Page 1 of 8

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

Reviewed this week

• Overview
  Risk of a significant sell off in commodities. More...
• InvoCare (IVC)
  Hold in the short term, but medium-term outlook is positive. More...
• Ansell (ANN)
  Oscillating between support and resistance. More...
• BWP Trust (BWP)
  Upside may be muted. More...
• BHP Billiton (BHP)
  Monitor closely. More...
• Commonwealth Bank (CBA)
  Monitor closely. More...
• Fortescue Metals (FMG)
  Not a lot of joy here. 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 US dollar rallied again last week, as the 'risk off' trade continued. This hammered the commodity markets, with gold falling by almost 7% and oil losing 6%. Agricultural commodities fared better but they were also weak.

The S&P 500 declined by 2.8%, holding up better than the European markets.

China had another bad week, with the Shanghai 'A' Share Index off by 3.9%; India fell 4.5%. Not a good sign for our resource stocks, although it should be noted that the Materials index is holding above critical support. But back to that later.

So what next?

Well, risk remains to the downside, with the US market trading below a declining 200DMA. Rallies to this average are common in a bear market and represent significant resistance. There is also resistance associated with the neckline of the Head and Shoulders top formation. This combined resistance has been discussed often. There is now another resistance in place - the trendline joining the July, October, and early December highs. Until these are overcome the path of least resistance remains to the downside.

The question remains as to whether or not we will get another significant sell-off.

Many believe that we will. I believe that there is a chance of that sometime next year, but it is unclear as to whether or not it is imminent.

At this stage the key to the near-term action in the world equity and commodity markets is the US dollar. So let's take a closer look at that.

The US Dollar index pushed above its early October high (which coincided with the low in the S&P) last week and is now in close proximity to the January high at 0.8164. As the CRB index and many commodities are now sitting on important support, I believe that we are at either a potential turning point, or at risk of a significant sell off in commodities. And if the latter occurs, it is likely to be associated with increased selling pressure in equity markets.

So the critical levels this week are 0.8164 on the US Dollar index (near month) and 292.3 on the CRB Index futures (spot). These are highlighted on the Feature chart. I think that at this stage, from a contrarian viewpoint, the odds are marginally in favour of a reversal in the dollar, and thus some near-term strength in commodities and equities. But it is not an easy call, and not one that I feel comfortable with. And even if we do get a bounce, I don't think that we will see any major strength in equities, perhaps just another test of resistance.

(click image to enlarge)

In Australia, the ASX Materials index is holding above the November lows, despite the recent decline in commodities and in the Chinese market. This is positive although there is little to suggest that a significant move to the upside is imminent. You can keep your eye on BHP over the next couple of weeks; a break below $33.68, in conjunction with the US dollar breaking above resistance and the CRB breaking below support would imply another sharp move to the downside.