February 10

Market Update for Mon 12 Feb 2018

Global equity markets remain jittery. Despite the current market volatility, the global growth story remains intact. The current correction relieved from overbought conditions which built in the US and other developed equity markets. Major equity indices are holding important support levels and long-term averages. We view the current down move as a (healthy) correction within an intact larger uptrend. Prices and technical indicators are quite stretched for a bottoming process to unfold.

Times like these cause a lot of worries among most equity traders and investors. If you are like most stock market investors, you may be feeling somewhat uneasy. Still, as difficult as this may be, such times can actually be used to be of great value by providing an opportunity to grow as a trader or investor. We all know that trading or investing involves risks which are beyond our control. And although we knew in the back of our mind that the market would not stay calm forever, it is human nature to find it difficult to embrace living through severe downturns, especially after the market has gone through an extraordinarily long period of extremely low volatility. It is also part of our human nature to feel the pain of loss more acutely than the pleasure of gain. All that is to say, if you are feeling a little on edge, you are not alone. It actually is very normal.

The only remedy to ‘survive’ severe downturns, corrections or bear markets is to have a clear plan. But again, risk assessments are usually made on paper and when markets are calm. There is a huge difference between saying you would stay the course, even if your portfolio is sliding by a certain percentage and actually seeing your portfolio beginning to slide. The return of market volatility reminds us of the importance of having a trustworthy process behind our trading and investment strategy. There needs to be a rule-based process behind every dollar traded or invested in the market, a clear plan as to when to buy when to sell and even when to stay aside. The process needs to be adhered to with iron-clad discipline. You can’t influence the outcome of the market and therefore you will never be able to claim praise for any gains and likewise, you can’t blame yourself for any losses. The only influence you have is on having a process in place, following a plan and execute it with discipline. The reward for your good work will be the overall return on your trades and investments.

There is nothing like a downturn to put our convictions to the test. It can be unnerving but it can also be beneficial. If we can use a downturn to build our resilience, just as athletes get better at handling pressure situations through the experience of competing in many such situations, we can become stronger through the experience of trading and investing in turbulent times. So do not let this downturn go to waste but use it to review what is gone into the construction of your strategies or your portfolio. Hopefully, you have a trustworthy process in place and follow it with discipline. If so, be reassured. You are miles ahead of most traders and investors. You are also more likely to succeed in your career as a trader or investor while others are more likely to fail financially and also emotionally. If you can use the current downturn to remind yourself that any fear we are feeling right now is completely normal — just like it is normal to feel nervous before the start of a competition at the Olympics. Human beings are designed that we have a heightened sensitivity to pain. It is something to notice, acknowledge, and use for our benefit.

However, this is not something that we usually act on when it comes to trading and investing. Pride, failure, overconfidence, shame, inexperience and fear drives us out of the market. The result of this is that those emotions keep us out of the market for a while. Usually during much of the recovery that follows a downturn. Remember, most of the big mistakes investors make with their portfolios happen during adverse markets. The events of the past week may have been just a wake-up call necessary to help you avoid a much bigger problem down the road.

XJO dropped 100+ points at the open and broke below the low of Tuesday’s climatic selloff. The price index recovered some of the initial losses. Volume remains above-average and the close mid-range is weak. The Weekly timeframe entered a confirmed downtrend for the first time since June 2015. So far the 5805 level is holding as support but prices remain deeply oversold, unable to bounce. The Chart-of-the-Day shows a Daily chart of the S&P/ASX-200 (XJO). Prices are sitting on the demand line of the uptrend channel drawn from the February 2016 washout low. Prices are back in a large trading range between 5650/65 and 5935/50 with its key pivotal level at the familiar 5805 support level. A break below this support level would end the uptrend channel and push prices into the lower half of the trading range for a possible re-test of the lower boundary line at the 5650 level. A recovery back above the area of resistance at 5935/50 is required to ease from further downward pressure. An attempted bounce this week stalled at this level which underlines the importance to recover this level first. This level is also mid-range of the wide-range down move on Tuesday. Market Condition is downgraded to a Stage 3, Daily and Weekly timeframes in confirmed downtrends.

The NH-NL Index remains negative. The Daily NH-NL indices dropped back into their bearish territory and the Weekly NH-NL index dropped below its zero line to the lowest level in almost two years. Daily NH-NL indices are building potential positive divergences. These divergences will trigger on Daily NH-NL indices ticking up and give a strong and reliable signal for a trend reversal. A negative Weekly NH-NL index is a message for adverse market conditions. So we need to see a break back above its zero line to have a better conviction of a sustainable recovery in the price index.

The Secondary Market Internals remain negative. The NH-NL Ratio dropped back to a deeply oversold level and its moving average continues to fall. A falling NH-NL Ratio moving average is a message for adverse market conditions. The NH-NL Ratio is required to recover its moving average to pull it back up again and therefore giving more conviction of a sustainable recovery in the price index. For that to happen, the NH-NL Ratio needs to recover its 50% neutral line. The Volatility Index remains at a 20.0 reading, denoting a risk-off sentiment in the market.

The Breadth Indicator remains negative. The McClellan Oscillator is unable to recover its falling tops line (red line) and is pulling back from it. A potential positive divergence is building between the price index and the oscillator. A tick up in the oscillator would trigger the divergence and give a strong and reliable signal for a trend reversal. Positive price action is required for such a development. This would likely push the oscillator above the falling tops line and even back into positive territory. The Summation Index is falling at a steep angle towards its +600 neutral line. A falling Summation Index is a message for liquidity leaving the market. A reading below the +600 neutral line is a condition for a squeeze in liquidity. Such a condition could lead to volatile and erratic selloffs as seen in February or November 2016.

The Bottom Line. Prices tested the Tuesday low again after a two-day pause in the downturn. The break below Tuesday’s low did not attract fresh supply but demand kept prices above the 5805 level. The inability of prices to bounce from their deeply oversold condition is weak. A recovery of the 5925 level is required to ease from further downward pressure. Market Internals remain negative. Market internals indicators at deeply oversold levels and messages for a short-term bottom in the price index didn’t materialize into a meaningful bounce. This denotes an absence of underlying strength. Trading Mode remains Protective.

We won’t be posting any Market Reports next week due to travels.
The next Market Report is for Monday 19 February 2018, prepared after the close of trade on Friday 16 February 2018.

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Posted 10/02/2018 by Notes on ASX in category Daily Market Update