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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

• Overview
  Sitting on the sidelines. More...
• Mirvac Group (MGR)
  Still above its 200DMA. More...
• Westpac (WBC)
  Accumulate, but only on near-term weakness. More...
• National Australia Bank (NAB)
  Resilience is encouraging. More...
• News Corporation (NWS)
  Upside limited. More...
• Woodside Petroleum (WPL)
  On support, but risk is to the downside. More...
• Envestra (ENV)
  Hold rating maintained, but SUN is best avoided at these levels. 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

When Australian stocks and various indices broke decisively to the downside in early August, the old support levels then became a significant overhead barrier. As noted at the time, these new resistance levels had the potential to cap upside for several months.

The bounce in equity markets over the past few weeks has taken many stocks up to test these resistance levels. Prices are now stalling and there is risk of near-term weakness.

These resistance levels are being tested at the same time as the VIX and the US T-Bond/S&P ratio are bouncing from short-term support. This creates a risky environment over the next week or so. Whether or not that will lead to a break of the August lows is unclear at this stage. But for now, from a technical perspective, it would be prudent to sit on the sidelines.

In Australia, the old support/new resistance levels that will have the most impact, are those that apply to the Materials and Financial sectors. Let's expand on that.

The Materials broke below the June lows, and the trendline joining the November 2010, March and June 2001 lows in August. This break completed what appeared to be a medium-term top formation, which had the potential to limit upside for several months. The index rallied up to test the breakdown point in mid August before pulling back sharply. It then bounced again, testing the resistance last Thursday. The price action suggests that a test of the August 22 lows at 11,853 is possible in the near-term. If that gives way then there is no strong support until the early-August lows at 11,082.

(click image to enlarge)

Price action in BHP Billiton (BHP) and Rio Tinto (RIO) confirm the prospect of a near-term pullback, although neither have reached their respective resistance levels as yet. But the price action since early August is representative of a countertrend rally, not the beginning of a sustained upmove. And as resistance on the Materials index is being met at the same time as the Financials are also pushing into an overhead barrier, the odds of further upside in the very near-term are slim.

On the Financial index, the key resistance is that associated with the July 2010 lows, and the downtrend from the April 2011 high.