February 25

Market Update for Mon 27 Feb 2017

According to a capital expenditure (CapEx) survey released on Thursday, investments declined more than expected in Q4 2016. The year 2016 shows the steepest decline in total CapEx ever recorded in Australia (-16% YoY in real terms) as more and more mining projects entered production phase. Across sectors, the decline in mining investment (-35% YoY in 2016) was hardly offset by rising investment in the services sector (+3% YoY), which benefited from a relatively weak exchange rate and lower interest rates. This pattern remained in Q4 2016 but the outlook for 2017 is less bleak. The survey implies a decline in mining investment by a less dramatic 20% YoY in 2017, while companies expect dynamics in service sector CapEx to somewhat pick up. The gradually fading investment drag is the main reason why analysts forecast GDP growth to pick up slightly in 2017. However, any boom for the domestic economy and especially the labour market may remain limited because of emerging drivers of growth, commodities extraction and exports being much less labour intense. Spare capacities could remain significant which in turn keeps domestic inflationary pressures low and allows the Reserve Bank of Australia (RBA) to remain accommodative for a bit longer.

The Dow Jones Industrial Average posts its 12th straight record – the longest such streak since 1987 – while both, the S&P 500 and the Nasdaq rose for a fifth straight week.

XJO closed 45+ points (0.8%) lower on the highest volume in over two months. Bears showed their teeth and selling remained for most of the session. A small bounce after the initial losses faced resistance below the 5765 level for selling to continue into a weak close near the low of the day. Bulls were unable to take advantage for yesterday’s spring and faced resistance at the 5805 level, broke below short-term support at 5780 and below support at 5765 and closed smack on the 21-day exponential moving average. This level is only a little above a 35/50-day weighted moving average which is very often used by institutional investors for intermediate trend analysis. The close is the first close below an 8-day exponential moving average. We made a post about the significance of the 8-day exponential moving average a while back in our Market Update for Mon 16 Jan 2017

Chart-of-the-DayThe Chart-of-the-Day shows a 2-Hour chart of the S&P/ASX-200 (XJO). We show the uptrend from the November 2016 low which came to a halt at the 5825 level, the pullback into the February 2017 low and the bounce into the double top. We reasoned at the time that we don’t believe to see the 5825 level again for a while. Prices seemed to have gone ahead what the market was able to absorb which produced a lot of negative divergences in price oscillators and market internal indicators. The February 2017 top is a visit back to that level but the marginally higher high was not a sustainable breakout but rather a failed secondary test. High volume in narrow ranges was an absorption of demand by supply or distribution which leads into a markdown phase. We believe this is where we are at and the task going forward will be where the price index is finding support before the next leg up can be made. We view the 5585 level to hold as important for the intermediate term trend to remain up. A break below the 5665 level would turn the current positive technical picture to neutral and a drop below 5585 to negative. The Weekly close is near the open of the previous week or to put it differently, almost all gains of last week have been given back. The mid-point of the first week after the spring early February 2017 is at 5665 which we want to see to hold. A close below 5705/15 support would turn the current Daily uptrend into a confirmed downtrend. Daily momentum is falling and about to become negative, impulse is red. The Weekly momentum is positive and falling with impulse blue. Impulse is becoming red on a weekly close below 5700. This level coincides with the 5705/15 level. Monthly momentum is positive and rising and impulse is green. These are intra-month levels, however. A close back above the 5785 level on Monday would be a strong statement by the bulls and denote an exhaustion of supply for the uptrend to continue which will likely lead to a new market top. Market Condition remains in Stage 3.

ASX NH-NL Index raw dataThe NH-NL Index is neutral with Daily NH-NL indices remaining in their neutral zone. Most Daily NH-NL indices are now giving negative readings and challenge a level where they found support during the November 2016 to January 2017 uptrend. A drop below would confirm that a change of character has occurred in the market. The Weekly NH-NL index is headed towards its zero line. A drop below would give a message for adverse markets. New Highs – New Lows raw data show that New Lows did not expand significantly after the down move on high volume. However, New Highs continue to contract.

ASX NH-NL Index


The Secondary Market Internals are neutral. The NH-NL Ratio dropped below its 50% neutral line and therefore a level where the NH-NL Ratio found support earlier in the uptrend. It’s moving average is falling. The Volatility Index jumped above its moving average and it only takes very little to jump out of its squeezed bands to give a negative signal for the market. We elaborated the squeeze of the bands as being a precursor of a period of increased volatility ahead. However, we don’t have a good idea what catalyst would drive the increased volatility in the market.

ASX Secondary Market Internals


The Breadth Indicator already turned negative at the beginning of the week and headed marginally lower. The oscillator is approaching the -20 line which acted as support ever since the uptrend started after the US election results. We will have a better understanding about the underlying strength of the market once we see how the oscillator reacts at that level. A negative divergence between the price index and the Summation Index is a strong and reliable signal for a trend reversal. This is a long-term indicator which supports our view that we won’t see the 5825 level again for a while.

ASX Breadth Indicators


The Bottom Line. Resistance holding and support failing is one of the most simplistic characteristic in a downtrend and this is the price action we have seen lately in the price index. Prices are in a pullback from a double-top formation. We expect some form of support in the former congestion zone between 5705 and 5715 and then at the long-term support at 5665. Resistance is at 5765 and especially 5785. A close above 5785 on Monday would keep the bullish story alive and likely continue the uptrend and produce a new market high. Market Internals are now negative with the NH-NL Index joining the Breadth Indicator. However, all market internal indicators are still holding at or above levels where they found support throughout the uptrend from the November 2016 low. Those levels holding could keep prices in a trading range while further deterioration in Market Internals would likely confirm a change of character in the market for prices to test lower support levels. Trading Mode is downgraded to Conservative.