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BHP and Rio poised to break above resistance

Lesley Beath  |  11 Dec 2012Text size  Decrease  Increase  |  

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The views expressed in this report are those of Lesley Beath and may differ from Morningstar's views.

 

Disclaimer: To the extent that any content in this report constitutes advice, it is general advice that has been prepared by Lesley Beath without taking into account the particular investment objectives, financial situation and particular needs of any individual investors. If necessary, you should consult with a licensed investment adviser or dealer in securities such as a stockbroker before making an investment decision. 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.


Overview

World equity markets continued in a positive mode last week, and as suggested a few weeks ago, strength into year-end is anticipated.

One of the more notable performances came from the Chinese market, where the Shanghai 'A' Shares Index rebounded by 4 per cent. This index has been a cause of frustration for several months, giving glimmers of hope that have always been relatively quickly dismissed.

So, is last week's action any different to the previous false signals or is it just more of the same?

Let's take a closer look, as a reversal in this market would, in all likelihood, have positive ramifications for the resource side of our market, which at this stage still remains below key resistance.

The chart of the Shanghai 'A' Shares will be familiar to regular readers and the recent focus has been on the lower limits of the downward sloping channel, which has been in existence since 2009.

Price bounced from the support associated with that channel in September on two occasions, in the second instance posting a weekly "key reversal" at the same time. That gave hope that China may have finally turned the corner.

The key reversal was followed by a slight improvement, but then the index began to drift lower again, breaking below support in late November. But the breakdown was not confirmed by the Shanghai 'B' Shares Index and was short-lived, with the index rebounding and registering another key reversal last week.

I have been of the opinion that China is forming a medium-term reversal, and although it has disappointed, I still think that is the case. That view was boosted by the action last week.

For those unfamiliar with a "key reversal" pattern, it occurs when (in a downtrend) price makes a new low but then reverses quickly, closing above the high of the previous session (whether that "session" be on the daily, weekly or monthly charts).

Weekly and monthly key reversals are not all that common and are known to mark medium-term reversal points. Obviously, the last one in the Chinese market only signified a temporary end, and this situation may well be the same, but I would err on the side of optimism at this stage.

This spark of hope in China comes as a number of global equity markets also show a solid improvement. This improvement is more evident in certain Asian countries and in South America.

In Asia, one of the more promising improvements is in Japan. Admittedly, it is overbought from a very short-term perspective, but both the Nikkei and the Topix broke topside out of a four-month range in November and further upside is expected.

This anticipated strength can take the Nikkei up to test the 2010 downtrend. That trendline coincides roughly with the March 2012 high, creating a major barrier at 10,146 to 10,255, which is approximately 6 to 8 per cent above current levels. It will be interesting to see whether or not Japan can overcome that resistance.

In South America, it is Brazil that stands out, with the Bovespa 56 Index under the influence of a new Buy signal.