An important juncture

Lesley Beath | 19 May 2015

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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/does not have an interest in the securities disclosed in this report.


Overview

Various equity and commodity markets are testing some interesting support and resistance levels at the moment, so let's jump in and have a look.

In the US, the S&P 500 and the Dow Industrials are pushing at their 2015 highs. The S&P Bank index is also approaching a significant barrier. The Dow Transportation index is once again testing the support that has been highlighted on numerous occasions and the Dow Utilities is in the vicinity of its 200DMA.

The Russell 2000 is holding above support after breaking out of a multi-month trading range earlier in the year -- so is the UK FTSE.

The VIX remains at the lower limits of its recent range.

The German equity market, as measured by the DAX, is drifting towards the October 2014 uptrend, but the Commerzbank index tested that uptrend last week. Action in the latter will give guidance in the week ahead.

The Toronto Composite index is also testing its 2014 uptrend.

The US T-Bond bounced off solid support last week.

The US T-Bond/S&P 500 ratio has drifted lower over the past month or so, after testing its major downtrend in late March. At the moment, the short-term downtrend that commenced in late March is still in place, but downward momentum is beginning to slow, so we need to be on the lookout for a possible short-term reversal in the ratio.

Copper is testing its 2011 downtrend.

I could go on, but as can you can see we are at an important juncture.

China is the odd one out here, as it begins to stall after the massive rally since mid-2014.

As for the Australian market, many of the major indices are now in close proximity to their 200DMAs. Those include the All Ords, the ASX 200, the ASX 20 Leaders, the ASX Financials and the ASX Insurance index. The ASX Midcap index is testing the October 2014 uptrend.

As in the US, while some indices are testing support, others are approaching resistance. The latter include the ASX Small Ordinaries, the ASX 100 Resources and the ASX Gold index. Those support and resistance levels are evident on the charts later in the report.

So what now? I think the odds marginally favour some near-term upside, both here and in the US. But let's just monitor the action over the coming week.

The banks have been a major drag on the Australian market over the past month or so and they have pushed the ASX 20 Leaders All Ords ratio below a significant support level. The retreat has been swift and savage.

The banks are now in the vicinity of support, and the ASX Small Ordinaries, the ASX Small Industrials and the ASX Small Resources are now approaching resistance, so there is the possibility of a turn in the ratio but there are no clear signals at this stage.

Given the extent of the recent price drop in the banks and the support now in play, a short-term bounce would not surprise. Australia and New Zealand Banking Group Bank (ANZ) has fallen 14 per cent, Commonwealth Bank of Australia (CBA) 16 per cent, National Australia Bank (NAB) 14 per cent and Westpac Banking Corporation (WBC) 19 per cent.

They are due for a bounce. It is still like catching the proverbial falling knife but short-term momentum indicators are improving, obviously from oversold levels.

Just as the current support on the All Ords (the 200DMA and the August/September highs) is important, the resistance on the Small Ords is also important. If the latter can break topside and the All Ords can bounce from support, then we may be on the verge of a healthy move to the upside.

This would be seasonally unusual, as the market has a tendency to peak in April/May and then take off again October/November. So far, the All Ords has complied with its recent seasonality, peaking in April. It may still be the case that April will be a medium-term peak, but even so there is room for a short-term bounce.

In the commodity space, the most obvious and importance resistance level is that on copper and silver.

Copper is now pushing at both its 200DMA and the major downtrend. The metal began its recent rebound in late January/early February, ahead of the downturn in the US dollar. That is an encouraging sign, but the resistance is hefty and the other base metal prices are not displaying a similar improvement at this stage.

But the share prices of the world's major miners are showing significant improvement. The monthly chart later in the report highlights the long-term support from which copper bounced early this year. You can see converging levels of support and resistance.

In my opinion, a clear break of the downtrend would signal the end of the bear market. It's an important level.

Another key resistance level is evident on silver. We have watched this closely in recent months, looking for guidance on the gold price. As the resistance on silver was more well-defined than that on gold, I was of the view that silver may well lead gold.

Silver broke the 2012 downtrend last week, but there is also resistance associated with the 200DMA and the mid-2013 and mid-2014 lows. That is significant and although last week's break is encouraging, silver needs to push above the January high at $1836 before we can say the trend has been reversed.

Obviously, the fall in the US dollar has had an effect on the price of silver and gold, with the latter rising 3 per cent last week. Momentum indicators are positive and if gold can hold above last week's high, and silver can push above its resistance, then the medium-term outlook improves significantly.

Last week's gains in gold were not just a result of the declining US dollar, as gold rose in euros as well. That's what you need to see before assuming a positive bias, so that's a good sign.

As for the US dollar index, it has fallen quite dramatically since peaking in mid-April. I noted the potential for a reversal in the US dollar a few weeks ago as it began to break down against a number of currencies.

At this stage there is no evidence that a rebound is imminent but we can watch the Fibonacci 38.2 per cent retracement on the US Dollar index (0.9219) to see if that acts as short-term support. If it doesn't, the index has downside risk to 0.9058 to 0.9866.

But I think it will be silver and copper that will give guidance here, as they battle to overcome a major barrier. Gold miners Barrick and Newcrest (NCM) are also pushing against key resistance so a topside break would be a major development for the gold sector.

Chart Packs

Use the links below to view the various chart packs.


Global equities     |      Australian equities     |      Currencies and commodities

 

Global equities

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Australian equities

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Currencies and commodities

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This report appeared on www.morningstar.com.au 2017 Morningstar Australasia Pty Limited

© 2017 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written content of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.