Is this the beginning of a corrective phase?
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While price action in the US market has not confirmed the onset of a major trend change, investors are in for a volatile month or so, technical analyst Lesley Beath says.
The US market finally awoke from its slumber last Friday. The quietness and calm that has been ongoing since mid-July was shaken as the threat of an interest-rate rise emerged.
I said a couple of weeks ago that the quiet in the US market was unnerving. And with the month of September at hand, with the Dow Transport Index still beneath its key resistance, and with the Dow Utilities Index retreating from the upper limits of its major trend channel, there was need for caution.
So was last Friday's decline the beginning of a corrective phase, or was it just a one-day aberration? I think the former, but I think it will depend upon the action over the coming week.
There are some interesting things going on with the major indices--some positive, some negative. Let's take a look.
In the case of the S&P 500, many analysts are highlighting the fact the index has broken below its 50DMA. That is true, but in my opinion it is not all that important.
What is important is that last Friday's decline took the index back to the support of the May 2015 highs. It is also in close proximity to the highs of November 2015 and June 2016. That is strong support.
And while that support is still in place, no medium-term technical damage has been done.
In the case of the Dow Transport Index, it tested the key resistance we were monitoring early last week, but obviously failed to break topside.
At this stage though, the index is holding above its 200DMA and although momentum indicators are deteriorating, the price action is not warning of an imminent decline.
The Dow Utilities Index, as regular readers will be aware, has been in sell mode for the past month or so. It is now approaching a cluster of support represented by: the 200DMA, lateral support associated with the May lows, and also a 50 per cent retracement of the December 2015 to July 2016 advance.
As with the S&P 500, the support on the Dow Utilities is strong.
As for the S&P US Banks Index, I have highlighted its recent strength in the last few reports. The break of the 2015 downtrend is still intact at this stage.
Unless the index retreats below that trend line, the technical position is constructive.
The Russell 2000 on the other hand, is more of a worry. It posted a weekly key reversal last week and its support is some distance away. This is probably the most disturbing of the indices.
The VIX had been threatening to push higher from major support for a few weeks: it did so with gusto last Friday. It is still below the levels it attained in the Brexit sell-off.
So what's the bottom line as far as the US equity market is concerned?
As we are in the month of September, I remain cautious. But--and remember, this could change very quickly--at this stage the price action has not confirmed the onset of a major trend change. My guess would be that we are in for a volatile month or so.
In Australia, the All Ords and the ASX 200 are approaching the support of the 2016 uptrend and the 200DMA. This gives the All Ords support between 5341 and 5275, and the ASX 200 support between 5266 and 5200.
In the last report I noted that a number of the larger stocks were testing their 200DMAs. They included: CSL Limited (ASX: CSL), Transurban (ASX: TCL), Westfield Corporation (ASX: WFD), Brambles (ASX: BXB), Alumina Limited (ASX: AWC), Adelaide Brighton (ASX: ABC), Northern Star (ASX: NST), Perseus Mining (ASX: PRU), AGL Energy (ASX: AGL), Origin Energy (ASX: ORG), Woodside Petroleum (ASX: WPL) and Santos (ASX: STO).
I said: "Given these stocks are diverse, I think their near-term action may give some guidance as to the health of the broader market. A break of the 200DMA would be a negative development."
Unfortunately, many of those sliced through their 200DMA during the week. They were the industrial stocks. The resource stocks are still holding above that average.
I think all eyes will be on Commonwealth Bank of Australia (ASX: CBA) this week as it probes its 2015 and 2016 lows.
While the other major banks are holding well above support, CBA has little room for error at current levels. I expect a break of support ($69.79) would result in a quick spike toward the $65 level.
Telstra (ASX: TLS) is in a similar position to CBA, with critical support at $4.98.
As far as the resource/industrial ratios e have been monitoring (ASX 100 Resources/ASX 100 Industrials ratio, ASX Resources/All Ords ratio, and ASX Materials/All Ords ratio) are concerned, there is still no resolution.
However, I do acknowledge the price structure of the resource stocks is more encouraging than most of the industrials stocks at this stage.
As for the other ratios we have examined over the past month or so, in reference to the medium-term prospects for the resource sector, there is no resolution there either.
The ratios are presented later, and the resistance levels highlighted.
The situation is obviously coming to a head--there is no need to pre-empt the market. The situation will resolve itself sooner rather than later.
So what's happening in the commodity markets? Let's take a brief look.
Oil: Above support but below the resistance needed to confirm further significant upside.
Base metals: Copper--still range trading; aluminium--losing upward momentum after breaking above the downtrend a couple of months ago; nickel--still constructive; lead--still positive; zinc--a weekly key reversal last week as resistance was approached suggests the sharp run up from the January lows may now halt.
Precious metals: Gold and silver are neutral at the moment, as they trade between support and resistance.
The gold/S&P 500 ratio has begun to rise again but it remains trapped in a very broad range, so there's no strong signals in the short term. However, from a longer-term basis, the ratio favours outperformance by gold.
Remember that the downtrend from the 2011 high was overcome some months ago--that turned the longer-term trend from negative to neutral-positive.
A break above the February high is required to push the ratio into a bullish trend. That may take time.
It no doubt will be an eventful week. Perhaps an eventful few weeks. But it is September, so it doesn't surprise.
Use the links below to jump to the various chart packs.
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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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