Momentum Tuesday (in lieu of Monday) 11 April 2023

From the entire team at Stockopedia we hope you all had a restful Easter period and are recharged to take on another shortened week of trading (though there certainly was something nice about markets being closed on Friday and Monday).

First a big hello and welcome to new members. Thank you for allowing us to come along your investment journey and we hope it is a smooth one (though we know markets rarely are.) For everyone else, we want to help as many investors as we can to invest successfully so feel free to share our name with any that you come across.

Before we begin, hopefully you have had a chance to look at the contributions thus far in the April edition of the Village Square. Please add a stock to the list. Because without the contribution from Members, the Village Square will fail in its objective of bringing investors together. The success of this exercise is up to all of us. Read the article here.

We also started a new quarter this month, so it was an opportune time to review our Australia and NZ NAPS (No admin portfolio system) portfolio. You can read the full diagnostic here.

Finally, we will have an upcoming webinar that you will receive an invite to this week. Please stay tuned to your email.

The agenda for today’s report is:

• Broader market sentiment

• Stocks of Interest

• 52 week high screen

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Broader market sentiment

JUST A REMINDER: I do not use the market charts to make decisions as to when to buy or sell stocks. 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.

S&P500

(Note: US Markets will start Trading on Monday, This commentary has been prepared using insights based on the lead up to last weeks (Thursday) close. Please be cognisant of this when reading the information, as views may change as a result.)

It was unsurprising to see the US have a break this week following a tumultuous three weeks, where markets defied reality with the S&P 500 falling just the 0.1% - essentially flat. However it was its first fall in 3 weeks.

S&P500 Weekly Chart

Inflation numbers in the US will be published on Wednesday (Thursday morning our time) and that will likely be a further contributor to short term sentiment. Given markets have risen on the idea that bad news means good news, hopefully the coming number can support that narrative.

Much of the focus last week was on jobs figures, where despite a very tight labour market as emphasised by Friday’s job report, during the week we learnt the number of new jobs openings have fallen and claims on jobless benefits had increased. These mixed messages obviously not clear enough to form a position either way. And with the next rate decision due on May 3 so there is still time for the market to gain a clearer picture.

The flat performance means there is not much more to add than what was said last week as the index is effectively the same. If you wish to resist that commentary please read it here. The only thing I can add is that for those looking for a signal of a possible break of this sideways channel to the upside may use the 4109.3 level indicates last week, however others perhaps may wish to wait for a break about 4180 which was an intra-week high at the start of February.

S&P500 Daily chart since start of 2023

Either way, the important thing to note will be the price action following the break, we will need it to consolidate with a solid base, or as we have been telling you in recent weeks, there is a risk it could be a ‘false’ break. The good news is we don’t have to gamble on it. Let’s just see what happens.

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S&P/ASX200

It was blessed relief for home loan holders, and red faces for economists, when the RBA held interest rates steady following 10 consecutive rate rises. Economists though took heart from the RBA Governor’s stance that rates will likely eventually continue to go up, which in some minds vindicates their belief that rates are still due to go higher.

The unchanged broader narrative on inflation wasn’t enough to dissuade the S&P/ASX200 from rebounding 0.57% for the week, its second consecutive rise following the strong recent sell down.

S&P/ASX200 Weekly chart

Much like with the US commentary, there isn’t much change for the Australian index. However one mini milestone that short term trades will want to see the index avoid is a failure to break 7301. That would likely see further evidence that the bottom end of the channel (support) will be the next retest, whereas if it can break above then it is likely the top end of the channel (resistance) will be the next to be retested.

But again, there is no need to pre-empt moves. Just be aware of possible eventualities and trade based on that.

For New Zealand members and those investors who have companies with New Zealand exposure it should be noted that while the RBA takes a 'wait and see' approach whilst new data can be obtained to see evidence of the recent impact of rate rises, the RBNZ on the other hand have taken the Bam-Bam approach to tackling inflation by almost willing their economy into recession by raising rates another 0.5% to 5.25%

Though the 0.5% rise might come as a shock, unlike the RBA which reports monthly (except in January), the RBNZ has a unique official cash rate cycle. This includes a quarterly Monetary Policy Statement, and in between then an interim Monetary Policy Review, which is when this latest decision was made. The next review point will be The Monetary Policy Statement on 24th May. But the reduced frequency of catch ups means a long term view on the cycle must be taken and often bigger moves can occur as a result.

I only mention these big macro events to provide context as to why things might be shifting from a sentiment perspective. This includes the latest Australian Bureau of Statistic numbers which showed that our trade balance continues to grow to a positive $14B. Mainly driven by imports falling more than exports. Clearly this shows that growth is indeed slowing, and that perhaps we may be coming to an end in the aggressive rate cycle that we have seen, which of course the market will like. While great businesses can navigate any challenge, traders need to keep an eye on them as they can impact broader sentiment which assists with their positioning in stocks, especially where they put their stops.

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Stocks of Interest

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 attend to it in the coming weeks.

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. 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:WEB Webjet. QM Rank 92 A$7.20

One company that continues o its merry journey is Webjet (ASX:WEB) that we last talked about in January. We discussed the breakout to new 52 week highs and the pace of recover since COVID closures (and even before).

ASX:WEB 1 year Daily chart

But in particular I wish to talk about the more recent price action where there was a strong possibility that a false downside break was occurring and why it may have been ignored.

Following the creation of a new high high in early March, the price pulled back ultimately to saw the price fall below the previous higher low of February. Further the ATR turned negative, and the short sell off was supported by a declining OBV meaning there was force behind it.

ASX:WEB 3 month Daily chart

So what were the signs that this may prove to have been a false break?

Other than the sell down was in line with everyone else on account of the broader market pullback, there was no news from the company to suggest anything was wrong, but further you will remember a core tenement of Dow Theory which is, “we are in a trend, until we are not.” In the instance of WEB, we were only one half completed on a new downward trend. Yes, we had a new lower low, but we needed a new lower high, but in this instance we got a new higher high.

Further you will see that during the period of new short term lower lows, many of those days saw rallying in price towards the close as exemplified by the long wick on the candle for even the days. This hinted that buyers were not that keen to let go of this one, and since we have seen the new higher higher and the price is back above the 2.5x ATR .

If you were stopped out, then given the price has since created a new higher higher and retraced from that level, should the price hold above $6.66 then we have our re-entry signal.

ASX:TLC The Lottery Corporation. QM Rank 90 A$5.16

Another company spoken about in January was Lottery (ASX:TLC). Relatively new in its corporate life as a standalone entity (Tatts history aside) we discussed it for the potential false break out that may have occurred.

At the time we noted that the price looked a little directionless and we were waiting for a break above $4.81 which we have since seen and the price has continued its uptrend.

ASX:TLC 1 year Daily chart

The chart looks quite good and provided the price stays above $4.81 there appears to a solid entry here.

ASX:RSG Resolute Mining. QM Rank 83 $0.465

One stock that has gone on a momentum tear recently is Resolute Mining (ASX:RSG) the African focused Gold Miner who has been the beneficiary of higher Gold prices and the companies latest Ore reserve support saw a surprising rise in Moz of Gold held.

ASX:RSG 1 year Daily chart

The previous depletion of the resource had seen the price of the stock come back significantly for some time and the stock has been in a long term downtrend since the lower high of $2.00 back in 2019.

One should not be under any illusion that this is a Momentum driven stock at the moment and the question is what sort of target could we expect from here? I feel there will need to be a pullback to catch its breath, so as long as the price stays above $0.31 (which is still a way from the current level and if I was trading it now I would have my stops tighter than that.) Then the next big upward target is $0.95 which coincides with a recent lower high, and a point of solid support between 2016 - 2019.

ASX:RSG 10 year Weekly chart

On the other hand if the price fails to hold these levels then the next downward target is at least $0.22 or worse. So this is the definition of a high risk high reward trade. And the way to manage risk from a trading perspective is to have your stop losses in place to help protect your capital.

ASX:SOL Washington H Soul Pattinson Company. QM Rank 99 A$30.98

Another stock discussed in January that at the time had just made a new 52 week high was Washington H Soul Pattinson and (ASX:SOL). The price continues to look solid, with the retrace in March creating a new higher low.

ASX:SOL 1 year Daily chart

The price has seen a rapid recovery to date so traders may wait for a pullback to position themselves for hopefully the next leg. That level would have to be above $28.69 which had been previous resistance, but I feel will now act as support. The upside target remains as it did back then at $32.60.

ASX:VEA Viva Energy. QM Rank 91 A$3.19

Another stock which has seen some positive action in recent times is Viva Energy (ASX:VEA).

ASX:VEA 1 year Daily chart

The price had looked to to remain in the sideways channel that started in June 2022. When the price briefly broke above that level in early March 2023 but fell back into the channel.

The good news that that the pull back was halted half way, part on account of the problems at the Lytonn refining facility at competitor Ampol. Now it would appear the price has jumped out, and following a pullback could prove a worthwhile entry.

Note: With VEA, oil is a cost of input. Therefore higher oil prices are detrimental to the company, whereas lower oil prices improves margins. Keep this in mind when analysing the company according to moves in the oil price.

ASX:NXT Next DC. QM Rank 87 A$10.87

Since the peak in August 2021, NEXTDC (ASX:NXT) has been in a downtrend . Much of this fuelled by the rise in energy prices which for a data center is by far and away the most costly expense of doing business.

But because of the growing demand for internet services and the obvious long-term sense that a holding in NXT makes, many are looking for a possible entry so let’s look at when that may be.

ASX:NXT 1 year Daily chart

Recently the price has found short term support, and has commenced a recovery to the next structural target which is the most recent lower high at $12.00. Short-term traders may wish to capture the $2 and then see what happens to price when it comes to resistance. Whereas investors with a long-term bent may prefer to be patient and wait for a break above $12 and then the subsequent consolidation to confirm that the pace of the correction has started to ease.

Either way, the price will need to stay above the October 2022 low of $8.32, else will have confirmed a continuing of the downward trend.

ASX:SDR SiteMinder. QM Rank 85 A$3.36

We now discuss another stock that is definitely NOT in an uptrend and that is SiteMinder (ASX:SDR). We do this to highlight things to look for when trying to pick reversal patterns so as to minimize the risk of trying to catch a falling dagger…. (remember: it doesn’t always work out. That is why we use stop loss levels.)

ASX:SDR 1 year Daily chart

There is nothing particularly redeeming for SDR’s cart. We have a clear level of resistance at $4.33 and the recent lower low of $2.72 is structural support.

So what would we want to see from here? Ideally the price would stop falling. This would then satisfy the first criteria of a reversal as a new short term higher low would form, last seen at the end of last month.

The second criteria we would like to see is then a break above $4.33. Patience is a virtue for traders and though some may point to the potential for gains, unless you have a particularly unique insight, it is a toss of the coin as to whether you could gain 28% to $4.33 or lose 20% to $2.72. Either way a break above $4.33 improves the odds that at least the pace of the sell down which has occurred from the peak since listing in 2021 is starting to abate.

Finally, given the strength of the downward move you would want to see a consolidation period where buys and sellers have it out, but at least the rice remains relatively stable, even if there is a slight pullback.What you will then want to see is a sign that buyers have rested back control and that would be a potential signal then. He is a visual example:

ASX:SDR Hypothetical scenario

But its rare things go to such plans so be wary.  In the IT sector, with the likes of APX and NLX we have had plenty examples of false dawns so always keep your stops tight and be sure to let the chart provide you confidence first before acting. Not the other way around.

ASX:AD8 Audinate QM Rank 80 A$8.56

Another company in the sector I am watching closely for a possible re-entry is Audinate (ASX:AD8) . Its Dante audio visual software is a global benchmark and its price has been resilient through the recent tumult with a price currently positioned around pre-COVID levels.

ASX:AD8 1 year Daily chart

While the stock is still down from the lower high of August 2022, we can see that currently the price is butting its head on the rising triangle which has formed in the short-term. Good news is that it appears to be on the verge of a breakout to the upside, which if it did would add further conviction behind the idea that the low in February was a new higher low for the stock.

The upward target would be $10.10 and even potentially higher as all time highs last seen in August 2021 is not that far away and if Momentum is strong enough it could carry the stock there. Buying the breakout would see a stop in place of $7.60.

ASX:IPL Incitec Pivot. QM Rank 94 A$3.13

A stock that has not done particularly well is Incitec Pivot (ASX:IPL) . We last spoke of IPL in early February. I mentioned that the price of $3.18 would be last chance saloon for holders and that it would possibly prove better buying for those who didn’t hold the stock.

ASX:IPL 1 year Daily chart

Unfortunately I did hold back then and now it has now passed that level. To be fair it has been hanging on for dear life, and I like the business fundamentally and how it can unlock value into the future.

However my rules are my rules. I hold them for now, but if they open or are down by the middle of the day on Tuesday,- I’ll be out.

SEK - Seek. QM Rank 95 A$24.80

One of the more perplexing announcements this week came from SEEK (ASX:SEK) who warned investors that despite record low unemployment and chronic staff shortages, revenue is expected to fall over the coming financial year as they have experienced a continued moderation of job ad volumes. However account of cost savings, they left their profit guidance unchanged.

On the day the price fell, as many (including myself) questioned how this could happen in what would appear to be the perfect operating climate for a company with a virtual monopoly. But since then it has recovered as the idea is that while their is a reduction in revenue at the minute, this will be more than offset by the cost cutting.

ASX:SEK 1 year Daily chart

I last covered SEK in February, pointing out the unusual prolonged downtrend and to the newly improved rising trend which had started to emerge, and I am glad to report that it still remains in play despite the revenue downgrade. That said the previous higher high of $25.74 will now be a key level to watch. For those who haven’t bought into the recovery story they may wish so see a break above that level to confirm that the market doesn’t take an unkind view to the update. As the old saying goes, “Downgrades come in threes” and some may be wary that this is just the first one.

As to why the drop off in classified ad volumes? Maybe employers have given up finding staff? We shall see.

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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 we attach 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 6 April and is sorted by the stocks closest to their 52 week high.

And remember, past performance is no guarantee of future performance.

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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: IPL, SOL, TLC, WEB . This position can and will change at any time without notice.