Our thoughts go out to our clients and friends in Auckland. We hope you have been spared the worst of the damage caused by flooding and that you'll get back on your feet quickly.

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"Positive"

That is how the movements of the market were last week. And as we lead into February there is renewed optimism that we may in act miss global economic armageddon. Even Treasurer Chalmers this week painted a more positive picture for the times with his vision for a more "values based capitalism ". Better than expected US data was also a theme this week as was the continued reopening of China.

Pleasingly our charts are starting to reflect that renewed optimism.

Week ended 27 January 2023

S&P500

US markets had an incredibly interesting week. According to the number each of the Dow, NASDAQ and SP500 rose. In the case of the latter it lifted 2.4%.

SP500 Weekly chart

Other than the positive week there were a number of key features about this week that were particularly interesting.

The price action takes us to the previous lower high. Should next week see a move above the level of 4100, then the lows of December become the new higher lows and dare I say it, we are in a new short term uptrend and we prime ourselves for a run at 4280 which would be quite a bullish signal indeed.

Further we sustained a move outside the downward channel which has been establishing since early last year. While not significant in of itself, it does show the pace of the decline over the last year may be easing. When combined with the positive price moves as described above we see the source of current renewed optimism.

For those that like to monitor the positions of the 50/200 day moving averages, the two lines have been converging and are now at their closest integer since April 2022.

Should a golden cross emerge (50 day moving average crosses back above the 200 day moving average) that will provide some further comfort the pace of the sell off may be ending.

Both the Weekly RSI and MACD are improving, in fact should the rise continue for the MACD it will be the first time both moving average lines would be positive since Feb 2022. Another positive signal.

But I caveat all these positive comments with a reminder that our views can change and therefore we should not be beholden to them. We play with the cards we're dealt at any stage, and with what we are seeing at the moment, now is not the time to fold.

The main bit of economic news was GDP which came in at 2.3% in Oct-Dec. While the official number is made up of various components Consumer spending, which accounts for close to 70% of total GDP, increased 2.1% for the period, down slightly from 2.3% in the previous period but still positive.

Notwithstanding that solid result, expectations are that the lagged impact of the surge in interest rates will push the economy into a mild recession in the first half of this year. However its important to remember that the first two quarters of 2022 started off with negative growth, matching a commonly held definition of a recession. But, investors remember that a resilient consumer and strong labor market helped turn growth back into positive in the final two quarters and gives hope for 2023.

Also in other data, inflation looks as if it easing. The personal consumption expenditures price index increased 3.2%, in line with expectations but down from 4.8% in the third quarter. Excluding food and energy, the index rose 3.9%, down from 4.7%. While it is still above the Federal Reserve’s 2%:target level, it appears to be moving in the right direction. Will it be enough to ease the pace of rate rises, time will tell. Expectations still are for another two rate rises. Though as they say, "these are priced in" so this outcome would no be a disaster for US markets.

XJO S&P/ASX200

What difference four weeks makes in investing. We have experienced the full gamut of emotion, from despair through to uncertainty and now euphoria.

Well that is how we feel anyways an investors.

With inflation confirmed this week to be running at levels not seen since the 90’s (and those days weren’t fun I remember) all of a sudden our treasurer has moved from the “global uncertainty” warning, over to a “inflation won’t around long” stance - though if I hear ever again that it is transitory, I think I will lose it - whilst also calling for an end to neoliberalism and a need to move more towards a "values based capitalism " as if somehow companies were still operating in the days of Dickens!

But politics aside, the higher high from 2 weeks ago pleasing has stuck and we look prime for a retest of all time highs of 7628.9 that we last saw in August 2021. The fact that this level has been tested three before and failed means that it will be a significant point for the market.

S&P/ASX200 Weekly chart

But as mentioned last week, we are preparing for a run at all time highs. Our fourth consecutive positive week has taken us well above the lower high of December 1. This positive run has seen from the low, 14 of 17 positive days (82.4%) to get us back to where we are. An astonishing run, and though in magnitude not as big a V shape recovery as we saw following the COVID lowers, it's impressive nonetheless.

We have now crossed above September highs, the May lower high and we are now only a smidgen away from 52 week highs which is a bullish signal indeed.

S&P/ASX200 1 year weekly chart

Is there a negative at the moment? Other than the looming strong resistance level (which needs to be respected and will a level we should all watch closely), the only thing I can think of is that every Zig is followed by a Zag, which will be the market behaving normally, especially after a run like this.

But all the over hang of free money during the COVID correction is still slushing around so the market will have a tendency to melt up. Unless something significant derails sentiment.

But at the moment our quarterly updates from companies have been good, consumers continue to spend blissfully unaware of rising prices and rates (bless them), China continues down the path of reopening and commodity prices continue to support our budget and market…. The lucky Country indeed.

Back to the chart and we can see the RSI remains firmly above 50 and our MACD is improving in positivity.

The 50 day EMA is diverging nicely away from the 200 day EMA (in the right direction) and pleasing to see that the volume returning to the market has resulted in a pullback as of yet. Money is coming in, not out of stocks as shown by the OBV.

But the overall positivity we highlighted last week remains, and with many good looking charts - let's cross our fingers that is run can continue.

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.

We continue to see a number of stocks shaping up for recoveries and/or many primed for continuation of their strong trends. It's been a while since so many charts have looked this promising. Fingers crossed it can continue .

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:CSR. QM Rank 89 A$5.27

In an environment of raising rates and the potential impact on the construction sector, building materials firm CSR (ASX:CSR) saw a sell off of its stock in 2022. However it would appear for the moment that a price has stabilised after hitting a floor of $4.00 in June 22.

Since that time the price has stabilised and after a brief 3 month period where the price was stuck in a channel, the price has successfully broken out and has now formed two consecutive high highs,

ASX:CSR 1 year daily chart

The other three factors I look for; ATR, 50/200 EMA and OBV have supported the latest run and therefore for those where it may be appropriate CSR is giving us a positive signal.

ASX:CSR Daily chart since start of 2023

For the purposes of disclosure, though the stock has provided a positive entry signal, I will not get in until I see a retrace in price. After missing the initial pop, jumping in now could mean I am buying the top of the zig just before it zags again (which is totally normal). While over the long term it won’t matter , in shorter term timeframes I prefer to buy stocks when they have a pullback (provided the chart still shows positive signals.)

So with CSR I am hoping for a pullback into the $5.10 range which will see the stock still in a mini-uptrend, still above the ATR and above the previous higher high in December . If I get some stock in that range it will mean I won’t have to wait long to know if I am wrong because I would set a stop loss at $4.60 which was the previous lower high of December.

Of course the price could behave nothing like this. It could continue on its merry way (to which I will have missed this run) or it may plummet to its death (figuratively speaking). What is important is that I have a strategy to deal with either scenario and I am ready to act.

ASX:WES Wesfarmers. QM Rank 94 A$49.62

Investors in Wesfarmers (ASX:WES) had a 2022 to forget, supply chain disruptions, staff shortages and rising rates impacted sentiment to a point where the fundamentals didn't matter.

However, hope springs eternal in 2023 as the price appears to be close to bottoming out. After reaching the low in Sep 22, the price has begun a steady rebuild and has just crossed above the previous lower highs of August.

ASX:WES 1 year daily chart

Though the break is not huge at this stage, it is a level that was previously tested in November and earlier this month. Each time the drawdown was smaller and smaller, creating new higher lows

The price is above the ATR. The 50 day EMA is above the 200 day EMA and OBV has been rising steadily.

Given the strength in the broader retail space, there are a number of positive tailwinds now in place to support a sustained break above resistance. From a transparency perspective, If the stock opens up or steady on Monday I will be in for a momentum trade.

ASX:AKE Allkem QM Rank 95 A$13.87

A few weeks ago I spoke of the current situation for Lithium stocks. Back then I said that the easy money on Lithium had been made. From then Lithium stocks have rebounded quite aggressively as the sell off prior was likely overstated, and hence why I am sure a stock in this sector has been requested for a look.

Just to confirm, I am not calling for the end of demand for Lithium. The high rates of demand will likely remain. What I am saying is that the extraordinary gains made in the last 2 years are likely to moderate and therefore we are closer to peak prices rather than an expectation of regular price doubling.

In that spirit we look at another member request in Allkem (ASX:AKE). We covered them in the past when we identified the new short term lower low and the price continued to fall away. 

However January has seen a recovery and as with most Lithium plays, in their prices as well. AKE has been a beneficiary bouncing off the December lows to now see its price fast approaching the lower high of $14.39 at the start of December. Excluding this it has recovered about half of what it lost from the peak which means it is at a crucial juncture now.

ASX:AKE 1 year daily chart

As previously mentioned we don't try to pick the direction of the next move. Rather we look for areas of significance that will likely see a change of sentiment or a continuation of the current trend.

From the positive side, a break of $14 39 will likely see a retest of the all time high $16.72. For price to break through that level on the first attempt would require some positive business news, otherwise the most likely scenario is that it would get to the level, then retrace and depending how deep it pulls back will govern the next.

On the negative side, if the rally of the past few weeks loses some steam and falls to $12.10 and breaks below that, then $10.90 and much lower targets come into play. $10.90 would therefore be an appropriate stop loss level from here.

ASX:MQG Macquarie Group. QM Rank 81 A$180.80

Speaking of stocks previously discussed, now we refresh ourselves on one late last year Macquarie (ASX:MQG) .

Without getting too specific it is pretty clear that for all of last year, this price of around $180-$185 has been significant. Early in the year it was a level that acted as support as price seemed to revert to it after a run. In the later half of the year it became a point of resistance as a number of recoveries tried but failed to break through that level.

ASX:MQG 2 year daily chart

Today we find ourselves after a few strong weeks again above that $180 level. The price has created a new near term higher high and broken out of the downward channel it was in.

Will this now be the start of a more prolonged run? Of course we don't know but there are a few things working in its favour.

First as discussed last month and has now been confirmed by a new short term higher high, the low in December was a higher low. Not only does this mean it has expended less energy to get back to this point, but it also the start of a mini recovery.

Second, the price has crossed out of its downward channel showing the pace of the sell off over the last few months has started to slow.

And finally the 50/200 daily moving averages have come close to crossing as they converge and OBV has supported the return to favour of MQG

ASX:MQG 6 month daily chart

So the chart is looking positive and for as long as investment markets and the economy remain solid, MQG will reflect that reality.

ASX:FEX Felix Resources QM Rank 84 A$0.27

A recent client request, Fenix Resources (ASX:FEX) held up relatively well during the Iron Ore price crisis in 22 mainly on account of its lucrative hedging position which saw it release prices much higher than other producers. Custodians of the Iron Ridge project, it saw its maiden shipment leave in Feb 21 and having acquired the haulage business, they are desperately trying to reduce costs of extraction, lest we return to the much lower iron ore price and production becomes unaffordable.

ASX:FEX 1 year daily chart

As a higher cost producer they need iron ore prices to remain elevated. To ensure this they have continued with their hedging program, though the prices for the next round are not as lucrative as previous and investors should be aware that while the dividend will likely remain elevated, there is a real risk it will be reduced.

From a chart perspective it has reflected the broader return to positive sector sentiment, though by not as much as the hedging contracts curb volatility.

Investors will note the big gap in the chart. This was after the dividend went ex on 1 Sep. Since then the price has bounced around. The stock is currently on resistance. This price level of 27 cents has been tested twice before (most recently in January).

The price is currently above the ATR and a series of short term higher lowers and higher highs sees the stock prepared to make another tilt at this level.

Should it be successful this time, the next stop is 30 cents. Above that and it will be to fill the gap at $0.35 - $0.36.But for that to happen the company will need Iron Ore prices to continue to rise and costs at their Iron Ridge project to keep coming down.

ASX:SXE Southern Cross Electrical Engineering. QM Rank 97 A$0.75

Another recent member suggestion, though Southern Cross Electrical Engineering (ASX:SXE) is a highly ranked business it doesn’t get too much coverage on account of its low liquidity (trades below $50,000 per day) and its low market cap ($184M). However one does not deny its fundamental qualities, qualities that major shareholder and money manager Thorney Investment Group too has recognised through their 16.7% holding in the business.

It's an engineering stock, so it has experienced the return to favour that much of the sector has. Though it is still cheap on account of the perennial discount applied to businesses involved in the sector.

Before we assess this business technically, it is important to remind everyone that technical analysis is not as reliable on illiquid stocks as it is on highly liquid stocks. This is because massive shifts in sentiment can be caused by one opinion changing. For example, should Thorney one day decide to cash in $2M worth of stock on market, no bullish pattern is going to save that price from going down. Therefore fundamentals are required when assessing illiquid microcaps alongside a long term view.

Despite the lack of liquidity SXE has an intriguing chart

ASX:SXE 1 year daily chart

Since the gap in September created by the stock going ex-div, you will see that the price has bounced and actually filled the gap at $0.73. As is normally the case the price then retraced, then made another tilt at that level. It failed again. However you will not see a better return for a retest. With the subsequent higher low, price is also above the ATR and recent momentum has been positive as both the 50/200 EMAs are going up.

A break above $0.73 will be a real positive given this set up. A stop loss from here at $0.67 would be appropriate as it may take some time to get out at a fair price given the lack of liquidity.

ASX:CPU Computershare. QM Rank 96 $A23.78

Since reaching its all time high in late November/ Early December, the price of COMPUTERSHARE (ASX:CPU) has been sold off. The stock has had a long run up, though the pace of the rise has started to diminish. The price has now fallen below the ATR and price is rapidly approaching the $22.50 - $22.70 range that the price will definitely want to hold. Below that and we will have a major lower low signally the start of a downtrend.

ASX:CPU Computureshare 1 year daily chart

That said that range could prove better buying for those game enough to try. Why? The support range has been solid over the past year. So solid that it could prove a good stop loss level. Buying closer down at that level means "you won't have to wait long to know if you a wrong."

But unfortunately not only is price heading to support, but also the 50 day average is about to cross below the 200 day average. The last time that happened was late 2020. I feel that if price fails to hold this range it could fall to $16.

On the buy case, I probably wouldn't look at it again until it crossed back above the all time high of $27.67.

ASX:SLX Silex Systems. QM Rank 88 A$4.57

If you have been a reader of the Momentum Monday contributions you would have noticed my preference to use previous highs and lows as stop loss levels. But are there times where such structural levels of support are not as relevant?

To highlight this we look at Silex Systems (ASX:SLX). The company has developed a way to enrich Uranium using a proprietary technology that it has developed. The stock has had an amazing year and is rapidly approaching a market cap of 1$b, after having started 2022 at a market cap of around $200

ASX:SLX 1 year daily chart

Such rapid runs can often lead to big draw downs as we saw in September 2022 when the price fell by close to 50%, however it has since recovered to a point where it has exceeded the previous high and is running at speed on an uptrend.

Normally if using structural levels of support a potential stop loss could be placed at $2.60. However as the current price is $4.75, the this would be inappropriate as it would mean given back a significant amount of money before eventually acting.

This is where a parachute stop loss level would be more appropriate (to reacquaint yourself with the various types of stops I use please read here.) Set the stop below the ATR at an appropriate level based on your tolerance to risk and belief in the business.

This will allow you to capture more of your gains, whilst still protecting your downside by setting an appropriate level based on the current situation. As we all know when a price goes parabolic the risk of a similarly aggressive pullback is heightened as profit takers are keen to protect whatever gains they've made.

If I was entering now I would consider a stop loss sub $3.80. This is still some distance from the current price but after such a sharp rally, it is likely the price will need room to breath before the next move (up hopefully).

SLX is also a reminder (including to myself) that we should never turn our back on companies. Investors who were on some or all of the first run up my have taken profits after the September peak, however the second run has been strong as well rising 75% in a month.

This behaviour aligns with the stop loss comment as stated above, after such rapid rises there can be a big pullback. But once the profit takers are flushed out it won't take much to see price run once again if the company continues to deliver good news.

In scenarios like SLX ,common sense at all times should be applied.

NZE:THL Tourism Holdings QM Rank 92 NX$3.01

NZ based travel company Tourism Holdings (NZE:THL)  obviously felt the full sting of Covid’s pinch. However withthings opening up, the company has started upgrading guidance once again, most likely the catalyst for the recent run.

NZE:THL 1 year daily chart

The company is about to embark on a new journey following the merger with Apollo, a similar Holiday RV and rental service though with global exposure. This new merged entity, with over NZ$1.1b of total assets under management, commenced trading on 1 December 2022 (and in Australia under a foreign exempt listing on the same date) and its price direction will be governed by it. Though the company has said, “ significant value creation is expected through synergy realisation.

Looking at the chart of THL, after the strong run up in October and November following the positivity around the proposed deal, the stock entered a sideways channel for two and half months until the breakout recently. The top range of that previous channel could make a nice level for a parachute stop if necessary.

Do note, though the liquidity has picked up for the new merged entity, it can be prone to low liquidity days so tread wearily. THL does trade on the ASX however liquidity is similarly low.

ASX:DRR Deterra Royalties QM Rank 92 $4.82.

It's often difficult to assess the chart so beholden on another's performance to dictate their own, as is the case with Deterra Royalties (ASX:DRR).

We last spoke about the stock in our second Momentum Monday instalment. It has held up quite well since then and on Friday popped up into a new all time high, but then was sold off during the day.

Receiving royalties from its ownership of the Mining Area C (MAC) and South Flank Iron Ore projects for BHP, its unsurprising to see the price of Deterra Royalties (ASX:DRR) oscillate along with the fortunes of BHP and the Iron Ore price.

With the next distribution due in March, investors will start to look to position themselves for the distribution. The company recently reported on the operational performance of BHP and as expect the ramp up at South Flank is the big story here as the MAC production levels were flat.

Notwithstanding the recent recovery in Iron ore prices, the distribution is expected to fall this year for DRR on account of the payment of past milestone payments which the company has benefited from. Pleasingly the ramp of South Flank which should hit nameplate production by 2024 will help.

Chart wise, we are back at all time highs plus we are on a higher dividend yield than back then, which normally is a great combination.

That said the price appears to be at the top of the trading range that had been in play since listing and traders will need to see either of two things to occur for a sustainable break above these levels.

• One would be a marked increase in Iron ore prices, and with China's reopening there are hopes of a further rebound.

• Second, the company would have to find another growth engine. The company has noted it is only the look out for value accretive assets, though to date we haven't heard anything.

That said, investors need to respect this level as its consistent failure to break above it in the past means, notwithstanding the new high, that a pullback is still a reality should the short term momentum not continue. Hopefully the positive momentum continues.

ASX:MYR Myer Holdings QM Rank 98 A$0.97

We last covered Myer Holdings (ASX:MYR)  at the start of the month on the 3rd January at a price of around 67 cents. It has been a very rapid recovery and notwithstanding the continued momentum, when managing money be sure to manage risk and consider a stock’s weighting within your total portfolio.

If you don’t want to take some profits now, be sure to lift your stop losses higher

ASX:MYR 1 year daily chart

Any suggestions?

If there is any company you would like to see written about? Do you have feedback on this contribution? It would be most welcome as we want to ensure that you receive editorial content that is most relevant to your investing.

Please feel free to write any comments below.

While we guarantee that all feedback will be read and digested, there is no guarantee that we will accept them. Though we do have an open mind at the minute.

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