Big miners an area of concern
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The views expressed in this report are those of Lesley Beath and may differ from Morningstar's views.
Disclaimer: To the extent that any content in this report constitutes advice, it is general advice that has been prepared by Lesley Beath without taking into account the particular investment objectives, financial situation and particular needs of any individual investors. If necessary, you should consult with a licensed investment adviser or dealer in securities such as a stockbroker before making an investment decision. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.
Well, we all know the Australian market pushed above resistance last week. How could we fail to, with all the media coverage that went with it? It was a psychological barrier and the market performed well, but what does it really mean? Is it just blue sky from now on?
As regular readers will know, I believe we cannot just look at the price action in Australia in isolation. That is why there will always be a comment on the US market and the key European markets, and even the troubled European equity markets.
I watch the Chinese market closely, and Japan. In addition, we talk about investor sentiment and important ratios such as the US T-Bond/S&P 500 ratio.
Numerous other markets and indicators are monitored. That is why, at times, action in one market may contradict what is happening elsewhere and we have to make a judgment call on what is likely to be the dominant force.
Which brings us to the question: Are there any signs of weakness in the Australian market, and if not, is the strength in Australia and the break of resistance reflected in other global equity markets?
Let's start with the first part of the question: Are there any signs of weakness in the broad Australian indices? Not really.
Since bouncing from the 200DMA in mid-November, the All Ords and the ASX 200 have risen in a very strong and steady fashion (more dynamic than at any time since 2009), and at this stage the consistency of the uptrend is unchanged.
It is overbought - more so than at any other time since the 2007 peak - but overbought conditions do not necessarily amount to sell signals.
When an index or stock is trending strongly, overbought and oversold levels on the momentum indicators can be misleading, and what we look for is a divergence. If momentum begins to deteriorate while the trend is still forging ahead, then we would start to worry. At this stage, that is not happening.
One indicator we can employ when a trend is accelerating is the "parabolic stop and release," or as some call it, "parabolic stop and reverse" (SAR). This was developed by market technician J Welles Wilder Junior, and was "designed to allow more leeway or tolerance for contra-trend price fluctuation early in a new trend, then to progressively tighten a protective trailing stop order as the trend matures". (Colby and Myers, The Encyclopaedia of Technical Market Indicators).
I use a slightly different interpretation of this indicator. Firstly, I smooth the price data (by a three or five-day or weekly moving average), then I run the parabolic stop on that smoothed data. When a sell signal is given (price drops below the stop), then we get an idea of when the trend is beginning to show signs of weakness.
I think the system works better using weekly data and on individual stocks that are accelerating to the upside. But it does have shorter-term implications and I have used it on the daily chart of the All Ords, and as evident, there are no signs of weakness at this stage.