Active Investor e-Newsletter

Gary’s Comments

The world is once again abound with negative economic news in both the USA and in Europe. These factors are obviously weighing heavily on equity markets which have seen falls around the world from 6% to 14% since early to mid April.

Equity indices around the world are stretched on the downside in the short term some of which have reached support levels. Short term reversal bounces should be expected. Perhaps the USA indices have already started their bounce. The critical aspect to these equity index bounces will be what level their respective bounces reach. In the short term, to at least regain their losses over the last two months, they do need to at least rise higher than their last short term high. See below what these are for the S&P500 and ALL-ORDS.

Many indices have changed to Long Term down trends by breaking their last quarterly lows. Whether these breaks turn out to be range extensions (and hence false breakouts to the downside) or a confirmed break of support will become known over the next 2 – 3 weeks. Based on index movements over the last 21 months there is a good chance that these are range extensions and that the wide ranging sideways movement will continue. This would mean that most, if not all, the falls over the last 2 months may be regained.

However, if the support levels do not hold and these are not range extensions then expect equity markets to fall a whole lot lower.

The spread between Brent Crude Oil and Light Sweet Crude Oil is widening again. Earlier this year in neared $20 then closed to around $12. Brent Crude has a major support level at $105. A head and shoulders (H&S) pattern is forming with a higher right shoulder than left. Sometimes this also turns into a symmetrical triangle. The problem is that the H&S is bearish whereas the symmetrical triangle can be bullish in that it is a continuation pattern of the prevailing trend. Further sideways movement is expected. That said Light Sweet Crude has broken its neckline of its H&S pattern but the right shoulder was lower than the left shoulder. $90 is its major support level.

Gold and Silver are setting up classically with symmetrical triangles. This pattern sets up relatively often in Gold. I would expect the pattern to resolve itself within the next 3 – 7 trading days with the odds favouring a breakout to the upside. Expect a move down to as low as $1520 first. However there is no guarantee of an upside breakout, it is just the higher probability at this stage. Wait for it to occur.

Silver has a similar symmetrical triangle forming but has a bit further to go before reaching a resolution, possibly another 2 – 3 weeks. Again, the odds favour a breakout to the upside which, by then, would be a break above the $37 level.

Copper has held it’s head above the $400 level, and has a lot of price congestion around the $410 level. This means there is plenty of indecision. A symmetrical triangle has also formed in Copper and is more mature than the one in Silver. I would expect a breakout one way of the other in the next 3 – 7 trading days as price gets more and more cornered as the triangle lines converge. However, here the odds are with a breakout to the downside. This would not be positive for small cap resource stocks on the ASX which are down nearly 22% since early April.

The S&P500 has found support at its rising 200 day SMA (blue line) and a minor support level at 1260. The 40 day SMA is falling from above which should provide some minor resistance on the upside.

The SIROC has reached the oversold zone and other oscillator indicators also indicate that the S&P500 is oversold in the short term. Hence a bounce was expected, at least in the short term.

On the upside the S&P500 needs to rise above 1293 in the first instance, and then up to the resistance level at 1320 where it is bound to get tested.

On the downside there is strong support provided by a Fibonacci cluster at the 1225 – 1230 level and at 1220 by a long term horizontal support / resistance line (black line). If support does not hold at these levels than there is a weak support level at 1180 and a stronger support level at 1100.

The ALL-ORDS has had a 552 point or 10.91% fall since its high close on 11 April to 20 June. “Sell in May and go away” would certainly have paid off this year!!

The bottom graph below shows how poorly the Australian bourse has performed against the S&P500 index. The green line is a 3 monthly SMA of the Relative Strength Comparison of the ALL-ORDS against the S&P500. It’s downward direction shows the underperformance.

The high on 11 April extended the range as has the low reached yesterday, meaning that the high on 11 April extended up past the previous high and yesterday’s low extended down past the low on 17 March. A support level was breached at the 4600 level bringing the ALL-ORDS to within a whisker of a stronger support level at 4500. Even stronger support is indicated by a Fibonacci cluster at the 4520 – 4530 level.

The daily SIROC has reached an oversold zone and the ALL-ORDS is oversold relative to its 40 day SMA. Price can remain oversold for extended periods of time so there is no guarantee that it will bounce just because it is oversold.

The 40 day SMA (green) crossed below the 200 day SMA (blue) on 14 June. This crossover is used by many as a very simple longer term timing mechanism. Typically a short term bounce occurs soon after a cross below and a fall soon after a cross above.

All this analysis does point to a there being a high probability of a bounce from these levels, at least in the short term.

What happens thereafter will need to be analysed on a week by week basis but in the first instance a rise above 4660 is mandatory for the market to go higher, and then above 4805. If a rise above 4660 doesn’t occur on the the next leg (or two) up, which could have started today, then there is a high probability that this market will go lower than current levels! Or at least test support at 4500 – 4530 a number of times.

How much lower? Well the next major support level is 4200 with a weaker support level at 4350 on the way down. Below that is a bit scary to contemplate right now. Let’s hope that the next move up takes us above 4660.

The SPA3 public portfolios continue to outperform the market by a large margin. See the performance table below that shows the comparative compounded annual returns.

Share Wealth Systems provides more detail on all of the above items at our eUGMS. The eUGMs are monthly multimedia presentations available to Share Wealth Systems members only.

The figures used in this Active Investor are based on data prices as of: 20/06/2011