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No strong US market signals

Lesley Beath  |  02 Aug 2016Text size  Decrease  Increase  |  

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There are no strong signals on the US market at the moment and the situation will resolve itself when it is ready, technical analyst Lesley Beath says.

 

Action in the major US indices was mixed last week. Some up, some down.

The Dow Transport Index closed lower and it still sits below its major resistance level. The NASDAQ finally pushed above its 2015 high.

The VIX, which was highlighted last week, basically did nothing. It remains at the lower limits of a lengthy range, indicating a high level of complacency.

Sentiment indicators, as we know, often give conflicting signals, and the high level of complacency on the VIX contrasts with a recent Bank of America Merrill Lynch Fund Manager Survey.

That survey put cash levels at 5.8 per cent of portfolios--the highest levels since November 2001.

The US Banks Index remains below its declining 200DMA and its 2015 downtrend.

All in all, I can't see any strong signals on the US market at the moment. At this stage we can just continue to monitor the situation. It will resolve itself when it is ready.

The German DAX ended last week just below its 2015 downtrend. France's CAC did likewise. This is a big test for both markets, and Europe in general.

Upside momentum on the UK FTSE is beginning to deteriorate. Caution is warranted in the near term.

The Japanese Nikkei is still trading below a declining 200DMA. As is China.

In Australia, the All Ords continued to advance and is now close to the August 2015 high at 5711--that may pose resistance.

The ASX Banks Index cleared the resistance that was highlighted in the last report. The next barrier for that index is the May high. A break above there would be a welcome development.

However, at this stage, the banks continue to underperform and the best opportunities still lie beyond the ASX 20 Leaders.

The ASX Midcap 50 Index has outperformed since early 2014, and almost uninterruptedly since July 2015. Domino's Pizza Enterprises (ASX: DMP), TPG Telecom (ASX: TPM), Aristocrat Leisure (ASX: ALL), Cochlear (ASX: COH), and AusNet Services (ASX: AST) are some of the standouts among the midcaps.

There are no signs of impending reversal in any of those.

The ASX Small Ordinaries has outperformed steadily over the past 12 months.

The Small Ords has been discussed often, and its outperformance potential noted just as often.

In price terms, the index has recently broken out of a lengthy sideways range and further gains appear likely.

The ASX Small Resources has also broken above significant resistance.

And if we look at the ASX Small Industrials we can see the index has pushed through the upper limits of a well-defined upsloping trend channel.

All three indices remain positive.

With stocks such as Northern Star Resources (ASX: NST), Evolution Mining (ASX: EVN), Mayne Pharma Group (ASX: MYX), Macquarie Atlas Roads (ASX: MQA), NIB Holdings (ASX: NHF), Regis Resources (ASX: RRL) and Invocare (ASX: IVC) as some of the top components, it's no wonder the index is outperforming.

On a relative-performance basis, there has been a fight for dominance between the Small Ords and the Midcaps since April 2015.

Since the beginning of the year, the ratio has traded in a pretty tight range. The direction of the next major move is unclear, but the one thing that is clear, in my opinion, is that both will continue to outperform the broader market.

With gold stocks among the best performers in the Small Ords this year, I guess we should try to assess whether or not they can maintain that strength.

If we view the daily chart of the ASX Gold Index you can see that since March, it has trended higher in a relatively stable trend.

A series of higher highs and higher lows has characterised most of the largest stocks in the sector.

That is positive, as it is not just Newcrest Mining (ASX: NCM) dominating the chart profile. Charts, presented later, highlight the recent action.

If we step back and look at the weekly chart, we see a very lengthy base formation that was finally completed in February.

And although momentum indicators are displaying an overbought condition, the duration of the base suggests further upside is likely.

Whether that occurs in the short term or not depends upon whether the gold price can push above its recent high at $1375.

The Australian gold stocks will also be impacted by the price of gold in Australian dollar terms.

We have looked at that recently, noting the resistance just above current levels. That resistance is still in place.

One chart I always monitor when assessing the outlook for gold, is the gold/S&P 500 ratio.

At times the ratio can rise simply as a result of weakness in the equity market. But when the ratio is rising because gold is advancing more than the S&P, then the outlook for gold is positive.

The 2016 high in the ratio was registered as the S&P bottomed in February. That high pushed the ratio above the 2011 downtrend, but the break was short-lived.

Since then the ratio has traded in a wide band. The positive factor, from a longer-term perspective, is that the ratio has been trading above that downtrend for the past few months. That is encouraging.

In addition, silver is outperforming gold and that has been traditionally viewed as a positive signal for gold. The monthly chart of that ratio depicts the recent rebound from a long-term support level.

Prior rebounds from that level occurred when gold was in a bull market.

Silver is also outperforming the S&P 500 and the breakout there is even clearer than the breakout for the gold/S&P 500 ratio.

As far as the ASX Materials and the ASX 100 Resources are concerned, both are pushing against a powerful barrier.

For the former, that barrier is the 2011 downtrend. For the latter it is the November 2008 low.

And while both indices have long-term buy signals in place, I think they may struggle with that resistance in the near term. A topside break if/when it occurs could usher in substantial upside.

Interestingly, the chart of US mining giant Freeport McMoran also depicts significant resistance just above current levels.

If the stock manages to overcome that resistance it would complete a major reversal pattern. Brazil's Vale is in a similar position.

So we have some of the world's major miners close to either a major breakout level, or a medium-term peak.

We have the ASX Banks Index and the All Ords just short of resistance. Let's see what they are capable of in the near term. It should be interesting.

 

Chart Packs

Use the links below to view the various chart packs.


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More from Morningstar

• US charts versus fundamentals

• Upward momentum on ASX could be unleashed

 

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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