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Here's why resources could continue to outperform

Lesley Beath  |  23 Aug 2016Text size  Decrease  Increase  |  

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The resource side of the Australian market is at an important juncture and if resistance levels can be overcome there could be continued outperformance, technical analyst Lesley Beath says.

 

The US equity market, as measured by the S&P 500 and the Dow Industrials, was relatively flat again last week.

There was better action in the Dow Transports and the S&P Banks index--both rose by 1.6 per cent.

The latter is now testing the resistance of the 2015 downtrend. The Transport index is still below its key barrier.

The Dow Utilities ended the week lower again. This index looks the weakest of them, as it retreats from the upper limits of the major trend channel.

As has been the case for a while now, there are no strong signals on the US equity markets.

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In the last report I noted the German DAX had broken decisively above its 2015 downtrend, and although the index closed lower on the week, the topside break is still intact.

France's break was less convincing, and it is now back below the downtrend.

China's Shanghai Composite managed to push above its 200DMA through the week. The breakout is in its infancy but it is a positive development after so many months of lacklustre behaviour.

The Australian All Ords remains below resistance, as does the ASX Banks Index. But the ASX Midcap 50 and the ASX Small Ordinaries managed to push above their recent highs.

ASX Energy and ASX Materials, aided by a 9 per cent jump in the oil price, strengthened on the week, with the former breaking above the resistance that we looked at last week.

Woodside (ASX: WPL) advanced 5 per cent, breaking above both the 200DMA and the September 2014 downtrend. There is lateral resistance at the $30 level--a break above there would open an initial upside target of $32-$34.

I know I have spoken about relative-performance quite a bit in recent reports and I would like to follow that again this week with a quick look at the relative-performance charts of the ASX Materials and ASX 100 Resources.

If we begin with the daily chart of the ASX 100 Resources/All Ords ratio, you can see there is lateral resistance at current levels. On the ASX Materials/All Ords ratio we also see resistance just above current levels.

If we take the ASX 100 Resources/ASX 100 Industrials ratio, there is similar resistance on the daily chart, but the weekly chart shows how close the ratio is to the 2011 downtrend.

So this is an important juncture for the resource side of the Australian market.

We have already seen eight months of outperformance by the sector, but if those resistance levels can be overcome it would suggest there could be continued outperformance over the medium term.

Before we finish talking about relative performance, let's review some of the ratio charts we have talked about over the past few weeks: Utilities, Telecommunications, Health Care and REITS.

ASX Utilities Accumulation/All Ords Accumulation ratio

The ratio is holding above support at this stage but I think a break above the recent peak is unlikely in the short to medium term.

A break below support (which is highlighted later in the chart section), would open risk of significant downside in relative-performance terms.

ASX Telecommunications Accumulation/All Ords Accumulation ratio

In the last report, I highlighted the break of important support. That break is still intact, although it remains marginal at this stage.

ASX REITS Accumulation/All Ords Accumulation ratio

Here we are watching the 2014 uptrend. It is in close proximity.

I have also looked at these three sectors and compared them to the ASX Materials Accumulation Index. Significant support is also evident.

That fits in with the resistance that the Materials index is facing when compared to the All Ords and adds to the importance of the current situation.

I have also reviewed the ASX Health Care Accumulation/All Ords Accumulation ratio on a couple of occasions.

A 16 per cent rise in Ansell (ASX: ANN) and a 5 per cent gain in Sonic Healthcare (ASX: SHL) pushed the ratio slightly above resistance last week.

But it was CSL Limited (ASX: CSL) which I believed would hold the key to any sustained outperformance by the sector, as it faced a very hefty barrier in relative performance terms.

CSL has been hit hard over the past couple of weeks and obviously that resistance in relative-performance terms was not overcome.

The ratio of CSL/All Ords is now on support, so near-term action will be important both in relative performance and price terms.

Price has fallen 12 per cent over the past few weeks and it is now testing is 200DMA--it is also in a zone of lateral and trend-line support. I believe CSL is moving back into a buy zone.

As you know, the 200DMA, in an uptrend, can act as an important support level. It can also act as resistance in a downtrend. Let's look at a few examples.

We can start with Bellamy's (ASX: BAL) and The A2 Milk Company (ASX: A2M). Both were stars in 2015 and their rise was such that the 200DMA was left far behind.

By the time it was tested, Bellamy's had declined by 48 per cent and A2 Milk by 46 per cent. Both stocks advanced after testing the 200DMA, resuming their upward path.

Blackmores (ASX: BKL) was another favourite before falling out of favour. At its low point in July it had fallen 41 per cent from the January high.

Although that decline was marginally less than the falls in Bellamy's and A2 Milk, Blackmores pushed below its 200DMA.

That means the 200DMA will now act as resistance. So Blackmores has more barriers to upside potential than the other two stocks.

Another example, also from the recently popular "food" theme, is Webster Limited (ASX: WBA). Webster's price declined by 48 per cent between May 2015 and April 2016.

The break of the 200DMA occurred in September/October and price traded below the average until mid-July. The stock is now trading above the average, suggesting that risk is now to the upside.

On the commodity front, once again the focus was on the oil price. It popped 9 per cent. This comes after a 6 per cent gain the week prior.

Remember the oil price bounced from its 200DMA in early August and it hasn't looked back. We have reviewed oil in the last two reports and I continue to think further upside is possible.

Gold remains below its key barrier. Upside in the near term appears limited. The US Gold & Silver Index is losing upward momentum and the Australian Gold Index is edging below the March 2016 uptrend.

After the gains so far this year, some corrective action would be normal.

 

Chart Packs

Use the links below to view the various chart packs.


Global equities     |      Australian equities     |      Commodities

 

Global equities

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Australian equities

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Commodities

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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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