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Australian market action encouraging

Lesley Beath  |  21 Sep 2016Text size  Decrease  Increase  |  

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Australia has shown some rare strength and the action in the market is encouraging, as long as last week's lows are not violated and stocks remain above their 200DMA, technical analyst Lesley Beath says.

 

It was relatively quiet on the S&P 500 last week, with the index basically flat on the week. The Nasdaq, on the other hand, popped almost 3 per cent, taking it just short of its 2016 highs.

The Dow Transport Index remains below its key resistance. The S&P Banks Index declined on the week and is now testing the breakout from the 2015 downtrend. So it is a mixed picture, as it has been for some time now.

European markets lost ground and the German DAX, like the S&P Banks Index, is now just above the 2015 downtrend.

There are not many strong signals out there.

I continue to believe that caution is warranted.

Australia, on the other hand, showed some rare strength on Friday as it bounced from support. That support was highlighted in the last report and it was encouraging to see it hold.

It was also encouraging to see Commonwealth Bank of Australia (ASX: CBA) bounce from critical support. I suggested last week that all eyes would be on the stock as it probed its 2016 lows.

The stock pierced those lows on Tuesday but then rebounded strongly. It finished the week almost 2 per cent higher, on good volume. So far, so good.

Telstra (ASX: TLS) also broke below an important support level on Tuesday, but then rebounded. A daily key reversal on Wednesday reclaimed support.

As with CBA, a break of support would have opened the way for significant downside, so that has been avoided--at least at this stage.

CSL Limited (ASX: CSL) is another stock that managed to hold above support through the week. I have spoken about the break of the 200DMA in recent reports and the next support became the March/April lows.

Price came within close proximity of that support through the week, although it did not test it. Friday's advance was the strongest in three weeks, so I am mildly optimistic.

CSL has declined by almost 20 per cent since July: time to nibble?

Blackmores (ASX: BKL) is a recent high flier that was brought back to earth recently. At its early September low, the stock had almost halved in value from its January peak.

The weekly chart depicts the incredible advance in 2014 and 2015, and then the fall below the 200DMA. Price tested that 200DMA in August and promptly declined.

The 200DMA will still act as resistance, but in the meantime the stock is rising from the lower limits of its recent trend channel. A buying/trading opportunity? Quite likely.

We have focused on the 200DMA in recent weeks as, one by one, stocks retreated to that important support. There are more stocks to add to that list this week.

They include, but are not limited to: REA Group (ASX: REA), DUET Group (ASX: DUE), AusNet Services (ASX: AST), Navitas Limited (ASX: NVT), Monadelphous (ASX: MND), Infigen Energy (ASX: IFN), Aconex Limited (ASX: ACX), and Carsales.com Limited (ASX: CAR).

All bounced last week, holding the 200DMA. Carsales.com is also on support in relative-performance terms, so the technical outlook is encouraging.

So what's happening with the resource/industrial ratios that we have been monitoring? Not much, but I do think, as I have for a while, that the bias is shifting towards the industrial side of the market.

If that is the case, then I think the banks could contribute to that outperformance.

Earlier this month we looked at that prospect. At the time, the ASX Banking Index had begun to stabilise in relative-performance terms (against the All Ords) but there was insufficient evidence to suggest a turn for better was imminent.

It is still not confirmed but the odds are now in favour of bank outperformance. It may not be a long-term reversal; it could just be a counter trend move, lasting for just a few months--time will tell.

If we look at the ASX Banks/ASX 100 Resources ratio, that too suggests the outlook is turning in favour of the banks.

On the commodity front there is not too much exciting news, although gold is weakening and threatening to break below support.

Traditionally, from a seasonality perspective, gold should be starting to show some strength at this time of the year. This seasonal strength comes as result of an increase in demand from August/September through to January/February.

Briefly, the increase in demand begins with the Asian grain harvest in August/September. This is followed a month or so later by the beginning of the so-called Festival season, which begins in India and is combined with the Indian wedding season.

After the Indian wedding season comes to a close, the Western holiday season begins. After this, the festival season switches over to China. That's it in a nutshell.

But seasonal tendencies are just that-- tendencies. And like cycles they should only be used as a guideline. But the fact that gold is not showing some improvement at this time of year does raise a cautionary flag.

The US Dollar is poised to move higher and this will add another headwind for the gold price.

The US Dollar Index (which is dominated by the euro) tested significant support in May and then again in June, and although the action since has been choppy, the trend is upward.

Apart from anticipated strength against the euro, the US dollar appears to be preparing to move higher against the majority of currencies.

By and large, there are no confirmed signals at this stage and it appears as though upside will be gradual.

The Australian dollar is not displaying any strong technical signs. It is still above its 200DMA but there is no sign of any significant move in either direction. But I believe that risk is to the downside.

The Australian dollar gold price remains below the key resistance level that we have been monitoring for some time. I do not expect it to be overcome any time soon.

There's not much more to say this week. We need to accept there can be some choppy trading ahead.

But I think the action in the Australian market is encouraging--as long as last week's lows are not violated and as long as stocks remain above their 200DMA.

 

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More from Morningstar

• Is this the beginning of a corrective phase?

• Could the Aussie banks outperform?

 

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.

© 2016 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written content of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.