Momentum Monday 27 March

It was certainly nice to go a week without a high profile bank failing. Just the tonic we need.

Cynicism aside, markets continue to look for signals to help gauge where the likely next direction will be. We really shouldn’t worry about that too much, just act when you need to.

Few things first.

The recording of the recent Quality webinar (Quality as in the Rank - we will leave the critique of our performance to you) is available here . Remember in future, when there is a webinar, even if you can’t attend the live event be sure to book you place and that way we will send you a recording that same day.

Now that the market here in Australian has experienced a mild come back surely there is going to be a little value out there. It's time to argue your case in the Village Square. Remember this is available on the principle that sharing is caring and if you feel there is an opportunity staring us in the face - then tell us! Go to this article and enter your stock in the comments section. A new Village Square will open in April. But can we afford to wait that long?

The agenda for today’s report is:

• Broader market sentiment

• Stocks of Interest

• 52 week high screen

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JUST A REMINDER: I do not use the market charts to make decisions as to when to buy or sell. I will always use a stock’s individual chart to do that. However, I do look at the market charts to get a sense as to how aggressive/cautious I can be when trading/investing individual stocks.

Broader Market Sentiment

Europe

Just a quick word on Europe which has become part of the epicenter of the events of recent times. The relatively quiet week put the focus back on inflation as the UK last Wednesday (Thursday AM our time) said that inflation hit 10.4%, breaking a streak of three recent declines. This outcome meant a further 25 basis point rise to 4.25% by the Bank of England was inevitable. Far from the concerns of the finance sector, in the real world things are hot and regulators desperately need to cool things off.

Concerns over there are not over yet over with many Credit Suisse bond holders suffering a $17 Billion write down in the value of their assets, seemingly being ranked behind equity holders. This will likely go to courts and drag out these issues even longer.

It looks like Deutsche Bank finished the week as the next potential target. It underwent a big capital restructure a few years back and despite 10 consecutive quarters of profit, including most recently its highest profit since 2007, and strong capital requirements, we have learnt these things can escalate quickly so anything can happen. In a resort I read of the topic it was well articulated the market was referred to as being on a “seek and destroy mission.” - No doubt there will be more to come.

US S&P500

Amongst all the tumult the US saw its second consecutive positive week with the S&P500 rising 1.4%.

S&P500 Weekly Chart

This despite lingering concerns on the financial sector and the Federal Reserve hiking rates by another 25 basis points. However, more importantly in the eyes of some, it also hinted that its rate-hiking campaign may be ending soon.

While it will be easy to start asking questions why hasn’t the Australian market reflected this positivity (more on that in a moment), the US market is by no means confident. In fact for the last 17 weeks now it has traded in a very tight range of 3837 and 4146 (since November 2022).

This is telling a few things. The first is that the market has entered the new calendar year feeling uncertain without any strong convection of where it should be optimistic or pessimistic with arguments for both the defense and prosecution quite compelling.

Second, the tight trading range in technical analysis is often seen as a bit of a battle ground. If I can use an analogy of a football game where it is considered a tight contest, both sides (buyers and sellers) are going goal for goal and the game is tense. Traditionally these are not good patterns to trade as there is a propensity for false signals and whipsawing.

Which finally, means that wherever the channel is broken is likely to see more action head that way as the dam walls break metaphorically and traders can see a clear direction. These moves can often be aggressive so such periods require caution.

S&P500 Since the start of 2023 Weekly chart

So which way will this channel break? That won’t be clear until it happens, however we can look for clues in the daily chart.

S&P500 3 month Daily chart

Before I continue I just wish to stress that daily charts on indices are notoriously messy so we need to take this all with a grain of salt.

You can see the following:

• A series of short-term low highs and lower lows

• The index is below the ATR

• The index is below the 50 day moving average, but above the 200.

• The 50 day moving average is above the 200 day moving average, however it is falling

• Both the 50 and 200 day lines are converging reflecting the sideways movement

So assessing these factors it would appear that sentiment is still toward the negative side unfortunately, suggesting a possible re-test of the downward range of the weekly channel.

I could quite possibly be wrong, however we do know that we continue to be on a knife's edge, so now is not the time to turn your back from a traders perspective.

S&P/ASX200

It was unlucky 7 weeks in a row for the S&P/ASX200 with the market falling 0.7% for the week.

S&P/ASX200 Weekly chart

Australian investors true to form are more pessimistic than our global counterparts, refusing to believe that the worst is behind us. And given the news…. Who can blame us? The length of this pullback has been frustrating. Even the COVID correction was done in four weeks (though the scale was much larger obviously!)

Which raises the question posed earlier, “why hasn’t the Australian market reflected the positivity in the US positivity?”

Think of stocks in an index. You have your bellwethers eg BHP and then your small caps eg SYA. You know in the case of both of these that when sentiment is positive, it is likely SYA will go up more than BHP. The reverse is the same when sentiment is poor. However when sentiment is unclear or unknown on both, more often than not the bellwether will be preferred on a risk-reward basis.

Now extend this concept to indices. The S&P500 is the bellwether and ASX200 is the small cap. It’s fair to assume that things are uncertain at the moment. Inflation, banks going broke, rate rises take your pick. In scenarios such as this it is logical that the perceived safety of the bellwether will win out. Until we have a solution to sentiment, the ASX200 will likely continue to underperform the S&P500.

Which begs the question, why bother investing in the ASX. Other than our homeward bias, the answer quite simply is that while we may underperform in uncertain or downtrends, on up trends we have a strong propensity to outperform, and it keeps luring us in. At least it does me.

I mentioned last week the break below 7038 meant lower targets were in play. However, let’s be optimistic for a moment. The weekly price action is still above 6474. And each negative week brings us closer to a positive one, especially as the US has risen two weeks in a row. And though the broader market has gone nowhere for the last two years, at least things have been stable enough for us to still be able to look at individual stocks.

And as a Melbournian, at least I am not locked down any more. See… life’s good!

Frivolous commentary aside, while there are real reasons to be cautious, the chart is not telling us to go into hiding just yet. The overall sentiment feels weak as evidenced by the drop off in the number of stocks near their 52 week high (see below) and we need to respect that, but it could quite as easily turn positive as it did in the lead up to mid February.

I have mentioned for the past few weeks that now is not the time to turn your back on stocks, we need to watch them carefully and have our stops in place. And understand that if you trade in the current environment you may find false signals. This is the nature of trading in a sideways market. It’s bloody frustrating!

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Stocks of interest

Tip: if you look at the list on the right hand side you will see the stocks mentioned within this week's contribution.

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. For those who may be new to this report 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. You can revisit the series of articles starting with Episode One here.

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

ASX:PRU Perseus Mining QM Rank 99 A$2.33

Gold miners have felt quite a bit of love in recent weeks in and amongst the turmoil in the financial sector with the price of gold fast approaching the highs of March 2020 which were the highest levels in recent investing history.

This positive move has been reflected in the rebound in many gold miners out there, with those with low all in sustaining costs (AISC) doing better than most. Further, the crisis in the finance sector has created an unusual mismatch where the USD rising has also occurred at the same time the Gold price is rising (normally the two work inverse to one another) - So this has been a good period for Gold stocks.

One such company is Perseus Mining (ASX:PRU), the African focused gold producer.

ASX:PRU 1 year Daily chart

Notwithstanding geopolitical issues which elevate the risk of being invested in PRU (the company has operations in Cote d’Ivoire, Ghana and a final investment decision due at the end of the year for its prospective Sudan operations), the chart looks solid.

The price on this recent tun has butted its head again around the $2.33 - $2.36 mark. A break above this level, subsequent pullback and then continued run will position the stock for all time highs of around $3.50 not seen since 2011.

The improvement at the Edigan (Ghana operations) has been pleasing and the Block 14 area in Sudan will be the companies first foray into East Africa will be a catalyst for continued improvement BUT it does operate in a volatile area. This why there has been a perennial discount on the stock in the past which seems to be eroded away as they provide comfort to the market that they can operate in such regions.

A stop at these levels would be $1.99 with believers holding on to $1.88 - but word of warning, this company could swing wildly so always stay on top of what is going on. That is why the company is looking to divest from West Africa. The Meyas Sand Gold Project is 70% owned by Peursus, 20% owned by the Sudan government and 10% by a local Sudanese ‘enterprise’. While Sudan is a major gold producer, most of it is unregulated, artisanal mining. PRU will look to leverage off its strong contacts to make the project work should the FID proposal in December prove favorable.

ASX:EMR Emerald Resources. QM Rank 96 A$1.505

Speaking of offshore gold miners, let’s revisit Emerald Resources NL (ASX:EMR) . We last covered the stock in January on the initial break of the resistance level at $1.28

Since then the price continued to run close to $1.60, it then retraced back to the prior resistance level, that has since become support, and rebounded back to $1.60.

Two things traders need to look for from here. Let’s discuss the positive scenario first. If the price on its current retrace is able to hold $1.28 and then continue back to above $1.60 that would create a new higher high and move up.

If however the price doesn’t hold $1.28, then a double top pattern would have formed which is a bearish signal and would see a target price of $0.96.

Therefore more aggressive traders who want to bet on a positive outcome have a clear stop loss level whether they decide to get in now or hope for some more value a little further below.

Those who want more comfort in sentiment may wish to sit this out until at least a break above $1.60. WHich might be an option as the company is in a messy court case at the moment with their investment in Bullseye (in WA) with a Chinese / Hong Kong partner taking them to court on the cessation of their JV agreement. If they win, I suspect the price won’t move as much as if they fail.

ASX: DEG De Grey Mining QM Rank 81 A$1.52

Sticking with the same sector De Grey Mining (ASX:DEG) too has experienced the benefit of the continued run in Gold prices.

ASX:DEG 1 year Daily chart

It has also been helped along by the progress made in what will be the Mallina project, and the increased interest from Gold Road Resources (ASX:GOR) taking its stake to 19.99% has been supportive of price in recent times.

Again, we now see ourselves at an interesting point. After a series of stepped increases, we are at a short term resistance level of $1.575. Traders would need to be patient and wait for a break and consolidation above that level, otherwise there is a risk of another Head and Shoulders pattern emerging. This reversal pattern may mean the next target could be $1.295 (the previous higher low) and then $1.025 below that.

ASX:QUB Qube Holdings. QM Rank 98 A$3.02

Logistic and terminal manager Qube Holdings (ASX:QUB) has been somewhat uninspiring over the last few years, but its stable operations are a refuge for some in the current volatility. Much like the carriers that it services, the prie takes a while to move and is not prone to sharp swings.

ASX:QUB 1 year Daily Chart

Except the price had gapped up through the $3.07 quite aggressively at the time of its half year report, however it has since retraced and filled the gap. For those who may have bought the breakout, or for those considering a position now a stop loss level at $2.95 would be appropriate. Its a level which was tested before the gap and afterward so it is significant in the short term.

While you won’t have to wait long to know if you are wrong, some investors may wait until the price breaks above $3.14. This will make it much more likely that a head and shoulders pattern is not forming and the ATR would have turned positive.

ASX:CHC Charter Hall. QM Rank 97 A$10.81

One of the sectors that has suffered a bit on account of rising rates, and the diminishing bond broxy trade is Real Estate. A bellwether for the sector is Charter Hall (ASX:CHC) who have had a tough year.

ASX:CHC 1 year Daily chart

Prior to the last month, the stock had been stoic in the face of consecutive rate rises. Even creating a series of higher highs and high lows which was in contradiction to the pressures emerging. But alas in the last month the company has succumbed to those pressure and broke below $11.86 which was the previous higher low, and it has rapidly made its way to $10.81.

This level is close to structural support of $10.61 which coincides with the June 2022 lows. If the price moves below that then it will be at levels not seen since 2020 with the next level of support at $6.36 which coincides with COVID lows.

Whilst the company is undoubted quality and a mainstay in the space, traders will want to be careful from here if they weren’t already.

NZE:KMD KMD Brands. QM Rank 87 NZ$1.04

After delivering an upbeat result last week KMD Brands (ASX:KMD) has received a reprieve from their recent sell down.

NZE:KMD 1 year Daily chart

Flagging a return of tourist travel. It attributed it as the reason for growing sales by 34 5% and returning the company to profit

This sales growth was flagged earlier by the company in November, when they flagged strong Q1 sales growth and it was the catalyst for the price breaking out of the 6 month sideways trend it was.

However, like many breakouts in recent times, it failed,and eventually broke below $1.00, a key support level during the sideways move.

Notwithstanding the bounce at the time of their report, there is still work for them to do to convince the market the downward sentiment is over. I feel it needs to get above the previous short term higher high of $1.16 to entice traders. But at least there are signs of life which investors will be happy to see after the tough 24 months experienced.

KMD also trades on the ASX under the same code.

ASX:OCL Objective Corporation QM Rank 95. A$12.77

Despite its qualities, a stock that has come under strain over the past 12 months is Objective (ASX:OCL)

ASX:OCL 1 year Daily chart

Obviously a drag on price is the lack of value in the stock, however when you compare it to similar TechnologyOne (ASX:TNE) who has very similar Quality and Value metrics then it is clear that this is considered to be poorer of the two cousins.

OCL is also more tightly held which adds to the volatility though provides some assurance in these uncertain times. Even the rapid recovery seen where price increased more than two fold to the peak in October 2021 could be attributed to this. However since this the price has been on a lengthy pullback.

ASX:OCL 5 year Weekly chart

The recent sell off through Feb and Mar saw the price break below 2022 support levels and now needs to hold these levels following the bounce back from $11.92. Otherwise more selling pressure will come so $11.92 would bea good stop loss level for those feeling adventurous.

Those however waiting for a technical signal will have to see the stock cross back above $15.08 which is the short-term lower high. They will then need price to consolidate and rise once again to confirm the pace of the selling in the last 12 months has eased.

While there are some ways away from this happening, its performance relative to TNE makes it interesting to monitor for now.

ASX:OML Ooh! Media QM Rank 94 A$1.585

A stock that continues on the recovery path is Ooh!Media (ASX:OML) . I actually covered the company in September last year within the AFR on account of an expected boom in advertising and to date they have continued to execute.

ASX:OML 1 yearDaily chart.

Since reaching a recent peak in early Feb, like many others the stock has undergone a retracement, but in fairness it hasn’t been too aggressive or significant in size. In fact one may argue that the stock is preparing for another run.

Crossing above $1.445 was significant as it was the structural low of August 2021. That level became resistance, and then on break out, it returned to its role of support.

ASX:OML 2 year Daily chart

So investors wanting to trade this setup may try to time their entry a little nicer by waiting for the price to pull back closer to support. Or they may wish to take a position now. Either way a stop loss would need to be set at $1.445.

ASX:REA REA Group QM Rank 93 A$131.74

After a tough 2022, signs of life are returning to Rea (ASX:REA) after what appears to be a series of higher lows, signifying that the pace of sell down of the past 2 years may be abating. This further confirmed by the stock now not too far from 52 week lows (see below)

ASX:REA 1 year Daily chart

The question now is if considering a position when? I think a break of the previous lower high at $132.81 is required. Once we see that, once we see a slight pullback from that and it is still above the ATR, then that will be a good time to consider the stock.

What do I mean? I have illustrated it below.

A strategy such as this would require a stop around $119

ASX:BRG Breville Group QM Rank A$18.48

Another stock in a channel for close to the past year is Breville (ASX:BRG), however unlike REA, they are on the wrong side of the channel.

ASX:BRG 1 year Daily chart

There may be a number of retail holders still in this business following its extraordinary rise from sub $10 in 2017 to all-time highs of $33 in August 2021. For much of the last ten months the price has swung between $17.00 and $23.43. These levels will therefore be significant should price break out of this range.

As the price is currently close to the bottom of the channel this is the immediate risk. Should the price fail to hold $17, the risk is the price could fall to $10.20. Not only was this the COVID low, but it was also a level of structural support in 2018-19 that even the COVD sell off respected.

If the price however stops falling and crosses above the channel at $23.43, then the next target to watch becomes $28.21, with the all time highs should the level be surpassed.

In these scenarios where the potential gains of losses may be sizeable,it is often best to wait for a clear direction before committing, particularly as the cost of being incorrect may be high. Ranges like this can be frustrating, so trying to trade within can often feel like the repetitiveness of purgatory. And given the last month, I would rather the feeling not continue.

Any requests?

If there is any company you would like to see written about you are most welcome to include it in the comments section below and we will attendto it in the coming weeks.

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52 Week High screen

Academic Research has shown that stocks close to their 52 week highs tend to outperform.

To that end I have attached the results of a screen run within Stockopedia showing every stock above 200 million market that is trading at least 5% from its 52 week high. (If you wish to recreate this criteria in the scanner select "Price vs 52 high" greater than -5%)

This has not considered liquidity of the stock nor does it consider its fundamental qualities. However we have included each factor score to help you.

Data is at 24 March and is sorted by the stocks closest to their 52 week high.

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Information in this commentary is current as at date prepared unless otherwise stated. However, please bear in mind that investments can go up or down in value, and that past performance is not a reliable indicator of future performance. For more Important Information please refer to the Disclaimer section of this website.

This communication may contain general financial product advice. It has been prepared without taking into account your personal circumstances, and you should therefore consider its appropriateness in light of your objectives, financial circumstances and needs before acting on it.

If our advice relates to the acquisition or possible acquisition of a particular financial product, you should obtain a copy of and consider the Product Disclosure Statement (PDS) before making any decision.

The author holds interests in the following stocks mentioned in this article: 360, NEU. This position can and will change at any time without notice.