Kris asked me to write Money Morning for him over the next two days and I thought I should spend some time alerting you to the fact that the ASX 200 is about to hit the skids.
I think it is very interesting to note (for starters) that our stock market made yearly highs on the 15th of April in 2010 and then the 11th of April 2011. I would not usually place much weight on such things but it is quite striking when you look at the charts and see how dramatic the fall has been after mid-April over the past few years.
Everyone knows the adage ‘Sell in May and go away’. I think we may be looking at another year where that saying proves its worth.
I wrote an article back in February prior to the second LTRO (Long Term Refinancing Operation) and said,
‘How the European bond markets react in the weeks following the second LTRO will be incredibly important. If Portuguese, Spanish and Italian bonds start selling off again even though banks are full to the brim with cheap cash then you can become very confident that the situation in Europe is going to unravel again.’
So let’s have a look at some European bonds and see how they are faring post LTRO2.
Notice the price action over the past few weeks. The yields on Spanish and Italian bonds are definitely starting to march higher.
European manufacturing activity is in contraction and unemployment is going through the roof. Reuters reports…
‘Unemployment in the euro zone reached its highest level in almost 15 years in February, with more than 17 million people out of work, and economists said they expected job office queues to grow even longer later this year.
‘Joblessness in the 17-nation currency zone rose to 10.8 percent – in line with a Reuters poll of economists – and 0.1 points worse than in January, Eurostat said on Monday.’
More austerity is in the pipeline and there is no way Germany can continue to hold its nose above water while the periphery is in free-fall.
Let’s face it, the only reason the equity markets are going up at all is due to the immense amount of monetary stimulus being shoved down its throat. Have a look at this chart I found on Zerohedge this morning.
It’s quite clear from this chart that if the Fed doesn’t take the baton from the ECB then equities are in for a rough ride.
Last night we saw the minutes from the FOMC’s previous meeting. The market was surprised to see that there was little appetite for more Quantitative Easing any time soon. Equities, commodities and bonds all sold off hard. We will see more of the same over the next few weeks if the market feels that the punch bowl is being taken away.
Another interesting development over the past few weeks is the rising divergence between equity markets and high-yield debt markets. They usually trade in lock step with each other and when they diverge it is often a great warning sign to tread carefully in equities.
So from here we have to turn to our charts and see if there are any possible signs of failure in the wings. When I look at my chart of the ASX 200 I have to say that the current set up is one of the best that I have seen in many months.
Many commentators have been discussing the 4350 zone in the ASX 200 as being very strong resistance. The way I look at it is that the 4350 zone in the ASX 200 is actually the top of a distribution that we have been in for eight months. This distribution has a Point of Control (POC) at 4200 (the dotted blue line in the chart). You can think of the Point of Control as the gravitational point around which the price action oscillates.
If prices fall back within this distribution then there is a very high probability that prices will fall to the POC at least and perhaps all the way to the bottom of the range.
Notice how many times in the past eight months we have seen a sharp price fall to either the bottom of the range or the POC once prices have re-entered the range.
Also notice how the 35-day moving average remains below the 200-day moving average. This is my definition for the long-term trend so we are still in long-term downtrend. A long-term sell signal is generated when price closes back below the 35-day moving average after having a false break of the 200-day moving average in a long-term downtrend.
Therefore if you look at the chart again you can see that if prices close below 4266 in the ASX 200 in the next few weeks then that will be a long-term sell signal and a return to the distribution that I have been talking about. In other words watch out below.
Murray Dawes
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