the coming week – from Colin Twiggs comes this chart and analysis:

Dow Jones Industrial Average is testing resistance at 11700. Breakout would warn of a primary advance, but the market is prone to false signals because of excessive volatility and it would be prudent to wait for confirmation. Respect of 11700, or a false break above 11700, would re-visit support at 10600.

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

www.twitter.com/ThePrinceMB

Comments

  1. anyone else out there just loving this bear market rally? like shooting fish in a barrel, everything you buy goes up!

  2. Congratulations on the new arrival!

    If a major event in the Prince’s life is a good indicator of market volatility, I’d say we’re in for at least several months of volatility. Little ones are guaranteed major upheaval for at least several months and in some cases decades.

    In any case, I agree that the rally is not unusual for a bear market rally. With the larger degree trend down, the odds favour at least a re-test of the recent lows in coming months.

  3. just re read this prince and think you have confused investors for traders

    “I still consider this a high risk rally and not an entry point for investors”

    I would say this is, has been an excellent entry point for investors. the market is coming off 26 month lows, large cap PEs on single digits and gross yields +10% in very lowly geared corporates. if this isnt a great entry point for investors i dont know what is.

    • Did you read this GB?

      http://www.macrobusiness.com.au/2011/09/australian-share-market-valuation-report/

      I think you’ve confusing investing with picking bottoms with CERTAINTY. Therein is the risk – that this rally could be either the start of a new bull market, or a pause in the bear market with a Western recession just over the horizon, and profit growth of your corporates slowing or actually receding.

      Single digit PE’s for ponderous, slow/zero profit growth corporates with very lazy balance sheets is not necessarily cheap on a historical basis (unless you limit your research to the last 20 years)

      My long term investing system AND my macro model are all screaming NOT LONG at the moment. Yes, the shorts have been covered for a nice tidy profit, but the longs are very small at this stage due to prudent risk management.

      • +1

        Balance sheets change rapidly once recessions kick in. Depends on the breadth of the downturn (China? Japan? Housing crash?) your ASX8 could get slaughtered.

        Congrats on the new Princekin.

  4. Congrats Prince!

    How elequently do these patters evolve in hinsight, like the double bottom on your second last chart. Beautiful indeed!

    ‘Misbehavior of markets’ is on priority in to-do list!

  5. I’m going to puke if I read another headline saying “Stocks rally on EU debt hope”. I think the solution to this debt crisis isn’t to have a plan, but simply to say you have one. I mean, will the market really rally for 2 week straight on no news? The only thing that is confirmed is that the EU leaders have a plan. It’s looking like it. But how good can their plan really be? It seems the main rumor about additional haircuts and recapitalizations will simply lead to a credit crunch.

  6. Prince, clearly you are a machine sent from the future. Who else could muster the energy to post at such a time?

    So, holding out for 4300. Then take a deep breath and back into the market…

  7. ceteris paribus

    Congratulations on your newborn.

    Yes, the rally is “not unusual” but it just might build into something.

    Very interesting to watch- without feeling any need to chase.

  8. Prince,
    the how long is the “long term” average you have used. It is obviously longer than the 10 month data set on show.
    Regards,
    SB

    • Hi Steve

      Its a 260 day weighted moving average. I prefer to see weekly closes (i.e close calculated after a Friday ASX session AND a US/Euro session – I do my weekly analysis Saturday morning because of this) above this average.

      Most traders/insto’s use the 200 day exponential moving average which is very similar, I find mine a bit more timely in my simple hedging system I use for long term investing system.

      I’ve covered this system before, but will be showing more in future special reports on how you can use basic market timing techniques to hedge your super or non-shortable non-super investments.

      • Thank-you.
        I graduated right into the depths of the Asian crysis black hole. The year previous, 80% of engineering graduates found emplyment, for my year it was closer to 30%. (I was lucky)

        It has made me think like a Bear and miss both the dot com and current housing booms. (Cash and basic long held stable dividend stocks only)

        So any education on rational stock picks is very welcome.
        SB

    • Haha, I am surprised it took this long. It seems the market really expected a wonderful quick-fix solution to everything.