Momentum Tuesday (in lieu of Monday) 03 January 2023

Happy New Calendar Year!

Which for those of us in the Southern Hemisphere marks the half way mark in the Financial Year for the vast majority of our businesses (and ourselves personally).

We enter 2023 under the veil of a possible global recession in many developed nations and of course, lingering inflation concerns. With the Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ) not meeting to discuss interest rates until February, there will still be plenty to contribute to volatility before now and then.

As mentioned, January means we have passed half way for many companies, therefore we are due to receive their half yearly accounts (some delivering their full year accounts) in the coming 8 weeks. We will also see companies start to drip feed top-line sales and performance figures to the market in January. The market will be zooming in on margin pressure this time around, so there could be some volatility in pockets of the market based on cost pressures.

Also for all of you with a more cavalier approach to your share holdings, which include some of the lower ranked stocks on our exchange (Eg Junior Miners and Biotechs), they will be releasing their quarterly activities and cash flow reports. For these companies where costs have been rising, nervous investors will be watching cash burn to see how likely they are to be raising capital again. Their collective performance in the last three months suggest it will be sooner rather than later. We have already seen a number of cash hungry companies slammed by holders on account of cost blowouts. Some of which have put a halt to business activities as costs sky rocket.

So while many of you will find the lure of sun, sand, board shorts and thongs too strong to ignore, rest assured that there will be a lot going on through January. So make sure your beach spot has internet reception. Hopefully the only crashing you get to see this month are the waves against the coastline.

Week ended 30 December 2022

It was a relatively quiet trading week to finish off the calendar year due to the Christmas holiday.

In Australia and New Zealand we also had the Boxing Day holiday - which for all you young kids out there was our original version of Black Friday sales.

2022 as a whole will be remembered as a negative year for markets globally, which actually doesn’t bother me. Why? Other than the fact that it is totally normal for markets to have a negative year once in a while, the market has faced the challenges of rising inflation, the war in Ukraine, rising interest rates, rising costs of living, energy crises, China lockdowns and fears of a global recession.

The fact that the market fell shows me some semblance of rational thought in the market.

In the lead up to January the focus has been on the rising cost of doing business, And that has been reflected in our charts.

S&P500

It was our fourth consecutive down week for the S&P500, which actually recorded its worst year since 2008 of a 19.4% slump.

S&P500 weekly chart

However scratch a little further beneath the surface and it is obvious where the real bleeding has occurred.

S&P 500 vs DJI vs NDQ 1 year chart

For the record, over the past 12 months:

• DJI - 8.78%
• S&P500 -19.4%
• NASDAQ - 33%

Herein lies what has been the immediate challenge for most DIY investors who often seek smaller companies to outperform ETFs. Venturing out of the big guys ultimately opened investors up to underperformance.

This experience was the same for most global markets and highlights why investing in 2022 felt more difficult than what the main index implied.

For the month of December, US Markets also retuned a negative performance, the first since September:

• DJI - 1.8%
• S&P500 - 2.9%
• NASDAQ - 5.5%

I don’t need to explain more than what is being displayed above. So the question is… Is there hope for the S&P500 and broader markets in general? 

Of course there is… that’s why we are DIY investors. We are purveyors of hope! But remember folks. Hope is not a valid trading strategy so just look at what the chart tells you as an indicator as to what may happen next.

Hope #1 - Though this week’s action resulted in a down week, it doesn’t tell the full story. For the past two weeks now, we have seen earlier selling during the week to then have support come back into the market. This has resulted in weeks where we have candles that look like dragonfly dojis (Author note: ‘Yes’ I know what you are thinking…. But it is what the pattern is called and candlestick charts were first developed in Japan in the 18th Century so the names are specific to their times - so what do they look like? Refer to the image below or Google it.)

The pattern on its own would indicate that the bulls are fighting back to keep the bears at bay to end the weeks close to where they started, implying that any sell down is being rejected.

Not only that but look at where the low points for the week were? They were very close to the top end of the 3700 - 3740 range that we have highlighted for the past few weeks. Of course, This week, they could smash right below that range, or they could respect it two and bounce strongly to the upside (hopefully the latter)

Hope #2 - Even though it is not so relevant these days given its limited number of stocks and calculation methodology, the Dow Jones is still a contributor to overall market sentiment. If you look at the chart closely you will see that back in November 2022, the DJI exceeded the previous August peak. Which means that provided the index doesn’t fall below 28755, there is a chance still that we may see a trend reversal.

Dow Jones Composite Index 1yr

So what does this all mean? It means the start of the US Financial Year is going to be an important one for the US, and therefore by extension, global markets. Especially as they come up to their earnings season.

S&P/ASX200

With only three trading days, this week it is difficult to glean much from the weekly performance of the S&P/ASX200. But as I mentioned last week, while we won’t glean much from any change in direction, it was still going to be relevant from a continuation perspective, and our fourth consecutive down week continues to highlight where the broader sentiment it sitting right now.

S&P/ASX200 Weekly chart

As has been highlighted for a few weeks now, we keenly watch the 6760 and 6830 level as a possible retracement point that could prove to be a very promising outcome should price bounce off it. (Author note: Just a reminder though, I don’t predict market moves. I simply look for points of significance so that when something occurs around that point it contributes to the broader narrative.)

Both the RSI and MACD are clinging desperately to positive territory, but obviously both have reflected the strain of the shift in sentiment.

The Hope? Well market’s by their very nature zig and zag. The S&P/ASX200 has been zagging (down) for 4 weeks now, which means we are one week closer to a zig (up) week. While an up week won’t change the broader sentiment, at least it will make us feel better and provide the opportunity for a more elegant exit for those of you who are looking to exit any positions.

From a calendar year perspective the Australian market too experienced a decline, however the sell down was tempered somewhat by the strength of the mining and energy sectors (in particular Coal stocks)

For the record, for the 12 months to December 30 2022,

• S&P/ASX200 -6.3%
• All Ordinaries -7.9%
• Small Ordinaries * -21.2%

* The Small Ordinaries is the ASX300 minus the stocks in the ASX100

This is reflective of what happened on most global markets where the larger cap stocks performed much better than the lower ones, and therefore many DIY investors felt the full brunt of that underperformance.

Similarly for the month of December there was nowhere to hide, however the performance was a lot more even.

• S&P/ASX200 -2.52%
• All Ordinaries -2.56%
• Small Ordinaries -2.19%

So we enter 2023 still locked into out sideways movement and therefore as previously advised, the ‘house’ view is it's best to be patient and trade stocks only on the perfect set up.

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:CRN Coronado Global Resources. QM Score 99

First thing to stress here is that Coronado Global Resources (ASX:CRN) is not like Whitehaven and New Hope , where these names are predominantly focused on thermal coal. CRN is focused on Metallurgical (Met) Coal (used in Steel blast furnaces ).

This is why its price has been more resilient than the other names, because the factors driving CRN at the minute are more linked in my view to the China re-opening. Even though Australia for the minute can’t sell coal to China, their economy plays a big role in setting global prices and CRN are beneficiaries of that.

The price of Met Coal rallied about 24% from the lows of early November to finish around US$401 per tonne

ASX:CRN 1 year daily chart

Price has clawed its way back to May highs and is now bubbling along that resistance level. Even briefly breaching it towards the end of November and in December.

The chart has the right setup with the price above the Average True Range (ATR) stop loss. The On Balance Volume (OBV) has been supporting the recent rally, and the two 50/200 EMA (Exponential Moving Averages) are both headed in the right direction (and widening). The price is also above both those levels which is also bullish.

The fact that the price of $2.04 - $2.06 seems quite strong tells me that any sustained break above that level would be a bullish signal to acquire CRN at the levels for a run up towards previous all time highs. (A sustained break means the price breaks above the resistance level, pulls back a bit and breaks up higher again. One might successfully argue that this first happened on 30 Nov, so a break above $2.10 would be the possible entry point.

Given the jitteriness of the market a stop at $1.91 would be prudent. While at the moment this would be a stop above the ATR line. Its important to note that if the price rose to $2.10, the ATR would rise as well.

ASX:WHC Whitehaven Coal. QM score 99.

A number of members have been asking about what is going on with the likes of Whitehaven Coal (ASX:WHC), New Hope (ASX:NHC), Terracomm (ASX:TER) etc and the answer is suitably vague. There has been no company specific news that have driven any pullbacks. Issues around heightened royalties, coal cap pricing and wet weather have all been well documented and already incorporated into analysts estimates.

Which means it is likely just a case of a stock that has had a good run, seeing investors take some profits off the table.

Whitehaven’s total return for investors in 2022 was 284% when you include dividends, so it's not surprising to see pragmatic investors lock in many of those gains. But the sell-off has been relatively aggressive recently and the chart is starting to change shape.

ASX:WHC 1 year daily chart

I got into WHC using charts so I will be using them to get out. Looking at where we sit now. Thursday’s close at $9.28 moved the price below the ATR, which as I have previously mentioned, is the point now where I need to set a (controlled) exit level.

If I had entered the stock recently, given the nervousness around a possible global recession etc I would set a stop loss no lower than $8.88 the price level should be based on your parachute stop level or close call level. (All of these stop-loss level concepts are discussed in the Momentum article I attached at the start of this week's contribution.)

However, I have been in the stock for a while so I am going to be a little more generous and place my stop below $7.91 which coincides with the low of September 2022. I suspect this will be an important level because it will be the start of an official downtrend given the highs of December were below those of September, and therefore a breach of $7.91 will create a new lower low (LL).

My ‘hope’ is that price eventually settles above the $7.91 level and continues its upward trajectory. The medium-term trend on WHC is strong for the minute, so even if I am stopped out. Assuming the price doesn’t crater (which is always a possibility - that’s why we apply stop losses) I would be looking for a re-entry point in the future.

ASX:SUL Super Retail Group. QM score 98

I last spoke about this company in the December 5th Momentum Monday article. I highlighted at the time the chart’s characteristics of breaking above the 2021 resistance level, the ATR moving in the right direction and rising OBV.

As will always happen, as sure as it was identified the price has pulled back to a point it is below the ATR and now we need to find a possible suitable exit level.

At the time I mentioned a level of $9.50 may be appropriate. However given the nervousness around the slowdown post peak-Christmas sales period and looking where the chart sits, if you only recently bought SUL you could perhaps consider moving the level up to $9.95.

As highlighted below, that level was a small gathering place on the broader run up from June and could allow for a less painful exit in such uncertain times.

ASX:SUL 1 year daily chart

The bottom target of $8.67 could be the last chance saloon level as discussed previously.

ASX:IGO Group. QM score 97

Another stock that I wish to highlight the power of breakout patterns, in this case to the negative side, is IGO (ASX:IGO)

ASX:IGO 6 month daily chart

Since October 2022, the price had been stuck in a sideways channel between $14.47 and $16.60. Both the upper and lower range were tested a number of times, meaning that both these levels were significant. What does that mean? It means a break of either of these levels would likely see further moves in that direction. In the case of IGO it broke to the downside, so the likely move was going to be continued falls.

Frustratingly the stock did try to break out of the channel in November 2022 (highlighted in red), but as you can see it failed and the price closed each time back in the channel.

The stock now is in a down trend with the previous support level $14.47 likely now to be a resistance level.

ASX:JIN Jumbo Interactive. QM score 94

So let’s turn our attention to Jumbo Interactive (ASX:JIN)

At first glance, the price indicates a mini support at $13.75. It is sandwiched in with an upper range resistance level of $15. This level derived from the lower high established in June 2022.

ASX:JIN 9 month daily chart

A break below $13.75 in my view will likely see the price retest the October lower low (LL) of $11,50 which if it breaches, I see very little in the way of structural support until $8.50. Breach that and it is very much look out below.

On the positive scenario a break above $15.00 gives it a chance to make a run at $19, which was the previous lower higher (LH) from late 2021 to early 2022. This will prove to be a strong resistance level. However if it breaks through that it could make another run towards all time highs last seen in 2019.

All these scenarios of course are hypotheticals and I have no idea which scenario will come true. However what you can see (as we did with IGO) is a break either way of support or resistance can have a massive impact on the overall trajectory of a stock.

ASX:TWE Treasury Wines. QM score 97

But not all pullbacks in stocks have to be bad things. In fact they can prove to be good buying opportunities, provided the stocks can hold their support lines.

Buying near support levels is often advised as you don’t have to wait long to know if you are wrong. Buying stocks at support levels is a concept I covered in the second of my momentum journey posts which you can read here .

One stock that would fall into this category at the minute is Treasury Wine Estates (ASX:TWE). The winemaker has had a very good run in price over 2022.

ASX:TWE 1 year daily chart

The break out above resistance in July was followed through with some solid support.

The stock now has a new higher high (HH) and higher low (HL) in place to indicate a short term uptrend.

But like many stocks at the minute, there has been a slight pullback over the last month. Inventors not in the stock could wait for a pullback close to support of $12.40. If the price holds above that level, and jumps above the ATR that would be a good entry point (Note the ATR entry point comes down as the price falls. So if the price tested $12.40 the ATR will likely come down as well from its current $13.90 mark.

But buying closer to $12.40…. Even $12.60 or there abouts… it really doesn’t matter. What matters is that it won’t take long to know if you are wrong as $12.40 would be a good stop loss level to have (which coincidentally is the stop loss level for existing investors in my view)

ASX:MYR Myer Holdings. QM score 96

Another stock in a similar scenario is Myer Holdings (ASX:MYR)

MYR has seen a rapid recovery from the lows of June with the price doubling. Therefore it is unsurprising to see the price pullback as it has.

The thing to note is that it is still in an uptrend with a series of HH and HL, however this doesn’t mean this will continue.

ASX:MYR 1 year daily chart

In fact the price is below the ATR and the stock is off its recent highs of 73 cents (at one stage falling to 62 cents). However, let’s say for argument's sake the price kept falling closer to the support level of 55 cents. Then buying at around 60 cents makes a lot more sense when you can set an exit level at a point of structural support.

This is why buying at support can be an effective tool for a trader who has the patience to wait and not rush a trade.

ASX:MAD Madar. QM score 95

Another stock that highlights the buying at support theory is Mader (ASX:MAD)

After a false break out (red circle) above resistance in August, the price eventually broke through (on heightened volume) in October (green circle).

ASX:MAD 1 year daily chart

The price continued to rise however eventually pulled back all the way to the support level (Blue circle).

And here lies a basic tenement of technical analysis, and dow theory in particular. Areas of previous resistance become support when broken and vice versa. So the previous resistance has become support, and would now be a good stop loss level if a position was taken now (or when the upside ATR is breached).

ASX:AUB AB limited. QM score 95

In its recent history, AUB (ASX:AUB) has a history of price gravitating to $22.50 on a regular basis. This started back in October 2021 and as can be seen on the chart below has gravitate in and around that level like an orbit.

AUB 2 year daily chart

If you hone in to recent price action, and you will see that the current price is bang on support and is hanging on for dear life. A break above the very short-term mini high of $23.50 may be enough to convince the price to go for another run to the high at the start of the year of $26, and then who knows beyond that.

But at the minute because price is at a support, a position now could be supported with a stop at $22.14 which is the ATR level. Even if you waited for a cross above $23.50, your stop will be less than 10% away from the current price.

ASX:AUB 6 month daily chart

Hopefully this now sufficiently explains the “you won’t have to wait long to know if you're wrong” principle that I am highlighting.

Any suggestions?

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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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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.

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