ASX 200: It’s down to iron ore

Iron ore encountered resistance at $70 per ton. Another test of primary support at $53 is likely. But a failed down-swing would be a bullish sign.

Iron Ore

The ASX 300 Metals & Mining displays a similar pattern, retreating below 3000 after testing 3050. A failed down-swing that ends above 2750 would be a bullish sign, while breach of support at 2750 would confirm the primary down-trend.

ASX 300 Metals & Mining

APRA eased pressure on the big four banks to raise more capital; the ASX 300 Banks index responding with a rally to 8800. Retracement that respects support at 8500 would be a bullish sign, signaling continuation of the up-trend. The industry is still light on capital but recent remarks by APRA chair Wayne Byres indicate that they are prepared to tolerate a more gradual adjustment rather than a new round of capital raising. Dividends may still come under pressure, however, in banks with high payout ratios.

ASX 300 Banks

ASX 200 consolidation between 5600 and 5800 continues. Declining Twiggs Money Flow flags selling pressure. Breakout from the consolidation will indicate future direction but this is likely to be dominated by mining (iron ore) and the banks. If both are pulling in the same direction, the index is likely to follow. Banks are increasingly bullish but the question-mark over iron ore remains.

ASX 200

ASX buoyant as iron rallies

Iron ore broke resistance at $60 and is headed for a test of $70 per ton. This is a strong rally but it does not signal the end of the bear market. Only when the rally ends and there is another test of primary support at $53 will we be able to gauge long-term sentiment.

Iron Ore

The ASX 300 Metals & Mining index broke resistance at 3000, completing a double bottom reversal with a target of 3250. Breach of 2750 is unlikely at present but would signal a primary down-trend.

ASX 300 Metals & Mining

The ASX 300 Banks index is testing resistance at 8500 but Twiggs Money Flow below zero continues to warn of long-term selling pressure. Breach of 8000 remains likely and would confirm the primary down-trend.

ASX 300 Banks

The ASX 200 is consolidating in a small triangle (some would call this a large pennant) between 5600 and 5800. Breakout will signal future direction. A lot will depend on iron ore (China) and the banks, which seem to be pulling in opposite directions at present.

ASX 200

ASX selling pressure despite iron ore rally

Iron ore roared back, breaking resistance at $60. But this is a bear market. Also port inventories are climbing, while housing price growth is slowing. Expect another test of support at $50 is likely. Breach would signal another decline.

Iron Ore

The ASX 300 Metals & Mining index rallied off support at 2750 but is likely to respect resistance at 3000. Breach of 2750 would signal a primary down-trend.

ASX 300 Metals & Mining

The ASX 300 Banks index also rallied but is likely to respect 8500. Breach of 8000 would confirm the primary down-trend.

ASX 300 Banks

The ASX 200 displays strong selling pressure, with Twiggs Money Flow dipping below zero for the second time. Follow-through below 5700 would test primary support at 5600. Breach of 5600, while not yet a high probability, would complete a broad head and shoulders reversal.

ASX 200

Bearish outlook for the ASX

Iron ore rallied slightly during the week. But this is a bear market. Expect resistance at $60 to hold and breach of support at $50 is likely, signaling another decline.

Iron Ore

The ASX 300 Metals & Mining index is testing support at 2750. Breach is likely and would signal a primary down-trend.

ASX 300 Metals & Mining

Banks are also under pressure, with the ASX 300 Banks index consolidating between 8000 and 8500. Breach of 8000 is likely and would confirm the primary down-trend.

ASX 300 Banks

The ASX 200 displays a broadening wedge consolidation. A failed down-swing, recovering above 5800 without reaching the lower border, would be a bullish sign. But this seems unlikely with a bearish outlook for the two largest sectors.

ASX 200

ASX banks and iron ore drag the index lower

Last week I wrote: “I believe that the latest rally is a secondary reaction and that the ASX is headed for a down-turn, with miners and banks leading the way. But it’s no use arguing with the (ticker) tape.” This week the ticker tape backs up my bearish sentiment, so I am a lot more comfortable.

Iron ore continues to fall, headed for a test of 50.

Iron Ore

Banks’ bear market rally also petered out, with the ASX 300 Banks index headed for a test of support at 8000. Breach would confirm the primary down-trend.

ASX 300 Banks

The ASX 200 broke support at 5700. Declining Twiggs Money Flow signals selling pressure. Breach of primary support at 5600 would warn of a primary down-trend.

ASX 200

Australia: ASX rallies

Iron ore is falling.

Iron Ore

And the broader DJ-UBS Commodity Index is testing support at 82. Breach would signal a decline to test the 2015 low at 74.

DJ-UBS Commodity Index

But the Aussie Dollar rallied Friday, the large engulfing candle suggesting another test of resistance at 75 US cents.

AUDUSD

Miners finished strongly, with the ASX 300 Metals & Mining index reflecting short-term buying pressure. 13-Week Twiggs Money Flow recovered above zero.

ASX 300 Metals & Mining

The ASX 200 is testing resistance at 5800. A 21-day Twiggs Money Flow trough above zero indicates medium-term buying pressure. Breakout above 5800 is likely and would suggest another test of 5950/6000.

ASX 200

Banks also rallied, with the ASX 300 Banks index headed for a test of 8500. Expect strong resistance.

ASX 300 Banks

Perhaps this UBS report had something to do with it.

I believe that the latest rally is a secondary reaction and that the ASX is headed for a down-turn, with miners and banks leading the way. But it’s no use arguing with the (ticker) tape.

A prudent speculator never argues with the tape. Markets are never wrong, opinions often are.

~ Jesse Livermore

ASX retreats as iron ore breaks support

Iron ore broke support at $60, signaling another decline. The medium-term target is $50*.

Iron ore

* Target: 60 – ( 70 – 60 ) = 50

Resources stocks lost momentum, with the ASX 300 Metals & Mining index respecting resistance at 3000. Twiggs Money Flow seemed to be recovering after a strong bearish divergence but has again slipped below zero, warning of selling pressure. Expect another test of primary support at 2700.

ASX 300 Metals & Mining

The big banks face selling pressure, with Twiggs Money Flow falling sharply. The primary down-trend on the ASX 300 Banks Index, having broken support at 8500, offers a medium-term target of 8000*.

ASX 300 Banks

* Target: 8500 – ( 9000 – 8500 ) = 8000

The ASX 200 respected resistance at 5800. Breach of 5700 is likely and would confirm another test of primary support at 5600*. Breach of 5600 would signal a primary down-trend, offering a target of 5200*.

ASX 200

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

ASX banks break support

The big banks fell sharply on the week’s turmoil, with the ASX 300 Banks Index breaking support at 8500. Breach signals a primary trend reversal, offering a medium-term target of 8000*.

ASX 300 Banks

* Target: 8500 – ( 9000 – 8500 ) = 8000

Resources stocks rallied over the week. Expect strong resistance on the ASX 300 Metals & Mining index at 3000.

ASX 300 Metals & Mining

Iron ore continues in a bearish narrow consolidation above support at $60. Breach would offer a short-term target of $50*.

Iron ore

* Target: 60 – ( 70 – 60 ) = 50

These are ominous signs for the ASX 200 which is testing medium-term support at 5700. A sharp fall on Twiggs Money Flow flags strong selling pressure. Breach of primary support at 5600* would signal a reversal, offering a target of 5200*.

ASX 200

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

ASX 200 bearish consolidation

The big banks fell sharply on news of a new levy on bank liabilities in the latest budget. At this stage the ASX 300 Banks Index merely shows a secondary reaction. Breach of 8500, however, would signal a primary trend reversal, offering a medium-term target of 8000*.

ASX 300 Banks

* Target: 8500 – ( 9000 – 8500 ) = 8000

Resources stocks compensated, with the ASX 300 Metals & Mining Index rallying to test resistance at 2850/2900. Breakout is unlikely given the weak lead from iron ore. Reversal below 2700 remains likely and would strengthen the bear signal for resources.

ASX 300 Metals & Mining

Iron ore formed a bearish consolidation above support at $60. Breach would offer a short-term target of $50*.

Iron ore

* Target: 60 – ( 70 – 60 ) = 50

Selling of the Aussie Dollar continues, with a medium-term test of primary support at 71.50/72.00 now likely.

Aussie Dollar

Consolidation of the ASX 200 above support at 5800 is a bearish pattern. Breach would signal a correction to test primary support at 5600*. Twiggs Money Flow still indicates long-term buying pressure and only a fall below zero would warn of a reversal.

ASX 200

* Target medium-term: 5800 – ( 6000 – 5800 ) = 5600

2 More Warning Signs for the ASX

The recent Iron ore rally has faded and the commodity is again testing support at $60. Twiggs Momentum (13-week) below zero indicates a primary down-trend.

Iron ore

The ASX 300 Metals & Mining Index broke support at 2850, warning of a down-trend. A Twiggs Money Flow peak below zero flags strong selling pressure.

ASX 300 Metals & Mining

Falling ore prices will place strong downward pressure on the ASX and the Aussie Dollar.

Aussie Dollar

ASX 300 Banks Index retreated below 9000. Declining Twiggs Money Flow indicates medium-term selling pressure. Follow-through below 8900, or Twiggs Money Flow below zero, would warn of a correction.

ASX 300 Banks

The large red engulfing candle on the weekly ASX 200 chart also warns of a (secondary) reversal. Breach of support at 5800 would signal a correction. Twiggs Money Flow still shows long-term buying pressure and only a fall below zero would warn of a market top (primary trend reversal).

ASX 200

* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000

ASX stalls at 5800

Banks have run into resistance, with the ASX 300 Banks Index retreating below 9000. The recent false break (above 9000) is a mildly bearish sign but the long-tail on this week’s candle is mildly bullish. Follow-through above 9100 remains more likely and would signal an advance to 9500*.

ASX 300 Banks

* Target medium-term: 9000 + ( 9000 – 8500 ) = 9500

This is not a criticism of the policy, but recent rate hikes on investor mortgages become a self-fulfilling prophecy. Concerns about the housing market lead banks to hike rates. Higher rates discourage new borrowing, leading to a contraction in demand. Which in turn leads to lower house prices.

Miners continue their downward path. The ASX 300 Metals & Mining Index has broken its long-term rising trendline, while Declining Twiggs Money Flow peaks below zero warn of strong selling pressure.

ASX 200

With its two biggest sectors meeting resistance, the ASX 200 is stuck at 5800. But rising troughs on Twiggs Money Flow (above zero) signal buying pressure. Breakout above 5800 is likely and would signal a test of 6000*. Reversal below 5600 is unlikely but would warn of a correction.

ASX 200

* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000

ASX banks lead the charge

The ASX 200 followed-through above 5750 after respecting its new support level at 5600, indicating an advance to 6000*. Rising Twiggs Money Flow signals buying pressure.

ASX 200

* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000

Australian banks are leading the charge, with the ASX 300 Banks Index testing 9000. A trough high above zero on Twiggs Money Flow indicates strong buying pressure. Breakout above 9000 would signal another advance.

ASX 300 Banks Index

Bank profits have declined for the last two years, but Bad and Doubtful Debt Charges are not a major cause.

RBA Chart Pack: Bank Profits and Bad Debt Expenses

The main culprit is declining return on equity as banks beefed up capital ratios and risk-weighting on residential mortgages in response to pressure from APRA.

RBA Chart Pack: Bank Return on Equity

ASX 200 correction

The ASX 200 continues to test its new support level at 5600. Twiggs Money Flow is now declining, reflecting medium-term selling pressure. Breach of support is likely and would test the lower trend channel around 5500 but the primary up-trend is unchanged.

ASX 200

* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000

The ASX 300 Banks Index has undergone a sell-off in the last few weeks, weighing heavily on the broader index. Declining Twiggs Money Flow indicates medium-term selling pressure. Respect of support at 8000 would indicate that the up-trend is intact.

ASX Small Ordinaries Index

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.

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

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

ASX Banks: Picking up pennies in front of the bulldozer

Earlier this week I wrote:

“The ASX 300 Banks Index broke through resistance at 8000. Twiggs Money Flow is still negative but recovery above zero now looks likely. Breakout would signal an advance to 8700 but I remain cautious and would wait for a retracement to respect the new support level.”

ASX 300 Banks Index

The picture changed within 24 hours. Breakout transformed into a false break, reversing below the 8000 support level. Twiggs Money Flow turned down and now recovery above zero looks unlikely.

Trading breakouts is like picking up pennies in front of a bulldozer. Especially when fundamentals offer scant support. I have never done an accurate count, but for every successful breakout there must me at least five, if not ten, false breaks and/or bull or bear traps. Not good odds if you want to preserve your capital. Far better to wait for confirmation, even if that means a higher entry price.

Australia & Canada’s experience with equal weighted indices

Correction to my earlier post. Equal-weighted indices don’t always outperform cap-weighted indices, as with the S&P 500. Australia’s ASX 100 Equal Weighted Index underperformed the cap-weighted ASX 100, recording annual growth of 3.79% (EWI) compared to 5.28% for the ASX 100 on a total return basis over the last 10 years.

ASX 100 Equal Weighted Index compared to cap-weighted ASX 100

Canada’s TSX 60 Equal Weighted Index, on the other hand, mimics the S&P 500. Equal Weight achieved an returns of 6.17% over the last 10 years compared to 5.33% for the cap-weighted index.

TSX 60 Equal Weighted Index compared to cap-weighted TSX 60

I will investigate further why Australia bucks the trend but I suspect the banks play a major role. The ASX 300 Banks Index substantially outperforms the broad ASX 300 Index.

ASX 300 Banks Index compared to ASX 300