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In this newsletter
Market review
Market Breadth
Trade Reviews
Thank you to ATAA
Market review.
Welcome to this news letter.
Its been around 8 weeks since the low in June created by the sell off that started in May. The market now recovering almost all lost ground pressing toward the previous high.
The market predictors of a crash got it wrong, just another example of how futile it is to attempt to predict the market. Trading within sensible probabilities the better option.
No doubt when we get even closer to the old high formed in May there will be calls of a double top, over bought, eminent crashes etc. Some will be right and some will be wrong, but good traders trade within the boundaries of the information they have, not listening to oracles or clever marketeers attempting to sell a product based on traders and investors fear.
So what information do we have? Lets go to the charts to see.
The market is strongly bullish, as indicated above. The closing price of the XAO is above both the 24 and 6 EMA’s on the weekly chart. Using a weekly system some trades were sold ( if you were disciplined enough to take your stops) during the sell off, freeing up capital to re employ in other opportunites.
More importantly some trades were not sold, defying the sell off with their individual strength. Often called “relative strength” meaning those shares are stronger than the relative market, so they do not fall enough to be stopped out when the market gets shaky. Further down the newsletter I will show you one of those trades.
A waste of time Selling? The market just corrected back up?
Some may be asking the above question. However no one knew how far the market would fall when it started to, rather than be like a rabbit in the headlights, frozen with inaction, best to take action when the markets signals.
Like now, the market is signaling to buy, so it is not the time to be frozen with fear. We don’t know how far this market will rise, so best to follow the signals, use risk control and flow with the market.
As I keep saying , the methodology is easy, traders make it harder than it is. A proven methodology is to buy strength and sell weakness, then control risk with good position sizing. So where is the strength in this market?
Churning and Breadth.
Perhaps the biggest and most relative piece of information at present (and good traders trade in the present) is the fact that the market now has what has been missing for quite some years……. breadth.
Market breadth is when more shares are rising broadly across the index, generally indicating a healthier market. I can tell from my 52 week high list that more stocks in more sectors are rallying, a very promising sign for overall market health.
Until recently most of the gains in the market were dominated by the large cap shares, particularly large dividend paying shares. With interest rates so low and real estate in most areas flat, average yields of 10% provided by the oversold large caps were just too good to ignore.
However things seem to be changing and money churning as seen in the chart below of the Emerging Companies Index (XEC) That index bouncing up after the sell off and now the recent recovery.
Also in this chart below of the Materials sector, looking stronger still, also rising with the XEC
Its not a time to start yelling from the roof tops to buy like a person possessed with blind faith, but it is showing the money is churning away from some older existing trends into some possible new ones.
Unfortunately we are so often at the mercy of the United States SP500 and I have been showing this chart in my recent news letters, stressing the fact that where it goes we tend to follow.
However looking closely at the chart comparing the indexes, the last month in this chart the XAO (that’s the gold line) has been holding up and even out performing the US, it would seem the reason for this is more market breadth, particularly materials and resources sectors, as the US market is tech heavy. Stocks in the high dividend large cap sector of the XAO are dominating the market less, and smaller stocks and materials are showing some strength.
Now below is perhaps THE most interesting and significant chart
This is a chart of the Reuters/Jefferies Commodity Research Bureau Index. The CRB is a chart reflecting and averaging the performance of 19 commodities. It is clearly rallying at the moment, a great sign for the Aussie market and economy. (as I reflect on the upcoming election , using an old cricket saying….it could be a great toss to win for either party.... if the commodities boom kicks back in, just as the election in 07 was a great toss to lose with the GFC looming)
There is no volume on this chart but never mind, the important thing is the price has made a technical upward breakout of a higher high.
Now if this is all getting a bit too analytical and technical, one of the good things about having a simple system is that all this analysis is taken care of. Strong stocks in strong sectors will start to make new highs, and as stocks weaken, fall or go sideways they are sold to be re employed elsewhere. Exactly what happened in May/June. Lets look at some examples.
Trade Review
Iluka Resouces made a 52 week high 2 weeks ago. It has pulled back a little but well within the "hold" parameters of the moving averages. This stock could pull back a little more if the heat comes out of resources in the short term, or it could quickly re assert it self and rally higher, time will tell, patience is required.
MOC is a stock I hold (I have ILU also). A good example of a trade that gave heart palpitations at the start, pulling back savagely after purchase. This trade is now almost 12 months old, when it signaled to buy there wasnt much love for stocks connected to housing...but look at it now. Still the price is running and until I get a signal to sell I will hold in the hope it goes higher. That is Trend Trading, hold strong stocks, sell weak ones and re employ the money. This stock also withstood the recent sell off without giving a sell signal, so it has "Relative Strength" to the overall market.
BWP had a good run from April 2012 till the May sell off in 2013. Rather than lament the fact it was stopped out and giving back some profit, the positive and more profitable view is to take the money from that trade (be it a winner or a loser) and re employ into other stocks. This trade has weakened, move on to another opportunity as I discussed, when the market presents those new trades. Flowing and moving with the market will help develop a mind set like this....
The less effort, the faster and more powerful you will be
Bruce Lee
Have you thought of this?
I mentioned I have held MOC for nearly 12 months, so when I sell after a 1 year holding period the tax payable on that profit is halved. Many traders persist with daily systems and work very hard to make profits payable at the full tax rate. Why not consider trading a weekly medium term system where most of the big profit trades are liable for just half the tax? Less trades, less brokerage, less slippage, less tax, more profit and ..........less work and stress.
ATAA Adelaide and Perth
In July I presented to the Australian Technical Analysts Association (ATAA) in the above cities. I would like to extend a warm thank you to all the organisers and attendees, thank you for coming along.
I hope I got you thinking in this news letter, good luck with your trading and investing. If you think this type of trading is for you, read my website for more info, reply to this email or even ring for a chat. 0403821523
cheers Peter.
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