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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 mixed selection from the Materials sector.

• Overview
  Textbook pattern - too good to be true. More...
• BHP Billiton (BHP)
  Still below resistance, but upgraded this week. More...
• Iluka Resources (ILU)
  Has surprised to the upside. More...
• James Hardie Industries (JHX)
  Won't set the world on fire, but surprisingly resilient. More...
• Woodside Petroleum (WPL)
  Encouraging. More...
• Beach Energy (BPT)
  Continues to trade above a rising 200DMA. More...
• Regis Resources (RRL)
  Elevated, but still strong. 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

Global equity markets took a hit early last week but managed to claw back some of the losses on Wednesday and Thursday.

Interestingly this pullback came as the US and the UK hit the combined resistance of their 200DMA and the neckline of the Head & Shoulders top pattern.

This pattern has been discussed and displayed on numerous occasions and a pullback to that level has been a high probability for the past couple of months. So we have reached a short-term destination point.

As I noted a few weeks ago: "when an index or stock is trading below its 200DMA, it is assumed to be in a long-term downtrend. Rallies up to the 200DMA are considered corrective moves, with the implication that the downtrend will resume once the bear market rally tests the resistance of the 200DMA. Thus rejection from the 200DMA in a bear market is viewed as a significant Selling opportunity ... if the market is to fail here it would bring out the bears who will argue that what we have seen over the past few weeks is just a short-covering rally and that the test of the 200DMA is a normal occurrence in the bear market cycle".

At that stage the S&P was testing its exponential 200DMA but I noted that the simple 200DMA sat at slightly higher levels.

This is what the S&P 500 tested last Thursday week.

What has unfolded since February is a text book pattern, which has been almost too perfect to be true. The Head & Shoulders top pattern formed over several months and was completed in early August. The index broke below its 200DMA at the same time. Pullbacks to the neckline of the Head & Shoulders are a classic occurrence, as is the pullback to the 200DMA. This year's example may well go down in the history books.

But the problem is that once the pullback is complete, there is a chance of another decline. That is where we are now.

So will the bears be correct?

I don't think so, not at this point in time. Although I do think that there is scope for a near-term pause with oscillations below the recent high.

It must be remembered that we are in a seasonally friendly timeframe, with November, December and January the most bullish three months of the year. This comes after the notoriously difficult months of September and October. October wasn't too tough this year, but it did mark a new low for the bear market and it appears that it is living up to its reputation as the 'bear killer'. (October was a turning point in bear markets in the US in 1923, 1946, 1957, 1960, 1966, 1974, 1987, 1990, 1998, 2001 and 2002).

As I always say, seasonality cannot be viewed in isolation, but it has worked well this year. The most respected seasonal in the stockmarket is the tendency for the market to underperform from May through to late October (hence the 'Sell in the May' adage) and to outperform between late October and April, with November, December and January the most bullish three month timeframe of the year. The Sell in May theory has worked well this year, now we will see whether the late October to January timeframe lives up to its reputation.