Treat market with caution
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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.
After stabilising above support for the past few weeks the US Dollar Index fell sharply last week, boosting the commodity markets even further.
We looked at the charts of nickel and aluminium last week, noting the close proximity of the prevailing downtrend. Copper was also testing the resistance of its 200DMA. The downtrends were overcome last week.
That is positive news for the resource sector, but with the US Dollar index still holding above the support of the August 2015 intraday lows, I would like to see that low taken out, and further strength in the metals over the coming week or so, to confirm the breakout.
Gold also pushed above resistance, following the recent topside break in silver. I highlighted the break in silver in the last report and wondered if it would lead gold. I said at the time I placed more trust in gold's action but did note that "silver is suggesting that the odds favour a topside break".
As with the base metals, I think we need to see some more positive action to confirm the breakout. That said, the action in precious metals sector is impressive.
The Australian dollar eased against the US dollar last week and upside momentum is faltering. Sell signals are evident on both the daily and weekly charts. The Australian TWI (Trade Weighted Index) fell almost 2 per cent, keeping it within the prevailing downtrend. The dollar took a hit against the Japanese yen (-6 per cent) and lost 3.4 per cent against the euro.
Gold, in A$ terms, gained 6.5 per cent on the week. The big challenge will come as the price tests its early 2016, October 2012 and August 2011 highs. If overcome, which is not indicated at this stage, it will complete a lengthy sideways range, opening up significantly higher levels.
In the US equity market, both the S&P 500 and the Dow Industrials slipped back below the resistance they had overcome the week prior. While the 1.3 per cent weekly decline in both the Dow Industrials and the S&P 500 is minor, the break back below resistance needs to be monitored closely as it could be a warning. False breaks are a common feature in markets that are struggling to decide the direction of the next move.
I have said in recent reports that my bear market prognosis was coming under threat and I still hold that view, but last week's action has created a short-term sell signal on the 13-week stochastic indicator (the first since February/ March), and as we are now entering a weaker seasonal timeframe, I think we should still treat the market with caution.
In Australia, the All Ords was basically flat on the week, held back by the banks. The resource stocks continued to press higher. The weekly chart of the ASX Materials Index, presented later, highlights the extent of the resistance at slightly higher levels. That will be the important barrier for this section of the market.