Category: Australia & NZ

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ASX risk off

The ASX 200 is retracing to test its new support level at 5500. Bearish divergence on 21-day Twiggs Money Flow warns of short-term selling pressure. Recovery above 5600 would signal a primary advance to 6000*.

ASX 200

* Target medium-term: 5600 + ( 5600 – 5200 ) = 6000

Small cap stocks, represented by the ASX Small Ordinaries Index, however, indicate the market is adopting a risk off approach at present. While institutional stocks advance, the small caps index is undergoing a sell-off, with Twiggs Money Flow reflecting strong selling pressure.

ASX Small Ordinaries Index

A line has formed over the last 7 weeks. Breakout below this level would warn of another decline (and a primary down-trend).

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ASX: Steam or froth?

The ASX 200 broke resistance at 5500. Follow-through above 5600 would confirm a primary advance with a long-term target of 6000*. Rising Twiggs Money Flow indicates medium-term buying pressure.

ASX 200

* Target medium-term: 5600 + ( 5600 – 5200 ) = 6000

The ASX 300 Banks Index has followed through after breaking resistance at 8000. Expect retracement to test the new support level but respect is likely.

ASX 300 Banks

What could go wrong?

….Apart from a precarious property bubble in China fueling commodity exports, a property bubble in Australia fueled by record low interest rates and equally precarious immigration flows, declining business investment and slowing wages growth.

The ASX price-earnings ratio is close to historic highs, suggesting we are in Phase III of a bull market — where stocks are advanced on hopes and expectations of future growth rather than on concrete results. By all means follow the rally, but keep your stops tight.

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Are stocks overpriced?

Some good discussion on our forum regarding current high stock valuations, based more on hopes than on earnings.

This chart of Price-Earnings ratios highlights the problem. PEs for both the MSCI World Index (ex-Australia) and the ASX 200 are close to historic highs (after the Dotcom bubble).

Price-Earnings

Strong earnings growth would soon fix this but there is little sign of that at present.

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Wider trade gap adds to economy’s worries

From Jens Meyer and Patrick Commins:

A surprise blow-out in the October trade deficit has raised questions about the predicted rebound in economic growth, following the first contraction in GDP in five years.

Instead of shrinking as predicted, Australia’s trade gap widened 20 per cent to $1.54 billion as growth in imports outpaced exports….

Paul Dales from Capital Economics said the October trade number was worrying as it implied net exports – a key GDP component – might be a big drag on economic growth in the fourth quarter, as volumes mattered for real GDP growth.

“This could all change when the November and December trade data are released. But at the moment, other parts of the economy will have to be much stronger to prevent another fall in GDP,” he said, adding that while that was probable, he was nonetheless now more worried about a possible recession.

On its own, the trade deficit is unlikely to tilt the economy into recession but there is a worrying contraction in business investment, outside of the expected mining slow-down, and in wages growth.

Source: Wider trade gap adds to economy’s worries

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Australia: Say goodbye to growth

Business investment in Australia continues its sharp descent since the end of the mining boom, falling below 14% of GDP for the first time since the Dotcom crash.

Australia Business Investment
Source: RBA Chart Pack

Apart from the expected “cliff” in Engineering, investment in Machinery and Equipment has fallen to record lows.

Australia Business Investment - Components
Source: RBA Chart Pack

Without investment, growth is likely to contract. The impact on Australian wages is an ominous warning.

Australia Wage Growth
Source: RBA Chart Pack

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ASX rally falters

The ASX 200 rally stalled at 5500. Declining 21-day Twiggs Money Flow indicates rising selling pressure. Breakout above 5500 would complete a bear trap, indicating a primary advance to 5800*. But reversal below 5400 would signal another test of primary support at 5150.

ASX 200

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ASX banks rally

The ASX 200 is testing resistance at 5500. Rising Money Flow indicates selling pressure has ended. Breakout above 5500 would complete a bear trap, indicating a primary advance to 5800*.

ASX 200

ASX 300 Banks Index followed through above 8000 after a brief retracement respected the new support level. Target for the primary advance is 8800*. A further secondary correction to test the new support level at 8000, however, should not be ruled out. A Twiggs Money Flow trough above zero would strengthen the bull signal.

ASX 300 Banks

* Target medium-term: 8000 + ( 8000 – 7200 ) = 8800

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ASX 200 threatens a bear trap

The ASX 200 broke through short-term resistance, a bullish sign, and is testing long-term resistance at 5500. In terms of classic Dow Theory, the primary down-trend is intact until there is a breakout above 5500. Today’s small doji candle indicates hesitancy but bullish divergence on 21-day Twiggs Money Flow signals medium-term buying pressure. Breakout above 5500 would also complete a bear trap, where breach of support is quickly reversed and followed by breakout to a new high. This is a powerful bull signal and would offer a target of 5800* for the primary advance.

ASX 200

* Target medium-term: 5500 + ( 5500 – 5200 ) = 5800

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ASX 200 runs into a hammer

The ASX 200 is again running into resistance, signaled by a hammer after the recent rally. In terms of Dow Theory, the primary down-trend is intact but retracement that respects the former primary support level of 5200 would suggest a bear trap. Recovery above 5500 is still in doubt but would offer a bull signal.

ASX 200

ASX 300 Banks Index broke out above 8000 but this week’s short candlestick body warns of hesitancy. Expect retracement to test the new support level. Failure of support would warn of a bull trap. Respect of support is as likely, however, and would confirm a primary up-trend with a target of 8800*. Recovery of Twiggs Money Flow above zero is still tentative at this stage.

ASX 300 Banks

* Target medium-term: 8000 + ( 8000 – 7200 ) = 8800

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