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Odds of near-term pullback increasing

Lesley Beath  |  26 Feb 2013Text 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.


There is very little change to the outlook this week. The cracks that were beginning to appear in a number of global equity markets remain, and the odds of a near-term pullback are increasing.

The S&P 500 posted a marginal loss last week, but the price action is a concern and there is now a sell signal on the Parabolic SAR - this was discussed in last week's report. The weekly stochastic has also generated a sell signal and the Nasdaq Composite posted a weekly key reversal last week.

Elsewhere, in Japan the Nikkei has been pushing against resistance for the past couple of weeks but has been unable to break topside. And as noted a couple of weeks ago, resistance is also being encountered by the yen.

This combination of resistance is important as the movements in the equity market have been closely linked to the currency over the past 12 months. The chart below highlights the close correlation.



(click image to enlarge)


In China, the Shanghai 'A' Shares index fell sharply and was obviously unable to break above the resistance that we have been monitoring for the past month or so.

In Australia, the All Ords and the ASX 200 were hit hard on Thursday, rendering the recent break above resistance questionable. As regular readers will be aware, I have been of the belief that the key to a sustained breakout lay with the major miners.

I had been closely monitoring the price action in BHP Billiton (BHP) and Rio Tinto (RIO) as they pushed towards the resistance of the 2012 highs. BHP broke topside on 14 February, but Rio was unable to do likewise. This was a warning, and the price action since continues to be a concern.

When assessing the outlook for a sector, or indeed the broader market itself, we really need to be aware of what the major components are doing. If there is a discrepancy in the action, it is a sign to be cautious.

A classic example in regard to the resource side of our market was back in mid-April 2011. At that time, BHP and the ASX Materials index broke topside but Rio failed to follow suit. That marked a significant peak in the sector and the broader market as well. The situation now is similar, with the broader market testing key resistance as it was in April 2011.