End of Week Market Analysis - 22nd January, 2011

The S&P/ASX200 Index (XJO) closed the week at 4755 points, below long term resistance at 4800 points. The jostle between the bulls and bears continue, with BHP and RIO (discussed in detail below) dragging the market back after a one-day leap across the pivotal 4800 barrier.

• Trend - the short term trend is flat, with 15 day EMA going nowhere, but the medium term trend is still intact, with price above the trendline and 13 week EMA.
• Momentum - crucially, medium term momentum will not penetrate the upper signal line. This is no new bull market. In the short term, momentum is positive, but sideways.
• Direction - in the short term, directional strength confirms price action analysis: a positive bias, but no strength. Medium term directional strength is waning, but remains positive.
• Cycle - the medium term cycle remains bullish, although intra-week did fall below a "bull" signal. This weakness extends into the short term cycle, although a break below the 0 line did not eventuate (which would indicate a short term correction)
• Support - support remains at 4700 in the short term and 4200 in the medium/long term. 
• Volume - medium term volume is flat, but positive, whilst in the short term, has dipped below zero for the first time since the new year week-long correction.

Conclusion
XJO remains a frustrating market, best served at the moment by either standing aside or non-directional trades, with a bullish bias - although the brave few could utilise a long term bear trade at 5000 or more points (I'd book up on macro factors there though! Although I personally believe the current market is overvalued and Australia is heading into a long recession, I can't say the same for those who actually move markets. I find "Jesus" whenever I'm wrong!)

XJO medium term trade: March or April 4600/4500 Bull Put Spread


The Banks (CBA, WBC, MQG)

Commonwealth Bank (CBA), as expected last week, is in a small uptrend which is gathering momentum.

• Trend - the short term trend is up, with price action all above the 15 day EMA and no closes below the 7 day HI EMA. A medium term trend from the low's of November 2010 may be developing, with current activity in the upper area of a trend channel. Recent price action is above the long term 260 day EMA, which is bullish.
• Momentum -  In the short term, momentum confirms a continued short term uptrend, but medium term momentum indicates a bear market rally only at this stage. 
• Direction - short term positive strength is dropping slightly, but still confirms above signal line. The medium term PDI has just crossed over the NDI above the signal line, but NDI has not crossed below 20 - trade management rules deny any medium term or large capital allocation until this level drops.
• Cycle - the medium term cycle is now bullish, supporting local/short term cycle. 
• Support - there is localised support at $49.50-$50 in the short term and $47.50 in the medium term. CBA reached a high of almost $60 in April 2010, which could be this moves target? 
• Volume - volume is positive on both scales, although I'd like to see a higher number of the short-term Force Index.

Conclusion
CBA is in a short term trend that wants to manifest itself as a new medium term trend, with a possible target of $60 (by around the end of April?) These are VERY early days yet, and I would caution any medium term trades or capital allocation until CBA earning's announcements on the 9th of February, with ex-dividend on the 14th (possible dividend yield play here...)

CBA short term trade: Feb $49.50/$49 Bull Put Spread

Westpac is again trying to break out of its medium term sideways bearish funk. As mentioned in last week's analysis, a short term uptrend was trying to form, but entry was denied by lack of confirmation by secondary indicators. Permission has since been granted.

• Trend - the short term trend is up, with classic price action gravitating around the 7 day HI EMA, with no intra-day action touching the 7 day LO EMA. The weekly trend is weak to non-existent.
• Momentum -  Like CBA, WBC is technically in a bear market, so any momentum that reverses but is yet to break into positive territory, or cross the upper signal line suggests a very short term rally. Medium term momentum indicates a reversion to the mean and does not yet suggest any sustained price action. 
• Direction - The medium term NDI continues to drop, but has not crossed below the lower signal line, whilst PDI floats below. This is reflected in the short term DMI readings, although NDI is obviously dropping, but not yet below the lower signal line.
• Cycle - the short term cycle is bullish, with a great indicator confiriming the end of the previous correction and the start of a new short term trend. The medium term cycle is now sideways bullish.
• Support - there is localised support at $22 in the short term and $21 in the medium term. WBC reached a high of $28 in April 2010, a long way off its current price. There is a sloping resistance line at $23 - a weekly close above this level (this or next week) would strongly suggest a new trend. 
• Volume - volume is positive on both scales, rising in the short term, but flat medium-term.

Conclusion
WBC is in a weak short term uptrend, yet to be fully confirmed. Structurally it remains in a sideways bearish stance. I remain cautious about putting on any bullish trades (of any substance) at this time.

Macquarie Group (MQG) has finished the week flat after a great breakout. As mentioned in last week's analysis, a KC Signal was forming - and then confirmed with a bearish engulfing candle on the 20th. Good entry point for long share/warrant traders, bad exit for long option (volatility) traders.

• Trend - the short term trend has finished, but it is likely to move sideways. The weekly trend is a flat base pattern which suggests continued bullishness. Although the close on the 20th was very bearish, it did not break the trailing stop nor close below the 7 day LO EMA. 
• Momentum -  Medium term momentum is now positive and moving towards the upper signal line to confirm a new medium term trend. Short term momentum, after a classic KC Signal, has retraced but still positive, above upper signal line and own EMA. This signals continued strength.
• Direction - The medium term PDI has crossed the upper signal line, which confirms a new medium term trend. This is reflected in the short term DMI readings, with a very strong ADX signal line (which I use rarely) suggesting overbought conditions. 
• Cycle - the short term cycle remains bullish, although it has dipped below the 100 line. The medium term cycle suggests overbought, but is reverting to more sedate conditions.   
• Support - there is localised support at $39.50 in the short term and $37 in the medium term. Historical resistance at $40 remains a barrier to a continued move, but will become support if it gets underway. 
• Volume - strong volume signals on both scales (positive since October 2010) but flat in the short term.

Conclusion
MQG has had a great run in the last couple of weeks and is now consolidating before its next move, as it appears overbought. Most secondary indicators suggest a new medium term trend, but the key signal is a crossing of the upper line on medium term momentum, reinforced by a new support area of $40. Be quick on MQG, as always.

MQG possible medium term trade: long warrant/share, on confirmation

The Miners (BHP, RIO)

BHP Billiton (BHP), ended the week poorly, although it found some support, on nervousness about China and its runaway economy. 

note close below the trendline but not the 63 EMA (green line)

• Trend - the short term trend is sideways at best, down at worst, with choppy price action, although supported by the 63 day EMA/13 week EMA. Weekly price has closed below the medium term trendline and all moving averages have 'stacked'. This is bearish for the short- and medium-term.
• Momentum -  Medium term momentum has failed to make a new high 3 weeks in a row, but it is still above its own EMA and upper signal line.  a bear market rally only at this stage. Short term is below 0 and own EMA, suggesting continued weakness. 
• Direction - The medium term PDI has dropped significantly, but is still above its lower signal line. NDI is also very weak. No directional confirmation here at all. Conversely, short term NDI has crossed over its upper signal line due to Friday's poor close. But, PDI is still above its upper signal line. Again, no confirmation here either. 
• Cycle - the short term cycle is now bearish, having dropped below -100. The medium term cycle however, has moved from bullish to sideways bullish. This is the clearest signal that a correction is not underway. Yet.  
• Resistance - there is signficiant resistance at $46 for BHP, near a 3-year high. i.e BHP is approx. where it was at the height of The GFC Episode One - "The Credit Menace". There is localised support at $44.50 and $43. 
• Volume - volume is slipping on both scales, although in the short term it is now negative, in the medium term it has crossed its own EMA - a clear sign of lack of buying support at these high prices. 

Conclusion

BHP is at a cross-roads. Will it continue its truly awesome strength and reach new 3 and 4 year highs on the back of increased commodity prices (due to the profilgateness of the US Federal Reserve)- or is it too geared to the miracle China story? Again, I'm looking at a combination of price action (a continued fail below the medium term trendline) and momentum before acting. 

BHP: cover all bull trades, stand aside. 

Rio Tinto (RIO), like BHP, ended the week poorly, and continued its sideways action. Are we still witnessing a bullish flat base pattern? 

• Trend - the short term trend is down, with lower highs in the past few weeks, although price remains supported by the 63 day EMA/13 week EMA. Weekly close is barely above the 13 week EMA. This suggest continued sideways action for the short- and medium-term.
• Momentum -  Medium term momentum has now fully slipped below the upper signal line (signifying a sustained medium term trend) but still remains above the lower signal line, indicating continued bullish support.  Friday's close took short term momentum to below zero,  but EMA is still neutral sideways. 
• Direction - Short term NDI has crossed over its upper signal line due to Friday's poor close and PDI is now below its upper signal line. This would normally confirm a new correction is underway. 
• Cycle - similarly, the short term cycle is confirmed as bearish, having dropped below -100. The medium term cycle however, has moved to sideways bearish only, but it is closely reverting to a bearish position.  
• Resistance - there is signficiant resistance at $88 for RIO, or back to where it was in September, 2008 - similarly to the where commodity prices were then and now... There is localised support at $84 and medium term support at $81.50/82 area. 
• Volume - the short term Force Index has been broadly negative for RIO since November 2010, slipping past a support level, whilst it finished the week in the negative on the medium term scale.  Like BHP , this indicates a lack of buying support at these high prices. 

Conclusion

Is RIO stabilising after a great run up from September to December ($72 to $86) reflecting the Fed's QE2 program - OR - is it getting ready for a large pullback as signs abound that not all is well? Just like BHP, I'm looking at a combination of price action (a breakout above resistance at $88 or a failure at $82) and momentum to confirm before acting. 

RIO: cover all bull trades, stand aside. 

Woolworths (WOW) Last but not least, let's look at WOW. After a very quick uptrend, WOW has finished the week bearish, with a large sell-off before announcing profit guidance on Monday. Given that JPMorgan recently upgraded WOW to a buy - a great contrarian signal - does this bode well for next week's action?

• 

  surfing W O W....

• Trend - the short term trend was sideways bullish and then quickly reversed, although price did not close below the 7 LO EMA, it broke the current trendline.  Weekly close is still above the 13 week EMA, but all moving averages are clustering (and frustratingly, the 260 day EMA remains flat). 
• Momentum -  Medium term momentum remains below zero and its own EMA and is slipping.  Short term momentum has closed below the upper signal line and its own EMA which is very bearish. 
• Direction - Short term NDI has crossed over its upper signal line due to Friday's poor close, with PDI now below its upper signal line. A crossover is not yet in place. This would normally confirm a new correction is underway. On the medium term scale, NDI is still above the lower signal line, which confirms that the short term trend has no hold, even though PDI is rising. 
• Cycle -  The medium term cycle attempted a change to a bullish sideways stance but is now neutral. A KC Signal in the short term cycle was confirmed with a move back to sideways bullish.  For WOW - which has constant short-term cyclical moves, this signal is very bearish.
• Resistance - WOW has a very long term resistance at $30 and support at $25.50. Localised support at just over $26 is a probable price target in any continued downtrend. A break below that area is unlikely, but makes for great investing opportunities. 
• Volume - the short term Force Index spiked before ending the week below its own EMA, another bearish sign. On the medium term scale, it still remains positive.  

Conclusion

WOW remains one of my favourite stocks to trade (and company to invest in - sly and demoralising sales tactics it uses with farmers aside) and continues to show that favouritism! I closed a number of trades intra-week due to the volatility and remained concerned at Monday's earnings announcement. Given WOW's previous behaviour, the only trades to consider at the moment is a long dated Bear Call Spread near historic resistance (very low payoff, high probability of success) or a cash secured put for investment purposes (say at $26 or $25.50 level)

WOW short term trade: cover all bull trades, March $29/$29.50 Bear Call Spread 

Note: one of my readers recently timed a covered call trade on WOW to perfection - with Friday's fall he made a 14% annualised return, but he is keeping his WOW shares for the long term (doing the trade in Self Manager Super Fund (SMSF). A great strategy combined with cash secured put buying for those with the time, capital and nous to add a few more percentage points of performance to your biggest investment (no your house doesn't count!). I intend to post on this "Super" trading system in the near future. Watch this space.