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Upward momentum on ASX could be unleashed

Lesley Beath  |  19 Jul 2016Text size  Decrease  Increase  |  

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We haven't looked at what has been happening in the markets for the past five or six weeks so let's jump straight in and see what has transpired while I have been away.

As usual we will start with the US equity market.

Before I left I noted the Dow Industrials had resistance at the 18167 level. And although that resistance was significant, the index was holding up well, proving quite resilient.

That resilience came as sentiment indicators, according to the AAII Sentiment Survey, showed the lowest level of optimism in 11 years.

Bullish sentiment at the time stood at 17.8 per cent, which was the lowest level recorded since April 14, 2005 (16.5 per cent).

That low level was accompanied by the highest "neutral" reading (52.0 per cent) since April 1990.

That combination suggested that risk in the market, over the next six to 12 months, was to the upside. So far, so good.

The Dow spent the time that I was away below the 18167 barrier but pushed impressively above it last week. That resulted in a break to new highs.

Let's take a more in depth view of what this index looks like from a medium-term perspective.

You might recall that the Dow and the NASDAQ have held above the uptrend from the 2010 lows. They presented a different profile to the S&P 500.

The rally from the February 2016 lows had pushed the Dow above the downtrend from the May 2015 high. That break occurred in early April but there was little upside progress.

Instead, the index had spent the time since in a consolidation mode. It pulled back to the breakout point in May and then again in late June. The latter episode also saw the 200DMA tested.

Price bounced from the 200DMA, ushering in the recent rise. So, the action in the Dow Industrials is constructive.

The S&P 500 also bounced from its 200DMA and broke to new highs last week. The break in both indices is marginal, so there is always the chance this could be a "false break," but at this stage the action is positive.

You might also recollect there was a sell signal triggered on both indices in late April and that intimated a cautious stance was warranted.

Sell signals do not always lead to a decline in price; they can just warn that upside momentum has abated.

When that signal was triggered, the Dow Transport index was still below the 2015 downtrend.

That was an added worry as the Transports were already in a bear market.

The Russell 2000, which we also watch carefully, was also in a bear market.

Now, for the first time in a long time, all these indices present a far more robust picture.

The action in European equity markets is a far cry from that in the US, as you would expect.

In many of the Asian markets and in the commodity-related markets of Brazil, Chile and Argentina, the chart profiles are heartening.

Similarly, the Australian resource indices are also robust, with the ASX Materials finally pushing through some hefty resistance.

BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) have yet to push above their April highs but as noted a couple of months ago, long-term buy signals were registered in March/April.

Those signals suggest risk continues to be to the upside.

And speaking of long-term buy signals, they are also evident on the Australian banking stocks.

Those buy signals (which were generated at the end of April) have been highlighted previously.

When we last spoke about them I noted that the signal did "not necessarily indicate that higher levels are likely in the short term, and there could well be some volatile action ahead, but it does suggest the worst is probably over".

Last week's gains were impressive but whether or not the banks have the capacity to push significantly higher in the near term is still unknown, in my opinion.

But I continue to believe risk is to the upside.

Action in some of the other indices is interesting. You will remember that during April and May, one by one, individual indices broke above significant resistance levels.

Those breaks were highlighted as they unfolded. They included ASX Healthcare, ASX Utilities, ASX REITS, ASX Consumer Discretionary, ASX Midcap 50, ASX Transport and ASX Retailing.

During May and June many drifted lower. In some cases, the retreat took them back to test support.

That support has held nicely. I won't discuss these indices now, but will present them later. The charts are promising.

If we view the chart of the All Ords, you can see the index popped marginally above resistance last Thursday and then again on Friday.

I think we need to see more follow through to confirm that break, but I do think the situation appears constructive.

When the All Ords tackled that resistance between mid-May and mid-June, the banks were already exhibiting signs of weakness. That made it difficult for the broader market to push significantly higher.

In the current instance, although the banks are approaching the 2015 downtrend, they are attacking that resistance from a less overbought condition than was the case in June.

Given the Australian market has spent most of the past 12 months in a broad range, I think a valid topside break could unleash some significant upward momentum.

And don't forget, a long-term buy signal is in place and the index has bounced from a significant support level.

The technical position of the Australian market appears more constructive than the fundamentals would suggest. That is often the case, and vice versa. But we really do need to wait for confirmation.

The banks are close to their major downtrend; if they can break topside it would be a positive development.

Okay, let's take a quick look at the currency and commodity markets.

The US Dollar Index continues to rise from substantial support and risk remains to the upside.

The Australian dollar is trading above an improving 200DMA. This comes after a test of that average in late May/early June.

That is constructive but the dollar is overbought in the short term and a daily "key reversal" last Friday suggests a pause is possible.

On the commodity front, the base metals show continuing improvement.

Nickel and aluminium have broken above their 2015 downtrends. Zinc has boomed this year.

Copper is not as dynamic as the others, as it trades in a sideways range--it needs to break above the March and May highs to confirm a change from neutral to positive. The good news is risk is to the upside.

The Brexit vote pushed gold above the resistance we have been monitoring for the past few months.

It has drifted lower over the past week or so and momentum indicators are deteriorating. Upside progress will be difficult.

Importantly for the Australian gold producers, the gold price in Australian dollar terms hit a major barrier the week before last.

That resistance has been in focus for a while now and it has been monitored closely.

For the time being, it has capped upside but we need to keep an eye on it. If it can be overcome, it would give the Australian gold stocks an added boost.

If we were just looking at the gold price and the Australian dollar gold price, you would be cautious at current levels. But silver is interesting and its chart profile is impressive.

It broke above its 2011 downtrend in April, at the same time as it completed a lengthy base formation.

It could not clear the resistance of the May 2015 high and by early June price had drifted lower to the April breakout level.

This type of pullback, and rebound, after resistance has been broken acts as a confirmation of the validity of the breakout. Silver has since surged, outpacing gold.

From a longer-term perspective, silver looks very impressive. I think that bodes well for gold but both metals are overbought in the short term so we could see some near-term weakness.

 

Chart Packs

Use the links below to view the various chart packs.


Global equities     |      Australian equities     |      Commodities and currencies

 

Global equities

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Australian equities

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Commodities and currencies

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To the extent that any content below constitutes advice, it is general advice (or, in New Zealand, a "class service") that has been prepared by Lesley Beath as a Morningstar authorized representative (ARN 469614) without taking into account your particular investment objectives, financial situation or needs. If necessary, you should consider the advice in light of these matters, consult with a licensed financial advisor, and consider the relevant Product Disclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest. 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. The author does have an interest in the securities disclosed in this report.

© 2016 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written content of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.