Bank & miners rally should lift ASX

The ASX 200 displays a cautious rally, with short candles reflecting an absence of buyer enthusiasm. But bullish divergence on 21-day Twiggs Money Flow indicates longer-term confidence.

ASX 200 with Volume

The monthly chart shows similar rising troughs on 13-week Twiggs Money Flow, reflecting buyer confidence. Recovery above 6000 would be bullish, suggesting another advance. Respect of resistance is less likely, but would warn of another test of primary support at 5650.

ASX 200

The ASX 300 Banks Index respected primary support at 7000, while bullish divergence on 13-week Trend Index indicates buying pressure. Expect a bear rally to test resistance at 8000. The primary trend, however, is down.

ASX 300 Banks Index

The ASX 300 Metals & Mining Index is consolidating above 3400 but rising iron ore prices are likely to lift the index. Recovery above 3800 would signal another advance.

ASX 300 Metals & Mining Index

The All Ordinaries Gold Index again respected resistance at 5500 and another test of primary support at 4500 is likely. Breach would warn of a primary down-trend with a target of 3500.

All Ordinaries Gold Index

I remain cautious on Australian banks and hold over 30% cash in the Australian Growth portfolio.

Nasdaq and S&P 500 rally

The Nasdaq 100 rallied now that mid-term election results are emerging largely as expected. Faith in the primary up-trend is growing but it will take several weeks, if not months, for confidence to be restored and memory of the correction to fade. Hesitancy and a second test of new support at 6600/6700 are likely. There are few “V-shaped” corrections of this magnitude. Most are “W-shaped”, as in the first quarter.

Nasdaq 100

The S&P 500 displays a similar rally but it will take time for Twiggs Money Flow to break the descending trendline and signal that buying strength is restored. Expect another test of support at 2600/2650.

S&P 500

ASX 200 support but bank decline continues

The ASX 200 continues to find support, with the latest large red candle and subsequent doji, testing primary support at 5650, accompanied by strong volume (indicated by red on the volume chart). Similar buying pressure (accumulation) is evident on 11th and 12th October.

ASX 200 with Volume

This is sometimes lost on the weekly chart but we can see Twiggs Money Flow troughs below have leveled out above the zero line, reflecting a mild bullish divergence (not as strong as rising Money Flow troughs but still a reflection of support). What is also evident on the daily chart (above) is how this week’s rally petered out, with shorter candles, awaiting further direction.

ASX 200

The ASX 300 Banks Index is testing primary support at 7000, the same level as its October 2009 peak. Declining peaks on the Trend Index warn of further weakness and breach of 7000 would offer a long-term target of 5000.

ASX 300 Banks Index

I have been cautious on Australian stocks, especially banks, for a while, and hold over 30% cash in the Australian Growth portfolio.

What we can learn from Black Monday 1987

The current sell-off has a similar feel to October 1987, where the crash was was precipitated not by a single external shock or tectonic shift but by an accumulation of bearish sentiment that led to a major sell-off. Here is a brief timeline (with thanks to Wikipedia):

  • August 25, 1987, the Dow peaked at 2,722 points after a strong 44% run-up over the previous 12 months, with low inflation and falling crude oil prices boosting the recovery.
  • October 14, the index dropped 95.46 points (3.8%) (a then record) to 2,412.70.
  • October 15, Iran attacked the American-owned (and Liberian-flagged) supertanker, the Sungari, with a Silkworm missile off Kuwait’s Mina Al Ahmadi oil port. The Dow fell another 58 points (2.4%), down over 12% from its August high.
  • October 16, Iran hit another ship the next morning, the U.S.-flagged MV Sea Isle City, with another Silkworm missile. The Dow fell 108.35 points (4.6%) to close at 2,246.74 on record volume. Markets in London were closed due to the Great Storm of 1987.
  • Monday, October 19, 1987, the crash began in Hong Kong and spread West. By 9.30am the Footsie (FTSE 100) had fallen over 136 points. Later that morning, two U.S. warships shelled an Iranian oil platform in the Persian Gulf in response to Iran’s earlier attack. The sell-off reached the United States, with the Dow Jones Industrial Average falling a record 22.6% or 508 points to 1,738.74.

Dow Jones Industrial Average, October 1987

The total draw-down of 36.1% was at least partly attributable to fears that conflict with Iran would impact on oil prices but there were also underlying tensions relating to exchange rates after the 1985 Plaza accord as well as fears of rising inflation and higher interest rates. What should not be underestimated, however, is the effect of programmed trading as institutional investors dumped stock in response to falling prices.

We are currently witnessing a similar herd mentality, where investors sell because others are selling, without heed to the merits of the stock they hold. Just not as severe (so far).

Dow Jones Industrial Average

The Dow correction is secondary but a lot will depend on this week. Whether primary support holds at 23,500 and whether institutional sellers join the melee.

The Moral of the Story

Compare Dow values today to those in 1987. The recent peak of 27,000 is almost ten times higher than the peak of August 1987. There is a lot to be said for sitting tight.

No explanation required

In the past week, I have seen a number of market commentators attempting to explain the current correction. Reasons given vary from rising interest rates, Fed shrinking its balance sheet, the impact of trade tariffs on manufacturing input costs and inflation, mid-term elections and peak growth in earnings.

Truth is, there is no single reason that could justify the dramatic market falls. Some of the reasons cited are insufficient while others are invalid. But no explanation is necessary. Market sentiment has simply shifted. The scale has tipped and more investors are taking profits than new money coming into the market. When that happens, prices fall. And falling prices become a self-fulfilling prophecy, scaring off new investors and panicking investors with a short-term outlook.

How long this will go on for, I cannot tell. But I am sure there are growing numbers of long-term investors picking through the debris looking for opportunities. And the greater the fall, the greater the opportunity.

Earlier in the week I cited Netflix (NFLX) as one such example. Price has fallen almost 20% in October 2018, while recently released earnings announced a 34% year-on-year increase in revenue for the third quarter and a 130% increase in operating income.

Netflix

Patience is required but opportunities abound.

East to West

A quick recap of markets.

China’s Shanghai Composite Index is in a primary down-trend, having broken primary support at 2650, but rising troughs on the Trend Index warn of strong support. I suspect this is government-orchestrated as investors have little reason for optimism.

Shanghai Composite Index

India’s Nifty is testing primary support at 10,000.

Nifty

Europe is in a primary down-trend, with the DJ Euro Stoxx 600 respecting its former primary support level at 365/366.

DJ Euro Stoxx 600

The Footsie is testing primary support at 6900/7000.

FTSE 100

Dow Jones Industrial Average is undergoing a strong correction. Bearish divergence on the Trend Index warns of a reversal but only breach of primary support at 23,500, completing a double-top, would confirm.

Dow Jones Industrial Average

Dow Jones Transportation Average is already testing primary support at 10,000. Reversal signals on both averages would confirm a bear market according to Dow Theory.

Dow Jones Transportation Average

But technology stocks play a far larger role than in Charles Dow’s day, more than a hundred years ago. The Nasdaq 100 is still a long way above primary support at 6,300. Bearish divergence on Money Flow warns of selling pressure, but only breach of primary support would confirm a bear market.

Nasdaq 100

The only thing we have to fear is fear itself.

~ Franklin D. Roosevelt, 1933 inaugural address

ASX 200 at primary support

The ASX 200 is testing primary support at 5650. Declining Trend Index peaks warn of selling pressure and breach of 5650 would warn of a primary down-trend.

ASX 200

Banks are weighing on the index, with the ASX 300 Banks index testing support at 7000. Breach is likely and would offer a long-term target of 5000.

ASX 300 Banks Index

I have been cautious on Australian stocks, especially banks, for a while, and hold over 30% cash in the Australian Growth portfolio.

ASX finds support

The ASX 200 found support around 5900, with a long tail indicating buying interest. Breakout of Twiggs Money Flow above the descending trendline would confirm. Breach of support at 5750 is unlikely but would warn of a primary down-trend.

ASX 200

Banks are weighing the index down, with the ASX 300 Banks index retracing to test resistance at its former primary support level of 7400. Respect would confirm another decline. Descending Trend Index peaks below zero warn of selling pressure.

ASX 300 Banks Index

I remain cautious on Australian stocks, especially banks, and hold over 30% cash in the Australian Growth portfolio.

Nasdaq warns of broad market correction

Tech stocks fell sharply, with the Nasdaq 100 closing below support at 7400, warning of a correction. Twiggs Money Flow (21-day) cross below zero indicates medium-term selling pressure. Follow-through of the index below 7300 would signal a correction to test 7000.

Nasdaq 100

The S&P 500 has so far respected support at 2870. Breach would confirm  a broad market correction and test the rising LT trendline at 2800.

S&P 500

Asia

In China, the Shanghai Composite Index is headed for another test of primary support at 2650. Trend Index peaks at/below zero indicate long-term selling pressure. Breach of 2650 would offer a long-term target of 2000, the 2014 low.

Shanghai Composite Index

India’s Nifty is undergoing a strong correction. Breach of support at 10,000 would warn of a primary down-trend.

Nifty Index

Europe

Dow Jones Euro Stoxx 50 is again testing primary support at 3300. A Trend Index peak at zero warns of mounting selling pressure. Breach of 3300 would warn of a primary decline, with a target of 3000.

DJ Euro Stoxx 600 Index

The Footsie is also testing primary support, at 7250, but a recovering Trend Index indicates buying pressure.

FTSE 100 Index

Rising US interest rates are already hurting developing economies like India and China, and a looming US-China trade war would threaten a global contraction.

Only when the tide goes out do you discover who’s been swimming naked.

~ Warren Buffett

ASX 200 correction

The ASX 200 broke support at 6120/6150, signaling a correction. Expect support at the rising long-term trendline at 6000. Penetration of the trendline would warn that the primary up-trend is faltering.

ASX 200

Banks lead the decline, with ASX 300 Banks index headed for a test of primary support at 7300. A Trend Index peak below zero would warn of strong selling pressure. Breach of 7300 would signal another decline. Follow-through below 7000 would present a long-term target of 5000, the 2011 low.

ASX 300 Banks Index

I am cautious on Australian stocks, especially banks, and hold over 30% cash in the Australian Growth portfolio.