Weekly Report, week ended, Friday, 8 February, 2013

CONTENTS

1.Australian Market.  Indices:  One-Week Performance

2.World Markets.  Indices:  One-Week Performance

3.Australian Market.  XJO – Monthly Chart (for the long-term investor)

4.Australian Market.  XJO – Weekly Chart

5.Australian Market.  XJO – Daily Chart

6.Australian Market Sectors – Relative Strength – Part One

7.Australian Market Sectors – Relative Strength – Part Two

8.International Markets:  SP500 – Daily

9.International Markets:  FTSE Euro Top 100 – Weekly

10.International Markets:  China88 – Weekly

11.International Markets:  Nikkei 225 – Weekly

12.Summary and Conclusion

13.SLF  – Weekly

14.STW – Weekly

AUSTRALIAN MARKET:
INDICES ONE-WEEK PERFORMANCE

•XAO: +0.95%. Seven of 10 S&P Sectors were up.

•Best:

–Consumer Staples +2.83%

–Health +2.36%

–Materials +1.31%

•Worst:

–Utilities –1.7%

–Info Tech -1.12%

–Telecoms -0.62%

 

•Risk:

–50-Leaders  +1.22%,

–Small Ords. -0.06%

–Risk Appetite – Risk Averse.

•Gold Miners: +1.19%

• Property Trusts: -0.28%

•The week was weird.  Best performers:  Defensives.  Worst performers: Defensives.  Small Ords did nothing.  The market was carried higher mainly by large blue chips.  Participation in the smaller end of the market was poor.

MAJOR WORLD MARKETS
INDICES ONE-WEEK PERFORMANCE

•Australia’s XJO was the standout performer this week of the five major world indices that I follow closely.

•Three out of the five were negative, albeit China managed a barely negative reading.

•All of the five indices are in strong up trends.

•A more detailed analysis of each one follows later in the report.

AUSTRALIAN MARKET:
MONTHLY CHART – XJO

•The chart is currently at 4971.3. January was very strong, up nearly 5%.  February has had six trading days and has gone on with the job.  That leaves 14 trading days left in February.

•The major horizontal resistance level around XJO 5000 is clear

•Stochastic, RSI and CCI are both overbought.  They can remain so for months.

•This chart has a lot of positives.  The uptrend is strong and remains above the 20-Month TMA, which has turned up.  The Directional Movement panel suggests the market is into its third month of a major bull market.

•The chart pattern is a right angled triangle.  The measured move for such a pattern, if it completes, is around the 2007 high.  In round figures 6900.

•The big question is “if”.  A monthly close above resistance is required to clinch the deal.

•The market is medium term overbought and has been up eight of the last night months.  That’s a good run so the market might pause here before carrying on upwards.  Of course, it could pull back into a serious retreat.  There’s no way of knowing.

•A monthly close above resistance is required for a clear breakout signal.

AUSTRALIAN MARKET:
WEEKLY CHART – XJO

•The XJO has now been up eleven out of the past twelve weeks.  The one down week was only marginally down (-0.3%)

•RSI.9 is at 85.2.  That’s very overbought.  We haven’t seen readings like that since the GFC started.  Readings above 80 occurred frequently in the 2003/2007 bull market.  So we shouldn’t presume that such a high reading is likely to produce a correction.  In a bear market, such a presumption would be reasonable.  In a bull market, it’s an indication of strength.  Are we still in a bear market?  That’s debatable.  A break above horizontal resistance would suggest that the bear has gone (or at least, hibernating for now.)

•Stochastic and CCI are both overbought, but can remain so for weeks.  Stochastic is at 99.915.  That’s near enough to 100.  That stochastic reading is the highest in the past 10 years.  (I haven’t gone back further than that.)  A stochastic indicator compares the current reading of an instrument with its trading range within a specified trading range.  This is clearly an extreme reading.  The market is ripe for a pull-back.

The bottom pane shows ADX and ADXR.  This is a measure of the strength of a trend (it ignores direction of the trend).  Above 20 is considered a strong trend.  That’s where it was in December 2012.  There have been stronger trends.  March-October, 2009 was stronger than this before hat trend finished.  Other stronger trends have been corrections – which are invariably more violent than bull rallies.

AUSTRALIAN MARKET:
DAILY CHART – XJO

•The XJO finished at 4971.3.  First level of horizontal support is is around 4860, then 4570.

•Indicators:

1.MACD Histogram. Below zero.  Negative.

2.MACD. Above zero.  Positive.  Possible negative divergence setting up.

3.RSI.9  is at 80.1.  Overbought. .  Possible negative divergence setting up.

4.Stochastic.  92.6.   Overbought.

5.CCI.14: +116.  Overbought. Possible negative divergence setting up.

6.ADX.  65.2 and turning down.

•I made mention in the previous section that on the ADX, above 20 is considered a strong trend.  Readings above 40 are considered extreme.  A reading above 60 is  quite rare.

•Dual resistance of a major oblique trend line and a horizontal trend line is strong.  We can see what happened back in October, 2012 when similar conditions prevailed.  The market fell about 5 per cent.

•Broken record time:  this is primed for a pull-back.  But the trend is up.

RELATIVE STRENGTH – AUSTRALIAN MARKET SECTORS – Part One

•In many previous reports I made a point talking about the relative strength of key sectors.

•This chart is an effort to capture all the sectors and sub-sectors that I review in one image.  I’m not particularly happy with the process that I’ve come up with but it’s OK.

•What I’ve done is to record the ADX readings for all the sectors and produce a bar graph of those readings.  Remember that ADX is  based on a 14-Day period and that a reading for the ADX above 20 is strong, 40 is extreme and 60 is quite rare.

•If above 60 is quite rare, how do we describe the ADX for Consumer Discretionary at 76?   Financials, Consumer Discretionary and Fifty Leaders are above 60 – quite rare.  Readings for Telecoms, Property, Info Tech, Industrials, Energy and Consumer Staples are above 40 – Extreme.

•The weakest in the S&P Sectors are Utilities, Materials and Health but all exhibit a strong trend.  Utilities rarely reaches extreme levels.  Materials has been lagging throughout this rally and Health after a multi-month run-up has eased off recently.  Gold Miners (XGD) is the only sector below 20 – non trending.

•We can also use this to make make inter-sector comparisons.  One I like to look at often is the comparative performance of Small Ordinaries and the 50 Leaders (the big blue chips).  Small Ords – ADX: 35.6 – trending strongly.  50 Leaders – ADX:  63.7.  In a bull market it’s a principle that the Small Ords leads.  If it is not, then market breadth is suspect and the continuation of the trend is in doubt.

RELATIVE STRENGTH – AUSTRALIAN MARKET SECTORS – Part Two

•The above discussion uses a blunt instrument – it is uni-dimensional, recording ADX at a point in time for each sector.  That’s a major weakness in the study.  It makes no effort to record whether or not the ADX is rising or falling.  A falling ADX suggests that the trend is slowing.

•Some analysts suggest that traders should consider action in a strong trend if ADX drops below ADXR (which is like a Moving Average of the ADX).  But no action while the ADX > ADXR (a “Do Not Sell” Zone) even though the ADX is falling.  (Other factors should also be considered.)

•The ADX for the XJO is currently falling from a high of 68.6 on 4 February to 65.2 on 8 February.  So the trend is slowing – a warning sign.  But the ADX is still above the ADXR.  (In a “Do Not Sell” zone.)

•The accompanying chart shows for each sector the distance of the ADX above/below the ADXR.  A negative reading means that ADX < ADXR.  Traders should be very wary of entering buy trades in such circumstances.  Sectors currently negative are:  Small Ords, Info Tech, Industrials, Health and Gold Miners.

•Again, comparisons between sectors are instructive.  50 Leaders is +6.8, Small Ords is -1.8.  Once again we are seeing strength in the 50 Leaders – risk adverse behaviour.

•Similarly, a comparison of the 50 Leaders (+6.8) with the XJO (+2.1) shows a wide discrepancy.  While both are on the positive side, we’re seeing risk adverse behaviour.

I could expand all this quite comprehensively but room in this report, unfortunately, doesn’t allow for that.  I might add that ADX and its accompanying indicator, Directional Movement, are highly complex and not for the inexperienced.    (The above approach doesn’t constitute a trading methodology but could provide valuable information in a top-down trading system.)

INTERNATIONAL MARKETS:
SP500 – DAILY

•The SP500 finished at 1517.93.  Support/Resistance:   1466.12/1526.72.

•The Index was up 0.31% on the week – and up for the sixth week in a row.  Six up in a row is rare.  Of course, it can go up for 11 weeks or 13 weeks or more.  There are no laws binding the movement of the index.

•Indicators:

1.MACD Histogram. Marginally below zero.  Neutral.

2.MACD. Above zero.  Positive but falling gently.

3.RSI.9  is at 62.3.  Negative divergence.

4.Stochastic.  92.7.    Overbought.

5.CCI.14: +151.6.   Overbought. Possible negative divergence setting up.

•Some indicators are overbought, some are showing possible negative divergencesSome indicators showing possible negative divergences.

•The up trend remains intact.

•Since 1996 the broad indices for the American market (Dow 30 and SPX) every year have returned, more or less, to the level seen at the beginning of January.  If history repeats, the sooner that event occurs the better for the market.  If this bull rally continues, then, it’s likely we’ll get a very big crunch later in the year.

INTERNATIONAL MARKETS:
EUROPEAN TOP 100 – WEEKLY

•The Euro Top 100 finished at 2376.81.  Support/Resistance:   2300.85/2398.62.  (Roughly 2300/2400)

•Unlike markets in Australia and America, the Index was down -0.64% on the week.  It had a great day on Friday – up 1.21%, hence the long lower tail.

•The Index has struggled now for six weeks to close decisively above  resistance.  The more failures at a level, the more the odds favour a reversal to the downside.

•Indicators:

–MACD Histogram. Marginally below zero.  Neutral.

–MACD. Above zero. But flattened out.

–RSI.9  is at 59.8 and falling.

–Stochastic.  90.    Overbought.  Falling below its signal line.  Negative.

–CCI.14: +63.6.   Falling below +100 with a negative divergence.  Negative.

•The odds are now beginning to favour the bears but a very strong support level lies at 2300, only about -3% away.  That may hold any pull back.  Bears were slaughtered on Friday – so the index may be going to take another crack at getting over 2400.

INTERNATIONAL MARKETS:
CHINA88 – WEEKLY

•China88 is a Dow Jones Index made up of the blue chip stocks on the Shanghai and Shenzen stock exchanges.

•The Index finished at 237.17.  Support/Resistance:   225.51/278.82.  The index was down marginally on the week, -0.04%.  The candle was a spinner – indicating indecision.  It’s not surprising that the Index had a pause week after such a strong run up.  China markets are closed next week for Lunar New Year.

•Indicators:

–MACD Histogram. Above zero.  But falling.

–MACD. Above zero. Positive.

–RSI.14  is at 72.   Overbought.

–Stochastic.  92.1.    Overbought.

–CCI.14: +135.9.   Overbought.  Possible negative divergence setting up.

•The market is overbought – that’s a negative.

•Of major significance is the break of the very long term down trend in place from August, 2009.  Both horizontal and oblique resistances have been dispatched.  This is a positive for our market.

INTERNATIONAL MARKETS:
NIKKEI 225 – WEEKLY

•Nikkei 225 is the broad market benchmark for the Japanese stock market.

•The Index finished at 11153.2.  Down -0.34% for the week.  Support/Resistance:   10982.1/11339.3.

•Japan has been behaving in a similar manner to China.  It’s busted out of a long term down trend and has had a remarkable run-up from late 2012.

•Indicators:

–MACD Histogram. Below zero.  Negative.

–MACD. Above zero. Positive.

–RSI.14  is at 77.7.   Overbought.

–Stochastic.  95.    Overbought.  Below its signal line.  Negative.

–CCI.14: +109.3.   Overbought.  Possible negative divergence setting up.

•The market is overbought and momentum this week is stalling..

•Of major significance is the break of the very long term down trend in place from April, 2010.  The uptrend is intact and close to the resistance of the April, 2010 high.  Some sort of pause or retreat is likely after such a strong run.

SUMMARY & CONCLUSION

First of all, a run down of the major world indices that I watch.  Two out of five indices were up.  Last week, four out of five were up. The figures:  XJO, +1.02%; SP500, +0.31%; Europe Top 100, -0.64%; China88, -0.04%; Nikkei, -0.34%.  The two most important countries for Australia (China and Japan) were in pause mode, with movements to the downside.  We may be getting out of sync with some important world markets.

 

Our market has reached trend levels rarely seen.  The weekly Stochastic on the XJO is just a smidgin below 100.  It can’t go any higher than 100.  That’s a higher level than at any time in the past 10 years.  The daily ADX is at 65.2.  Above 40 is an extreme reading.  Small Ordinaries continue to underperform the Fifty Leaders and the XJO.  It’s a principle that in a strong bull market, the small caps lead.  They’re not.

 

This strong trend raises the question:  Are we now in a secular bull market.  Plenty of commentators think so.  The DMI on the Monthly XJO is indicating that we are.  The poor performance of the Small Ords says: NO.  I think we still have to crack XJO 500 and then test that as support before we can feel confident.

 

How high can our market go?  Who knows.  But the odds aren’t good for this to continue like this in the short term.  In the longer term, if the market can crack XJO5000, then the odds of reaching XJO6900 are good.

 

Next week?  The market is so overbought after such a strong month (months?) it’s time for a breather.  I think we’ll be down by the end of the week.

 

A reminder – every year since 1996, the American indices have, more or less, returned to the early January level at some time during the year.   But – maybe history won’t repeat this year.  Maybe this market will never, ever, ever go down again.  And Barron’s won’t have to eat humble pie.

 

Remember:  do your own research.  Make your own decisions.  I hope that the information I show might help you just a little.

For daily updates – check http://redbackmarketreport.wordpress.com/

ETF:  SLF – WEEKLY

 

•This week I’ve continued to show the chart for XPJ – the Property Sector.  I’ve mentioned before that SLF has low liquidity which means that prices on offer are often those offered by the market maker.  They offer prices with a very wide spread.  If you put in an “at market” order you’ll often end up with a price which is out of kilter with the underlying instrument.  This also results in distortions in the tracking stock, SLF.

•This week the Property Sector was down, -0.27%%.  It’s been in a strong bull trend since August, 2011.  Once again, it’s looking stretched to the upside (close to the top of the SEC) with overbought indicators – but no real sign that this bull rally is likely to end.

•The Property Sector is an interest rate sensitive sector.  It’s borrowing costs go down and investors seeking income will switch out of other instruments (e.g., bonds and bank accounts) and into Property Trusts seeking higher dividends.  While the RBA is in rate cut mode, it’s difficult to see how the Property Sector can suffer significant falls.

•According to Comsec, SLF Dividend Yield is 5.1%.  That remains  good value.  Dividends are paid quarterly.  Next dividend date is the end of March, 2013.

•(SLF is the Exchange Traded Fund which tracks the performance of the Property Sector on the Australian stock market.)

ETF:  WEEKLY STW

•STW is the tracking stock for the ASX200.

•This week the ETF rose +1.02%.  The up trend remains intact.  Take signals from the XJO chart.

•Dividend Yield:  3.7%.   Dividends are paid half-yearly.  Next ex-dividend date will be at the end of June.

•(STW is the Exchange Traded Fund which tracks the performance of the ASX200.)

REDBACKA