Momentum Monday 16 January 2023

Welcome to Momentum Monday.

After what has been a relatively quiet period for markets, things will begin to warm up as we fast approach the quarterly earnings season in the US and the half year reporting period in Australia.

While this section discusses the charts more than the fundamentals, any chartist will know that major news events can have a significant impact on sentiment. While we try to find clues in the momentum of the price prior to any news, this period could still get volatile. So be sure to eagerly watch your holdings if you decide to trade at this time.

Week ended 13th January 2023

S&P500

Another strong week for US markets saw the S&P 500 Index (SP:SPX) rise 2 67%, the best weekly performance since September, and it's 2nd in a row.

S&P500 weekly chart

The driving factor was the US inflation figure which despite coming in at 6.5% was a 0.1% decline in December, increasing hopes that CPI may be finally under control .

But have we seen the worst of the company news yet? On Friday (Early Saturday our time) we saw the commencement of the US earnings season, and at least at the open, the market didn't like what it saw.

Wells Fargo saw profits for the last quarter cut by half, and said that the economy will “get worse than it’s been over the last few quarters.” JPMorgan Chase also warned the market by saying its setting aside more money to cover credit losses. Even Citigroup and Bank of America also said they’re anticipating a “mild recession.”

Despite this though the market was able to shrug off the bad news and by the end of Friday had closed up.

Next week more companies will report and they will contribute to overall sentiment as it's time for the fundamentals to take stage.

As with most things index related, often the returns are governed by the few and in the US it is the tech stocks that have the biggest influence on the broader index given their size. Microsoft will be the first of the tech giants to report and the other will follow in early Feb.

It has been interesting to note that in the past few months the S&P500 has underperformed an equal weighted portfolio of the stocks that make up the S&P500 and according to Bloomberg, is at its widest point of underperformance since 2019.

S&P500 vs S&P500 Equal Weight 1 year chart

As mentioned earlier, this was the second consecutive week of gains by the SP500 .

As highlighted in last week's Momentum Monday edition, the hammer formation saw continued momentum and the latest drive has now taken us to the top of the downward channel at 4000.

As previously mentioned, while a break out of this down channel won't necessarily mean an end to the current downtrend, it may provide some reprieve that the pace of the broader sell down may be starting to ease. (Note: it is similar reasoning to that which is being applied to inflation at the minute.)

On the flip side, if this week proves to be negative, then some traders may feel afraid that any recovery is weak and a strong sell off may ensue.

With the index at such an interesting juncture, and the US kicking off earnings season, one suspects this will be an important time for their market as technicals and fundamentals coverage.

Also note, markets will be closed on Monday as the US marks Dr Martin Luther King Jr day.

S&P/ASX200

And it is the same for the S&P/ASX 200 Index (ASX:XJO) , but after two solid green weeks, it's amazing what a bit of optimism does to the psyche.

The last week in particular we saw the S&P/ASX200 rise by 3.07% to 7328.1.

XJO Weekly Chart

This level is above the beginning of December, and signals a strong run with 80% of the last ten days delivering positive days.

XJO last 10 days

Reasons for the renewed optimism this week? Take your pick, China’s reopening and signs that global inflation may be cooling (though still high) buoyed confidence enough to convince investors to take a nibble.  Or was it easing global inflation concerns. Well that is what the headlines say anyway.

Domestically, we don't see inflation easing anytime soon hitting 7.3% (to November 2022), which was the level back two months ago. Despite the rise, experts are still calling for only one more rate increase, which seems reasonable given the RBA’s past actions.

While the RBA is talking tough, it is no doubt trying to use its messaging to achieve what rates alone can not. Australians are still spending , and in an attempt to curb consumer enthusiasm and get them to self regulate, the RBA will likely continue with its hawkish tune for a while. Apparently the community does listen to the RBA, given they are now blamed for the past "zero rate rise" comments and for them taking very large home loans - which was never going to be a reality even at the time the comments were made - but we all need a scape goat right?

But at the end of the day, it’s unlikely a hyper aggressive stance will be taken by the RBA because as they proved during the COVID closure, they are acutely aware of asset values and therefore will likely not induce a recession just to keep inflation in check.

But all that doesn't matter for now as we look at the chart. As mentioned, the move last week took us to a new mini Higher High (HH). So our "hope springs eternal" position seems to be working a charm.

XJO weekly chart - 8 weeks

While we are literally talking a game of inches here, the HH means that the low of two weeks ago became the new higher lower (HL) and the range of 6800 - 6840 has held fast for now.

The only thing that warrants caution is that it was a particularly quiet week business wise. This past week was so positive for the market, that it will likely have to take a breath, meaning there is a risk that this is a false break.

But if it can consolidate at this level and keep rising then it may be the best chance we've had in months to retest our upper resistance level. (It's nice to be able to say that again.)

Obviously the coming reporting season will have a big say as to how things will go, and the coming business and quarter updates will be a guide as to what to expect.

And here is another tip, while you wait for your companies to report, be sure to read the updates of their competitors to get a sense as to what to expect. This is because the factors driving an industry are the same for all participants, therefore if there are tailwinds or challenges facing their competitors, it is likely the same is occurring to them.

So while I would like to say we can get a little more aggressive, as cautioned a few weeks ago, talking reversal signals at this time of year is notoriously unreliable. So I am going to maintain my caution stance for another week at least. Until at least I feel comfortable that the recent move is sustainable and can be maintained.

Gold Stocks

Gold has had a good run and that has been reflected in the run that many gold stocks have had in recent times.

Stocks like NST, EVN, BGL, NCM, DEG (and the other 168 gold stocks on the ASX) have seen life reinvigorated into their charts on the back of Gold rising almost 20% in 3 months.

Gold Price 1 year

The current price of gold is also being helped by the stronger US dollar against the AUD, meaning Australian miners are benefiting at the minute (costs in AUD (relatively weaker) but revenue in USD which is relatively strong).

And from a chart perspective we see the price of gold fast approaching the recent highs of early last year and in mid 2020. Prior to that the last time gold was at these levels was in September 2011.

So what does this all mean?

The double top of 2020 and 2022 are levels to be respected as they will prove to be exceptionally significant points given we are talking multi-decade highs. The price at the minute finds itself at the 2011 peak meaning that a sustained move above these levels will likely see a retest of the US$2050 zone.

Gold Price 3 years

Overall the recent chart for gold still looks very bullish and will do so for as long as price stays above US$1,785. Otherwise there is a risk that we are setting ourselves up for a bigger retracement than we saw in November 22

So what is the bear case? There are a few things to watch for. The first is that if there is a recession across the world as many predict, the value of the US dollar will go up and if the inverse relationship with Gold continues, that means the price of gold will fall.

The second is that you will notice that before each pullback in 2011, 2020 and 2022 there were rapid runs in the price of gold before it retraced. We too have been on a similar run and if past behaviour persists, the more rapid the run up, the higher the risk of the pullback.

Gold price - 23 years

The third thing to watch is when it comes to producers, costs are starting to rise so AISC (All in sustaining costs) per oz should do the same. This will impact margins and see the price of many gold miners potentially underperform the gold price, irrespective of where the price of gold goes.

Despite all the above, if gold can hold these 2011 levels, then gold traders will eagerly be watching the 2020 and 2022 levels. This will be bullish for gold stocks, should they be able to run their operations efficiently and to schedule.

Remember, gold price alone doesn't guarantee success for a gold stock or otherwise. This is no better evident than by the reactions to recent updates from GOR and WGX this week. (BTW GOR was by no means a disaster, just a little underwhelming).

The coming quarterlies will be telling for these (and other mining businesses).

Stocks of Interest

Author note: In line with the approach I am using with Stockopedia, I will focus the majority of my attention to stocks with a QM rating above 80 and market cap above $500M. To learn more please read the last instalment of my momentum journey here. I will discuss where their charts presently sit to provide context for potential and current investors.

These stocks are considered purely for the purposes of education. Be sure to read all relevant commentary to understand the context from which a chart is presented. It’s not always positive!

ASX:EMR Emerald Resources NL. QM Score 97 A$1.33

It's been quite a volatile ride for Asian focused gold miner Emerald Resources NL (ASX:EMR) who has bounced all over the place. It has performed a stellar recovery since the lows of July and now sees itself trading at all time highs.

ASX:EMR 1 year daily chart

Such rapid V shape recoveries do normally see the price pullback to take a breather, though it doesn't always happen. In the instance of EMR it may not if gold prices continue to rise.

EMR is more leveraged to gold price moves given the nature of their operations. So if you feel gold will keep running for longer, then perhaps the recent run supported by a rising OBV is sustainable.

If you take a position here, my general rule is to keep stop losses tight as parabolic moves can move just as aggressively the other way.

ASX:BSL Bluescope Steel. QM Score 98 A$18.37

Since discussed late last year, BlueScope Steel (ASX:BSL)  continues down the road of recovery bouncing to new short term higher highs with the price driven in large part because the view last week was the pace of US inflation will continue to slow, thus reducing the Feds need to be overly hawkish in its actions.

ASX:BSL 1 year daily chart

The price has now crossed above the ATR and the 50 day EMA is about to cross above the 200 day ema for the first time since Nov 21. It closed the week at levels not seen since June last year, and has had a series of higher highs and higher lows since the lows in July that were subsequently retested in September.

But after a series of short term higher highs and higher lows, BSL has a look as if it is a stock on the move. If you were able to pick some up at around the $17 level, a stop of $14 80 would be appropriate.

ASX:SIQ SmartGroup. QM Score 91 A$5.40

Since the lows of Oct - Nov, Smartgroup (ASX:SIQ) has been trying to lift itself off the canvas and it appears to have some momentum building behind it.

ASX:SIQ 1 year daily chart

First those lows of Oct and November provide a nice level of support as the price touched those levels ($4.60) twice and rebounded. Now at $5.40, the stock has created a new short term higher high (HH) further confirming the cross back above the ATR in December.

The other pleasing thing to note is that since the higher low (HL) in December, the OBV has improved supporting the recent run. The set up looks good with a short term stop for drawdown sensitive investors at $5.14. However for most, given a set up like this, $4.60 maybe more appropriate.

There are significant levels that lay ahead of it. First is $6.85 which would close the gap created in Aug last year. Traders would be aware that filling gaps is often a point of significance.

For example, if price gaps up, then the price will pullback to fill the gap and then continue its broader move up. In this instance a possible theory would be that the price recovers, fills the gap at $6.85, but then falters and comes back down again. No guarantees of course, (eg they could make a positive statement and price keeps going higher) but it will be a level to watch.

The other will be around $7 30 which is the previous lower high (LH) traders will be looking for consolidation at the point to gain strength for a continuation of the recovery.

So with significant levels above it, and support below it, SIQ has an interesting looking setup for the moment.

ASX:NEC Nine Entertainment Co Holdings. QM Score 84 A$1.92

Nine Entertainment Co Holdings (ASX:NEC) has seen many investors drawn to it given its digital diversity and attractive dividend.

The added bonus of a holding in Domain Holdings (ASX:DHG) has been a winner over the past few property boom years.

However, the nervous property market, coupled with the changing entertainment and news behaviours of individuals, has started to put a strain on price despite its underlying qualities and value.

NEC finds its price on a precipice which is a warning for existing holders, but a possible opportunity for new investors as they won't have to wait long to know when they are wrong given price is close to the ~$1.80 support level which has been tested a few times now.

ASX:NEC 1 year daily chart

Stop losses should be set at $1.80, which is why the current level may prove an aggressive trade with a target of $2.40 which coincides with the resistance level above it. Conservative traders may wait on the sidelines until that happens.

A break either way will be significant so investors (either those holding or watching) should pay attention.

ASX:ALL Aristocrat Leisure. QM Rank 82 A$33.20

Keeping with the theme of buying on support, Aristocrat Leisure (ASX:ALL) has had a volatile ride of late.

ASX:ALL 1 year daily chart

After what seemed a mini recovery from May to November, the price undid all its hard work giving back its gains.

It retraced all the way to $30.50, which was the previous low back on the 12 May 2022, but has since bounced off that level once again.

While it is not out of the woods, there is a clear structural support level here that proves to be a good stop loss level for those looking at a play at this potential recession proof business.

ASX:WOR Worley. QM Score 95 A$15.42

Worley (ASX:WOR) finds itself at a strong point of resistance as it tries to make its fifth tilt at $15.45 in seven months a successful one.

ASX:WOR 1 year daily chart

So why might this tilt be successful? Other than the broader market sentiment and continued demand for their services:

1. The pullback from the retest of resistance was not deep therefore the stock has more energy moving into this retest.

2. The OBV has continued to rise, all the while the price has remained at the same level. This would suggest that up days are supported more than the down days are feared and therefore the weight of money is betting on a positive outcome.

A break above resistance could signal a possible entry when price pulls back after the initial break.

On the other hand if price fails to break resistance for a 4th time then a stop loss at $14.10 - $14.12 may be in order.

NZE:ATM A2 Milk. QM Score 99 NZ$7.65

After a long rebasing period extending almost 12 months, A2 Milk (NZE:ATM) is back at levels not seen since October 2021 when the stock last tested this resistance level.

NZE:ATM 2 year daily chart

While the stock has an almost impossible task to get back to all time highs, even the longest journeys start with one step at a time. And the company has now experienced 10 consecutive positive weeks.

Price is above the ATR, the 50 day moving average is above the 200, and the lines are getting wider apart showing the recent trend is gaining momentum.

That first step to a long recovery for ATM will be to cross above NZ$7.66, lest this prove to be another failure of resistance. Should price cross and consolidate above this level then what was resistance becomes support and the company will prepare itself to take on larger targets.

The other pleasing note is that since June 22, the price has been on a short term uptrend creating a series of higher highs (HH) and higher lows (HL). Such a stepped run up creates a more sustainable move and appears to be ATM'S best chance in 2 years to allay this downward slump.

A2 Milk (ASX:A2M) is the Australian listing, and while the pattern is similar, due to the impact of currency, A2M still has a little way to get to the Oct 21 resistance level.

ASX:WEB Webjet. QM Score 93 A$6.74

CEO of competitor Helloworld (ASX:HLO) Andrew Burnes recently said he was "confident that leisure travel will remain a non-discretionary component of the household budget."

This change in buyer behaviour has been of benefit to Webjet (ASX:WEB), who likewise has seen strong demand for it services, in particular its WebBeds booking service.

The price has reflected this and now finds itself above Oct 2021 highs.

ASX:WEB 2 year daily chart

It has been a while since WEB has had the clear air that it finds itself in. The rapid run in prices over the last few days will likely see profit taking occur.

When it happens, and should price stay above $6.10, it looks like a textbook entry signal on WEB.

ASX:IDX Integral Diagnostics. QM Score 83 A$3.17

Integral Diagnostics (ASX:IDX) has been in a significant downtrend for quite some time, with a series of lower highs and lower lows formed over the past 2 years.

ASX:IDX 1 year daily chart

One of the basic principles of Dow Theory is that a price is in a downtrend, until it is not. So notwithstanding the recovery since October lows, IDX remains in a downtrend.

This despite the price being above the ATR, OBV rising and the 50/200 day EMA converging.

That may change if price closes above $3.37-$3.40 as that will be a higher level than the previous lower high in August 2022.

This will be significant because if you can visualise the zig and zag pattern of a chart, if it fails to break above that level it will create a need lower high (LH) which would mean that the downtrend is still intact and downward pressure on price will remain.

More conservative traders would wait for the price to keep rising first before taking a position in a recovery. While it may mean that the full potential of any gains are missed, the odds of buying into a stock which has ceased its downtrend are better.

Any suggestions?

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