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

Reviewed this week

• Overview
  Mixed Australian market but with some encouraging signs. More...
• UGL Limited (UGL)
  Major low confirmed. More...
• Fortescue Metals (FMG)
  Major resistance to hold and force a new decline. More...
• GUD Holdings (GUD)
  Breakout from base points to higher levels. More...
• AGL Energy (AGK)
  Consolidation ready to give way to a new rally. More...
• Bendigo & Adelaide Bank (BEN)
  Prolonged consolidation ready to give way to uptrend. More...
• PMP Limited (PMP)
  Ready to take another hit. More...

Please note: before making an investment decision, Morningstar recommends you read the fundamental research available on these stocks.

Disclaimer: To the extent that any content in this report constitutes advice, it is general advice that has been prepared by John Gajewski 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

A strong rally last week saw the S&P500 (and many other national indices) clear the resistance of the early September high and extend the gain off the early October low to 20%! October has the reputation of "killing the bear", so October's strong upward action suggests that a new phase higher is starting.

As always, one needs to treat these potentials with care.

In favour of the upside are a number of features. Firstly, October 2011 is the largest monthly move in the uptrend from the 2009 low (667). Secondly, it has happened off a low that is higher than the 2010 low (1,011). Next, the weekly-based Stochastic indicator has confirmed a bullish divergence for the October low. Finally, the VIX has moved decisively below its range of the past couple of months, suggesting that the attempt to reverse the long-term uptrend is failing.

No matter how positive the outlook it will only be a rise through the last peak of 1,370 that will confirm the SP500 in its uptrend. Provided any downswing is contained to 1,190 then the SP500 remains on the upward path.

The one negative feature of the chart is the current rally returning to the neckline of the Head & Shoulder pattern and to the now downward trending 40 week moving average. A strong drop from current levels will signal that this pattern and moving average still have force; a subsequent drop through 1,190 will confirm the upside attempt has failed, leaving the S&P500 vulnerable to a new decline.

As the Head & Shoulder pattern capped only the rally from the 2010 low it ranks below the implication of an October low with strong technical aspects. So until the S&P500 falls below 1,190 the upside should be preferred.

(click image to enlarge)