ASX witnesses impressive action
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With the short-term resistance of the January high in place on the Australian share market, the question now is whether that resistance can be overcome, technical analyst Lesley Beath says.
I am not sure how long some of you have been reading my weekly reports. They have certainly been ongoing for quite some time. I began writing for Morningstar in 2010, after its purchase of Aegis Equities Research in the March of that year. I had written for Aegis since 2002.
There have been so many momentous events in that 15-year span. Writing about them, trying to work out what was happening, and guiding readers through my thoughts, has been both stimulating and rewarding.
For those who have followed my weekly dialogues, I thank you. I know that I have readers who date back to my days at AMP--some 25 years ago. It's nice to know that my work has been so accepted and appreciated.
I have always believed that the best way to approach my work, has been to be open and transparent with my thoughts. At times, there will be nothing major to write about: when that happens it's best not to "talk just for the sake of talking". My mother taught me that many years ago!
When there have been conflicting signals, or I can't make head nor tail of what is happening, I have acknowledged that situation. Sometimes there are simply no clear signals, and it would be irresponsible to suggest otherwise.
My role has not been to predict future events: that is impossible for both the technical and fundamental analyst. Instead, it has been to assess a situation, absorb all the events that are happening around global markets, and try to work out the where the risks and rewards lie.
By highlighting those risks and possible rewards, readers can assess the state of play, act on it if they wish to do so: or simply note the situation, think about it, and then select their own course of action.
There are many who deride technical analysis and that, in my opinion, is a shame. I think technical analysis, and the technical analyst, has perhaps been misunderstood by some.
People hear descriptions such as "head and shoulders," "rounding bottoms," "double tops," "flags" et cetera and often don't understand that these are simply terms for accumulation, distribution, or continuation patterns.
Each pattern reflects the combined emotions of a vast number of investors. The technical analyst does not look to the stars in the sky, or the Ouija board--just the price action across numerous investment vehicles.
I think one area that is often overlooked by some technical analysts is asset allocation. For fund managers, this is the most important investment decision: for the smaller investor, it might just come down to a decision as to what sectors might give the best returns, and then to which stock in the sector will outperform its peers.
That's why I focus on relative performance so much. It is important for both the fund manager and the individual investor. The ratios that we look at on a regular basis simply help to determine when the pendulum is about to swing from one extreme to the other.
I certainly hope that over the years I have been able to enlighten some of you, and that you have learned something on this journey that we have taken together.
But as they say, all good things must come to end. I will not be writing for Morningstar after the end of February.
I'd like to thank Morningstar for giving me the opportunity to share my thoughts with you for the past six or seven years. It has been a privilege.
When I told a colleague about this change, they said to me: "Write--keep writing." I will do that--you will find me.
Before I say goodbye, I have two more reports to write--so I'll get stuck into this week's now.
The ASX All Ordinaries Index tested its early January high last week. There was impressive action across most sectors--telecommunication being the standout exception.
I said in the last report there was scope for some near-term upside in the market and now, with the short-term resistance of the January high in place, the question is whether or not that resistance can be overcome.
Viewed in isolation, the resistance on the All Ords is not that onerous: it is the resistance on the major banks that grabs attention. The ASX Materials is also in the vicinity of a hefty resistance zone.
Remember that the Australian banks were facing the same barriers in early January, and could not break topside. I think the odds of a topside break in this instance are higher than they were in January (albeit marginally), but I would wait for the breakout before becoming optimistic.
The resistance on both the ASX 100 Resources and the ASX Materials is plain to see, and demonstrated in the charts later in the report.
The healthcare sector, which has been in focus over the past couple of reports, is also in an interesting position. If you remember--from discussions over the past couple of weeks--the price action in CSL Limited (ASX: CSL) was regarded as a pennant formation.
Price broke topside the week before last and traded up to resistance last week. With pennants and flags, there is a price target that can be derived by measuring the "flag pole" (simply the initial burst higher) and then adding that distance to the breakout point.
With CSL, the target is at slightly higher levels, but given the significant resistance now impacting, I think caution is warranted. At least until such time as that barrier ($123.24) can be overcome. ResMed (ASX: RMD) is in a similar position.
On the other hand, the ASX REITs Index continues to present a constructive profile. It is neither overbought nor near resistance. It is showing signs of stabilising in relative-performance terms, after underperforming the market since last July.
In the last report, I spoke about the ASX Small Ordinaries/ASX All Ords ratio, noting the proximity of support. I said at the time "now, as the ratio bounces from the support of the early-2016 lows, it is worth monitoring closely for signs of reversal yet again. It's early days so we need more confirmation but if the trend is in the process of reversing, even for the short to medium term, then some investors may wish to take advantage of it".
The ratio fell last week, breaking its recent low, but it is above the 2016 lows. It is still worth monitoring closely, but needs to reverse relatively quickly. A break below the 2016 lows would open potential for another "leg down" in relative performance terms.
The price action in the index itself still appears constructive, but both the Small Resources Index and the Small Industrials Index have yet to break above their key barriers. So patience is warranted--no point second-guessing the situation.
And the big question--financials or resources?
The situation is taking time to resolve, which is not that unusual. I won't go into a detailed description of the action--a picture paints a thousand words so they say, so I'll let the charts do the talking.
I'd be leaning towards outperformance by the financials at this stage, but let's wait for some clarity.
On the commodity and commodity-related front, copper pulled back last week, closing below the resistance it had overcome the week prior. Aluminium pushed higher as did iron ore. Both Brazil's Bovespa Index and Chile's Santiago IGPA Index pushed above the resistance that has been on the radar for some time now.
So, that's all good, although there are numerous barriers above current levels, so upside, even if it continues, is unlikely to be plain sailing.
The US market continues to push higher in a constructive fashion. The S&P Banks Index pushed above short-term resistance last week; the Russell 2000 did likewise but the break is not as robust.
I can't see any major threat in the US market at this stage, despite the extent of the recent gains.
Currency markets were uneventful.
The Australian dollar continues to stall at the 2013 downtrend and as mentioned last week there is solid lateral resistance at 77.64 to 78.20. Resistance is also evident against the euro. Of course, we could easily see a break in one direction on one of the crosses, and a break in the other direction on the other.
The big battle is really between the US dollar and the euro at this stage. And although the euro has risen against the US dollar this year, I think the US dollar will gain the upper hand again; although the timing is uncertain at this stage.
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To the extent that any content below constitutes advice, it is general advice (or, in New Zealand, a "class service") that has been prepared by Lesley Beath as a Morningstar authorized representative (ARN 469614) without taking into account your particular investment objectives, financial situation or needs. If necessary, you should consider the advice in light of these matters, consult with a licensed financial advisor, and consider the relevant Product Disclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest. 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. The author does have an interest in the securities disclosed in this report.
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