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Australian market not painting an inspiring picture

Lesley Beath  |  31 Oct 2016Text size  Decrease  Increase  |  

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Many Australian stocks have broken below their 200DMAs and that is not a good sign, as technical analyst Lesley Beath illustrates.

 

The Australian share market starred last week. But not in a good way. It was one of the worst performers among global equity markets, down 2.7 per cent.

The All Ords remains above numerous support levels, including its 200DMA, but it's not an inspiring picture.

In recent reports, I have noted that many Australian stocks have retreated to their 200DMAs over the past couple of months: I have been encouraged by the resilience as that support held.

But lately, more and more stocks have broken below that average. That is not a good sign. And there are instances where sharp drops have seemingly come out of nowhere.

It's a tricky market. The charts of individual stocks are all over the place. Some positive, some negative.

The major market averages do not really reflect what is going on behind the scenes. It's a bit of a "dog's breakfast" as my grandmother used to say.

The market mood remains skittish. It's disappointing but not all that surprising. Australia is getting very little direction from either the US or China.

And left to its own devices, stocks have traded in an erratic fashion, reflecting individual situations rather than an overriding bull or bear phase.

I spoke last week about Bellamy's (ASX: BAL) and The A2 Milk Company (ASX: A2M), noting the improving price action as both began to rise again after another re-test of the 200DMA. But both stocks were hit hard last week, down 11 and 8 per cent, respectively.

They are still trading above the 200DMA, but last week's action negates the improving profile. Let's watch these stocks from a distance in the short term.

We also looked at Blackmores Limited (ASX: BKL). It was near support but it did not show any signs of improvement. I suggested it was on the radar, but it needed to do something constructive to inspire any enthusiasm.

The stock traded briefly below the $100 level on Thursday before mounting a sharp reversal. A far cry from the $220.90 level attained in early January.

Thursday's low of $97.91 is just a fraction above the Fibonacci 61.8 per cent retracement of the bull run from $19.95 in November 2013 to $220.90 in January.

That retracement level can often act as a support so current levels are interesting. But interesting is just that--interesting. It doesn't mean the tide is turning. It just means this is a potential turning point.

And what about Wesfarmers (ASX: WES)? The stock was always going to struggle as it hit its major resistance level, but the reaction is surprising.

Wesfarmers has failed in its attempt to break topside and remains trapped in the range that has been in place since May 2013. Risk is to the downside in the near term.

The healthcare sector has been beaten down in recent times. We have reviewed the ASX Health Care/All Ords ratio a few times over the past couple of months, anticipating underperformance.

The sector has underperformed since late July and heavyweight CSL (ASX: CSL) has lost 19 per cent. The stock broke below its 200DMA in early September and then rallied up to test the underside of it later that month.

It has since retreated and is trading well below the 200DMA. The stock remains vulnerable and is now sitting on an important support level.

A break below $98.54 would complete a significant top formation. It appears as though CSL's medium-term chart profile is changing after trending higher since August 2014.

Ramsay Health Care (ASX: RHC) and Cochlear (ASX: COH) were also hit hard last week, down 4 per cent and 6.7 per cent, respectively. ResMed (ASX: RMD) dropped 6 per cent.

Sonic Healthcare (ASX: SHL) declined by 5 per cent. Like CSL, the stock is on an important support level, which if violated, would target significantly lower levels.

If we look at the ASX Health Care/All Ords ratio, it is now close to support. The ratio needs to reverse relatively quickly to avoid the potential for another substantial drop.

On the resource front, Rio Tinto (ASX: RIO) finally joined BHP Billiton (ASX: BHP) in breaking above a key resistance level.

Brazil's Vale broke above its key resistance the week before last, jumping 12.6 per cent. It followed that gain with another 11 per cent advance last week. The stock has risen from a low of $6.44 in January to $20.74 last Friday.

A price target toward the $26 level is indicated over time. A pullback toward the breakout point ($16) cannot be ruled out in the near term.

On the global front, we continue to wait for some lead from Wall Street, but we may need to wait until after the US elections.

As I have been saying for a while now, there are not a lot of clear signals, but I think risk is to the downside.

The S&P 500 is right on support and the Dow Transport Index is at resistance. The S&P Banks Index continues to edge higher. So, it's the same old story week after week.

The one aspect that is beginning to worry me is the action in the Russell 2000. It is always a concern when the Russell and the S&P diverge and I have found that often the Russell will give some early guidance for the S&P.

The index broke below the mid-September and mid-October lows last week and momentum indicators are in sell mode. It suggests caution is warranted.

I haven't commented on the US T-Bond/S&P 500 ratio for a while, mainly because there hasn't been a lot to say. However, the situation is now quite interesting.

As regular readers will know, I watch this ratio to give some guidance for the outlook for the US equity market. Breaks of important levels of support or resistance on the ratio may give early signals in some instances.

Normally, the ratio will trend downwards when the equity market is rallying, and vice versa. Over the past few months the ratio has ground lower as the both bonds and equities have also declined.

Although the chart merely reflects the fact that bonds are falling quicker than equities, this is strange action: I'm not quite sure what to make of it, but it doesn't inspire confidence.

The US T-Bond is now sitting on a cluster of support levels. This is a critical juncture for the bond market and we should get a resolution relatively quickly. Risk remains to the downside, as it has done for several months now.

To say it's an interesting time in the US is an understatement, despite the seemingly boring action in some of the major global equity markets.

 

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More from Morningstar

• Markets seem too quiet for comfort

• All quiet on the technical front

 

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 consent 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.