Momentum Monday 12 December 2022

Welcome to our Momentum Monday newsletter.

Remember: In Stockopedia momentum doesn’t just mean price moves (though it is a big part of it.)

Just to refresh your memory Stockopedia’s Momentum Rank is a ranking system based on a blend of price momentum and earnings momentum in the form of upgrades, positive revisions to earnings and earnings surprises to learn more read here https://www.stockopedia.com/le... this report we pay no attention to the factors of Quality and/or Value. However, when combined with either of these two factors, an analysis of the charts can be a powerful strategy, if applied with discipline.

Week ended 09 Dec 2022

Last week we saw markets take a breather from what had in general been an aggressive move to this point.

* The reason for looking at the US S&P500 chart is because it plays such a large role in the sentiment of the broader Bourse and therefore it can’t be excluded from broader consideration.

S&P500 (US)

A pull back from the top end of the downward channel is enough to remind us that we are not out of the woods yet when it comes to the broader downward move on the S&P500.

Though we are better placed here than a few weeks ago, the obvious risk is that there is a continuation back to the bottom end of the channel which may take us to ~3300-3400, which coincidently is a structural support level, formed back in October 2020 while the market clawed out of the COVID correction.

Assuming that the pullback is an orderly one, a break up above 4280 is still necessary to prove that there may be a reversal of a trend occurring. As mentioned last week, the level of 3903 would be a nice pullback zone.  Failure to hold that level could see the levels mentioned above tested next.

Pleasing the MACD is still in positive territory, notwithstanding that the pullback last week has seen a slight convergence in the MA indicators.

The RSI has dipped below 50 again which is unsurprising. The RSI can be quite volatile as a single measure. On a two week average basis the line has consistently stayed under 50 since March, further underlying the move down.

As mentioned last week, investors need to be cognisant of these risks, particularly as the US market plays such a large part in sentiment for our market.

S&P/ASX200

The hype surrounding the China re-opening wasn’t enough to stop some profit taking occurring across the board, as investors brace themselves for the global recession (that seems like will avoid our shores.) Given as every man and his dog, including some of our leading investment firms are now predicting a recession in many major economies in 2023, we need to appreciate that this will play a role in broader market sentiment.

For the last 6 weeks we have chosen to ignore these concerns. Perhaps the reopening of our major trading partner induced the sell off (???).

The irony of this situation is no better captured than by the Materials sector being our best for the week as Iron Ore prices rebounded strongly. Yet the price of oil fell, presumably for the opposite reason Iron Ore went up. Making sense of these large commodity/macro gyrations in impossible. Which is why basing views on a quantitative approach is far less cumbersome than relying on qualitative outlook.

Looking at price action is another form of quantitative analysis, and rather than just categorizing it as the playground of the wretched and broken hearted, significant academic hours and expensive computer networks have been developed and spent on the concept of analyzing prices to predict future moves.

Sorry, I am digressing again.

S&P/ASX200 Weekly Chart

As we reminded you all last week, pullbacks are totally normal and there is no need to panic just yet – though the drums of economic concern make us all want to start singing a (bad and sorely out of tune) rendition of, “Do they know it’s Christmas?” by Band Aid.

As mentioned last week, provided the ASX/S&P200 stays above the range of 6760 to 6830 (hopefully higher) then that will add further confirmation that the market may be headed on a short-term gallop, with the next target being resistance at all time high levels. 

The pullback to 7213.2 took us below the weekly close back at the 29th May, however that isn’t really a level of structural significance and it wouldn’t cause traders to panic.

S&P/ASX200 Weekly Chart

But who am I to be the only happy guy at a funeral? Just to add a shade of pessimism to this commentary, last week did look a little weak. When looking at the daily chart of the S&P/ASX200 the down days saw more volume than the up days, showing a possible wavering by the Bulls to fight back.

S&P/ASX200 Daily Chart 05/12 – 09/12

Also on a longer-term view, if the S&P/ASX200 somehow got back down to 5899, then I see very little in the way of structural support until 4600. There I said it, suitably scared now? Fingers crossed this doesn’t happen of course, but it might – remember I don’t try to predict future price moves, I simply look for levels of significance.

Despite last week’s pullback, the RSI remains above 50 indicating that the market is moving in a positive trajectory, and the MACD has crossed to the positive side, with a growing positive bias.

We also get to welcome ASX:MND Monadelphous to the ASX200 and say goodbye to ASX:SBM St Barbara

All-in-all we can remain comfortable in the short-term allocating funds to stocks. However just look for the right set-ups.

Stocks of interest

The index simply reflects the performance of stocks in the market. So it was unsurprising to see some pullback in many stocks over the week.

Retracements are healthy and the recovery since the June lows remains in play.

All price, commentary and charts are at 09 December 2022

ASX:QBE QBE Insurance Group

QBE for some time has been trying to breakout into new higher levels. Since May 2021 the price has broken through the $12.50 range and come back down.

However, despite recently warning the market of the impact of heightened catastrophic weather claims on the business, the price has been resilient, refusing to fall back into the range. This stoic performance is a positive indicator with traders no doubt hoping a break above $13 will see blue skies ahead.

QBE Daily Chart 1yr

Traders should be cognisant of the warning provided by the company, and therefore keep their stop losses relatively tight, $12.70 which is that stubborn upper range level that the stock has failed in the past.

Alternatively, $11.90 given the current operating environment may be another red flag. The market has held the stock up despite the negative claims outlook due to a positive premium pricing outlook and rising rates improving their investment returns.

Pleasingly the 50 day moving average is still going up and the stock trades above the ATR. Investors looking for a possible better entry could wait till price pulls back to support to consider a position.

ASX:NUF Nufarm

Nufarm is in the early stages of attempting to pull itself out of the sideways channel as evidenced by the series of new higher highs which have formed since September 2021

NUF Daily Chart 1yr

It's trying hard to return to the Agricultural Sector highs of April this year with the conflict in the Ukraine and demand for increased productivity from land underlying the demand for NUF stock.

In the short-term the stock is in an uptrend. Investors with a hyper aggressive focus or drawdown sensitivity could insert a stop at $5.90. More pragmatic investors would look at $5.42 which coincides with previous higher low set in November, just before the company released its full year result.

ASX:TAH Tabcorp Holdings

After a period of consolidation between $0.90 and $1.00, TAH has gone on a bit of a gallop recently, breaking out and fast approaching a resistance level of $1.085 - $1.09 set at the end of last financial year which was actually a multi year high. The retracement and now recovery adds weight to the return to new multi year highs. The 50 day moving average crossing above the 200 and headed in the right direction is also a pleasing thing to see, with OBV returning to levels not seen since recent highs.

TAH Daily Chart 1yr

A break above that level ($1.085- $1.09) would be quite a bullish signal, though don't expect an explosive move up. When TAH last broke out of the year long sideways channel, the break didn't last long and it fell back into the channel taking a further 5-6 months to break out of it again.

A solid level of support currently exists at $0.87-$0.90. A break below that and levels of $0.72 could be retested.

ASX:RIO Rio Tinto

RIO, along with all other Iron Ore miners, has experienced a bit of a renaissance with China's reopening see the price of Iron Ore return back above US$100 per tonne.

RIO Daily Chart 1yr

It looks primed to recent highs in 2021 when the Iron Ore price hovered above $US200 per tonne. That resistance level would be $130.80 - $130.90, though it has to break $128 which was the previous lower high set in March 22.

Support (or stop loss for someone entering now) would be $88. This is a fairly significant level for RIO with the level having been tested a few times in the past and acting as support each of those times.

RIO Weekly Chart 5yr

ASX:DRR Deterra Royalties

The rebound in Iron Ore prices has similarly seen the price of DRR also rise.

DRR Daily Chart 1yr

A stock of focus for many income seeking investors with a forecast dividend of 4.7%, since bouncing off support (which is set between $3.90 - $3.92 ) the price has recovered in line with rebound in Iron Ore prices as its profits are for the moment solely generated from Royalty payments from BHP's South Flank operations.

A break above $4.90 would give it clear air and see it possibly head for another run, as the South Flank operations ramp up.

Any stop loss would be set at the prior support level highlighted above.

ASX:S32 South32

Since bouncing of support at $3.39, S32 is preparing for another crack at resistance at $4.20 - $4.30 range.

S32 Daily Chart 1yr

For longer term traders a breach of $5.36 would be preferred, as that was the peak between the two support tests of $3.59,

It's ability to achieve these levels will be a combination of strong economic activity and a rebound in the groups of metals that it processes. It's why the price feels like it's on a knife's edge as OBV moves sideways and has done for four months. Also the 50 day EMA is below the 200 EMS reflecting a recent trend which is not overly strong.

Traders would be encouraged to only act on clear signals with S32 as economic and geopolitical factors play a strong impact on their price.

ASX:BSL Bluescope Steel

BSL is another BHP spin off with a similar looking chart to S32.

In this instance what was support of $17.50 that was breached in June 22 has become resistance now as price tries to recover.

On Monday 05/12 they did make it through that level and for now is holding.

BSL Daily Chart 1yr

Whether it can sustainably hold this level will likewise be a combination of economic activity (both in North America and Australia) and commodity prices. Though in this instance rising iron Ore prices reduce the attractiveness of its product as the market often tends to seek cheaper alternatives.

ASX:JBH JB Hi-Fi

One of the premier retailers on the ASX, JBH commands a position in many fundamental portfolios.

From a Chart perspective, it found support at $37, bouncing well off the range both times. Price is rapidly approaching the previous lower high from August and this will be a significant range for the business. Currently the price is above the ATR and has been stepping u nicely as part of the recent recovery.

JBH Daily Chart 1yr

Should it break above the lower high level of between $46.05 and $46.70 then investors will be looking for another run to the fifties. Short term traders may wish for a stop at $42.50. Longer-term investors will look at the level of $37.05

ASX:MQG Macquarie Group

MQG is still in a downtrend following the last four days of trading.

A series of low highs and lower lows is what constitutes a down trend and as Charles Dow said when creating Dow Theory, a trend remains in effect until there is a clear sign that the trend has reversed.

MQG Daily Chart 1yr

Unfortunately MQG’s highs on the 1st December were not enough to surpass the highs of August . The price has also fallen below the ATR indicating that the recent bounce has lost puff.

Since confirming to the market that operating conditions were a little tough and the fact it is leveraged to the strength of the global economy, the market has taken a more pessimistic view on the short term outlook for MQG.

Investors will hope it can hold $150, though I feel $130 - $135 could be more significant as that would coincide with the bottom of the downward channel (depending how long any retracement plays out).

Despite its underlying strength, the price performance since 1 December was important, and MQG remains in a downtrend. It needs to get back up above $184 to atleast prove it has found its feet in the short tem.

ASX:VUK Virgin Money UK

Since relisting as VUK following the spin-off from the NAB back in 2016, the price has had a very volatile ride.

Most recently on account of the travails in the UK economy, whose performance VUK is attached.

However, since forming the lower low at $2.09, the price found some support at that level, and has rebounded to cross above a short term mini high, and pleasingly the price is now trading well above the 50 EMA which coincidently is now above the 200EMA for the first time since a fleeting moment in February. Investors now hope it is on track to test its previous significant resistance level of $4.00 - $4.06.

VUK Daily Chart 1yr

The aggressive move up makes it a little difficult to set a structural stop loss for here. There the ATR line of $3.01 may be more appropriate than the $2.76, or even $2.09 level.

ASX:CGF Challenger

CGF has butted its head against short term resistance a few times in what looks like preparation for a test the recent higher high of $7.70.

CGF Daily Chart 1yr

It needs to hold support at $6.25. $5.57-$5.60 would be last chance saloon. As the stock has been in a trading channel since March 22, traders may wish to wait for a clear breakout (above the 7.60-$7.68 range or below $6.21) either way before considering what to do next.

ASX:A2M The A2 Milk Company

A2M after years in the doldrums there are short term signs of life for A2m.

A2M Daily Chart 1yr

The recent creation of a new higher high continues the step up pattern which started when the price multi year lows at $4.01 back in June this year. The stock is now trading on 52 week highs which is traditionally a good sign. Though investors who have been burnt by the stock in the past may understandably be cynical. Pleasingly, the 50 day EMA has not only moved above the 200 day EMA for the first time since 2020, but it is also headed in the right direction (Hint: North-East)

Investors should expect a pullback to support this rise. Should it stay above $5.16- $5.20 then they can take comfort in the new higher low created confirming the return to a positive short-term uptrend..

The next big test, can it get above $7.39 which was the last lower higher of October 2021.

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The author holds interests in the following stocks mentioned in this article: NUF, QBE, RIO. This position can and will change at any time without notice.