In my outlook piece this week I discuss some thoughts on the technical outlook for the index and how this relates to the news calendar for the week ahead.
The trend channel on the daily chart continues to do a good job defining the uptrend that’s been in place since November.
Most of the peaks occurring at the trend line resistance have also nudged above the upper Bollinger Band. This is upper green line on the chart with the relevant trend peaks highlighted by arrows.
Peaking outside the upper band is an indication of strong momentum. It is more that 2 standard deviations from the mean (in this case the 20 day moving average). This is the opposite of a divergence situation where there is weakening momentum but still higher prices. Divergence often comes before a trend reversal.
Strong momentum can result in weak pull backs e.g. no further that the 20 day moving average(middle Bollinger Band). This has been a hallmark of the trend since November which has stayed comfortably above the 20 day moving average.
In the last 3 days we have seen more of this strong momentum behaviour with candles climbing along and poking through the upper Bollinger Band.
For short term traders, a standard approach to a well established trend line combined with strong momentum might be:
- Don’t stand in front of the freight train. Trade only from the long side until there are clear signs of falling momentum and/or a break below major support levels.
- Use tests of the trend channel resistance as a profit taking opportunities
Unless we get a good reversal pattern set up and divergence, then the current situation suggests caution with picking tops. A break below the channel support and moving 20 day moving average support may be a minimum requirement. Until then, the trend is your friend.
The Week Ahead
Profit results will be the main focus this week. There are two many of these to mention but a couple of other developments to keep an eye on include:
- Appointment of Bank of Japan Governor.
The adoption of “Abenomics” following the Japanese election has been a significant event for world risk markets with the Japanese stock market rallying by more than 30%.
As I write this there is speculation that a new BOJ Governor will be announced within the next week. Markets will be watching this closely.
Appointment of Mr Muto, a slightly more conservative candidate than originally anticipated may be seen as a negative. Consistent with the minor pull back scenario though, I feel any such concern is likely to be short lived. It seems highly unlikely that Shinzo Abe will appoint a governor who is not broadly sympathetic to the stimulus policies he campaigned on. In fact, a somewhat more conservative candidate who is seen to be appropriately independent of government could well be seen as a long term plus by the market.
- Italian Elections. These are due on 24 and 25 February and do have the potential to unsettle the market.
The short term impact of a “bad” outcome for the market may be limited as it is not likely to materially impact the near term risk of a Euro crisis.
However, many remain concerned about the longer term risks in Europe. A return to reasonable growth levels in Italy is a precondition for a Euro recovery.
Markets would like to see a stable coalition government involving former Prime Minister Mario Monti. Victory by Mr Berlusconi would be a “risk off” event while victory by Mr Bernadi in his own right or in a very unstable coalition may also unsettle markets at least temporarily
In recent outlook pieces I have discussed the potential for the forward Price Earnings ratio to continue rising given current low interest rates.
It’s now hit 15.25, a long way from the 11.4 base back in July last year but still comfortably within the 13.5-17 range that applied in the years leading up to 2007.
One of the highlights of last week’s profit results was JB Hi Fi which saw a 17% rally prior to going ex-dividend last week. It seems to me that the journey of this stock from “market darling” to the most shorted in the index and now perhaps back to something in between, says something interesting about the market valuation theme and current trading opportunities.
I plan to post a separate blog with some thought on JB Hi Fi and market valuations in the next couple of days