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

Reviewed this week

A look at a number of stocks that the Research team rates as Reduce or Sell.

• Overview
  Resistance and key reversals. More...
• Beach Energy (BPT)
  Risk of a near-term pullback. More...
• Monadelphous (MND)
  Lock in profits. More...
• Aquila Resources (AQA)
  Uncertain in the near term. More...
• Santos (STO)
  A weekly 'key reversal'. More...
• Brambles (BXB)
  Continued risk. More...
• Incitec Pivot (IPL)
  Not rated as a Sell or Reduce by the Research team, but risky from a Technical perspective. 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 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

The All Ords broke to new 12-month highs last Monday, but the breakout was short lived and the index ended up posting a weekly 'key reversal' on Friday.

These patterns (key reversals) reflect a sudden change in investor sentiment and can mark medium-term turning points. The current one is not as robust as previous examples, as it did not come at the end of an extended upmove; but it did come after a strong four week rally, and it has come at an important juncture in the market, so it does warrant attention.

(For those unfamiliar with the term, a key reversal is when price pushes to new highs, above the high of the previous period, but then reverses and closes below the low of the previous period. The pattern is also known as an 'outside day' and this description makes it easier to visualise. Key reversals often mark the end of the prevailing uptrend and the beginning of a corrective phase. In a downtrend, the situation is the opposite. Whilst daily key reversals are noteworthy, more importance is placed on a weekly or monthly key reversal, in the belief that these signal a significant change in investor psychology).

Obviously not all key reversals mark the end of an uptrend, that would be too easy, but they are relatively reliable. This one could merely mark a short-term peak, and that is the most likely

scenario at this stage, but it could end up being more destructive and that is why, until the banks and resources break topside, I am adopting a cautious short-term view; within the context of a longer-term positive outlook.

If we look back at some key reversals over the past few years, the most reliable have been those that have occurred after a strong run. Let's see how this latest one compares to some of the others over the past few years.

July 2007

The July 27th experience is an interesting example.

Price registered a weekly key reversal, and this marked the beginning of a month-long decline. The market did push to new highs after that but some sectors posted their bull market peaks at this juncture.

May 2008

This was very close to a key reversal. It did not fit with the strict definition but nonetheless it marked the end of the bear market rally. The reason it did not fully comply with the definition was because the May 23 close was 5866, whereas the May 16 low was 5846. But as the S&P 500 had posted a weekly key reversal that week, it was a strong indication that risk was increasing.

September 2008

This did not follow a strong advance but it did come after a pause in the downtrend. The signal came prior to the panic decline that pushed world indices sharply lower.

March 2009

This was posted in the week ending March 13th and was a positive reversal. It came after the bear market decline, and signalled a major turning point.

The All Ords also ended up posting a monthly key reversal in March. This was an extremely bullish signal.