Why investors should look to BHP for market guidance
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The Australian market looks more impressive than its global peers, and if the resources stocks can overcome their resistance, the outlook would improve considerably, technical analyst Lesley Beath says.
It was yet another relatively quiet week for the US equity market. And, as has been the case for some time now, there are no strong signals.
The market appears to be in limbo, waiting for a catalyst to give it some direction.
In Europe things are a little clearer, with the German DAX bouncing from the support that was highlighted in the last report. That support was the downtrend from the 2015 high.
Remember that downtrend was broken a few weeks ago and a pullback to the breakout point is quite common. The situation would have taken a turn for the worse if the index had drifted back into the downtrend, but it didn't.
France's CAC is in a similar position so the action is encouraging, although I would like to see the August highs taken out before adopting a positive outlook.
In the UK, the FTSE has performed well since the Brexit vote, although it is now just below a powerful barrier. The monthly chart presented later highlights that resistance and its duration.
Until the three major European markets can overcome their near-term resistance, I hold a neutral view.
In Australia, the outlook is a bit more impressive. The support that has been outlined in recent reports has held, and as I said last week, as long as the mid-September lows are not violated, and as long as stocks remain above their 200DMA, the outlook is encouraging.
Last week saw some solid performances in the banks, with the ASX Banks Index pushing above the downtrend from the July 2015 high.
Commonwealth Bank of Australia (ASX: CBA) added to the gains of the previous week, holding above a critical support level. CBA has been the drag on the index but with the stock holding its support, the worst is probably over.
The ASX Banks Index has been outperforming the All Ords since July, and it does appear as though further outperformance is likely.
As I said last week, this may just be a countertrend move, lasting for a short time. We will just have to wait for further developments.
The resource side of the market also outperformed last week. None of the key resource/industrial ratios that we have been watching have been overcome at this stage, but the action in the stocks is getting interesting.
Last week's action in the banks and resources had a positive impact on the ASX 20 Leaders/All Ords ratio. The 20 Leaders has been trending lower in relative-performance terms since early 2015 and it is a theme that has been discussed on numerous occasions.
The Midcap 50 and the Small Ordinaries have been the place to be. But the ASX 20 Leaders has gradually outpaced the All Ords since the beginning of September and there are early signs the downtrend may be reversing.
The downtrend from the July 2015 high has been overcome and it would not take much to complete a small basing pattern--if that occurs then the outlook for the major stocks becomes a lot more compelling.
I have been very much in favour of the smaller end of the market ever since the ASX 20 Leaders/All Ords ratio broke down from a lengthy topping phase back in May 2015, but I think that situation is beginning to deteriorate.
Charts of the ASX Small Ords/All Ords ratio and the ASX Midcap 50/All Ords ratio depict the close proximity of the 2015 uptrend. We won't pre-empt the outcome, but I think the odds are in favour of a break of the uptrend.
Let's get away from ratios and move to the price action.
As you know, the All Ords has bounced from the combined support of its 200DMA and the February 2016 uptrend. The rebound was in conjunction with a large number of individual stocks retreating to, and bouncing from, their 200DMA.
If we look back further, we see the February lows were on long-term support--the uptrend from the 2009 low and lateral support associated with the 2010 and 2011 highs.
This year's lows on the ASX Materials Index were in line with the lows in 2008. The 2016 low in the ASX Small Ords came from a series of support dating back to 2013.
So the 2016 rally comes off solid long-term support.
The big question now is whether or not the market can push above its August high. By the look of other global markets, we may not find out in the near term.
However, we may get some guidance from our once "big Australian" BHP Billiton (ASX: BHP). We have been watching its progress as it has climbed over the past few months, tracking above the early February uptrend.
However, the stock has yet to push above the resistance from the April peak. That is an important barrier which is now being tested.
Rio Tinto (ASX: RIO) is also approaching the April peak, as is Brazil's iron ore giant Vale. In Rio and Vale's cases, if that resistance can be overcome it would complete a lengthy reversal pattern.
I know that in recent times I have been of the opinion that the resource side of the market may begin to underperform, and that still could be the case.
But if these three stocks can sustain a topside break the outlook for the sector, and the Australian equity market in general, would improve dramatically.
On that note, did anything major happened in the commodity markets through the week?
Not really. I gave a quick summary a couple of weeks ago--here it is and any new comments are in bold.
Oil: above support but below the resistance needed to confirm further significant upside.
Base metals: Copper--still range trading, although it has bounced nicely over the past two weeks.
Aluminium: losing upward momentum after breaking above the (2014) downtrend a couple of months ago. A strong bounce last week has kept the 2015 uptrend intact.
Nickel: still constructive.
Lead: still positive.
Zinc--a weekly key reversal last week as resistance was approached suggests the sharp run up from the January lows may now halt.
Precious metals: gold and silver are neutral at the moment, as they trade between support and resistance.
So, no real change in the situation.
No change in the currency markets either, so I won't comment this week.
So what's the bottom line this week?
The Australian market looks more impressive than its global peers and if the resource stocks can overcome their resistance the outlook would improve considerably.
The pendulum may be about to swing in favour of the larger stocks after almost 18 months of underperformance. That is not confirmed as yet, but it is something we should be monitoring closely.
The jury is still out on the resource/industrial ratios--although we should get a resolution relatively quickly. But it's still September/October, so we need to remain on our toes.
Use the links below to view the various chart packs.
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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.
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