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Rudi’s View: Head-and-Shoulders All Around

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Jul 23 2010

By Rudi Filapek-Vandyck

Flashback to July 14, when I wrote the following paragraph: “Sometimes the real message lies not where the majority of market commentators is looking. I have cherry picked two indicators that have caught my attention this week. Both might be pointing into the direction of a new trend for global risk appetite, which ultimately should bode well for equities.”

The two indicators I was referring to, as explained in two stories published on July 14 and July 15, were the US dollar and base metals. Both were signaling at the time, in my view, that overall risk appetite was making a return to financial markets.

And here we are, a little more than one week later, and I have observed quite a number of market observers have come to similar conclusions, be it on the new direction for the US dollar, be it on the new direction for base metals, be it on the new direction for equities.

Always difficult to put an exact timing on when equities decide to start the next rally. Market bears will tell us major indices are yet to decisively break above 200 daily moving averages (and they are correct in that assessment). But even the poster boy for all bearish commentators, Dave Rosenberg at Glushkin Sheff, has noted the technical picture for some blue chip stocks in the US has improved this week past.

Here's an observation made by observers at National Australia Bank this morning: “We've been surprised by the perkiness of the AUD, believing that uncertainty over the global economic outlook wouldn’t be resolved favourably until Q4 (which is we have a forecast of 0.90 for then but 0.86 for the current quarter).

“There’s no doubt that the recent widening in the Australia-US 2-year swap yield spread to a two year high of almost 428bps is supportive for AUD/USD, indeed suggesting the currency should be trading at around 0.94 if this were the sole driver of the currency.

“However, it’s been the apparent quick turnaround in sentiment towards the Chinese and global economic outlook that has caught us out. Initial resistance at 0.8966, support at 0.8870.”

Technical market analysts at Barclays Capital have zoomed in on copper, which has now completed and confirmed a reverse head-and-shoulders formation on price charts, suggesting the lows seen in May should remain the lows for the foreseeable future and the next upswing should have already started.

I note several fundamental analysts have issued positive outlooks on copper in July, including the team at Morgan Stanley in Australia this week.

The team at Barclays does keep a lid on overall enthusiasm for the short term, though, reporting technicals would seem to indicate copper could be in its way again to US$7800/tonne, but the analysts suggest US$7250 seems like a more realistic target for now.

Strong support is in the US$6730/75 area, the analysts report.

BTIG market strategist Mike O'Rourke similarly zooms in on the improved technical picture this morning: “The simple fact is that from a technical perspective, things have been pretty ugly. The only technical factor flashing a buy signal was sentiment, and that is because it was so poor. Finally, there are several technicals showing positive signs.

“Today the Dow Transports closed above both their 50 and 200 day moving averages for the first time in over a month. The Transports also took out their most recent high recorded last week, Dow Theorists will be looking to see if the Dow Industrials confirm the move in coming sessions.

“The S&P 500 appears to have formed a small Head & Shoulders bottom with the 1100 resistance level as the neckline. One only needs to look at the trading action since May to realize how important 1100 is. In addition, several S&P 500 sectors are creating the similar Head & Shoulders bottoms patterns, although some are further along than others. Industrials and Materials are the furthest along, but Financials and Health Care also have potential.

“Additionally, keep an eye on the Energy sector. Crude has held the US$70 level for the past year and now Energy equities are oversold as the problems in the Gulf move closer to resolution and Commodities appear to be heating up.

“We like to watch the Continuous Commodity Index (the old CRB) because it is equally weighted and thus a better measure of broad Commodity action. The CCI appears to be in breakout mode above the 480 resistance level, where it has been capped for 6 months. This is notable because this is occurring in an environment where deflation fears are elevated and the 10 year treasury yield is below 3%.

“This divergence should not last too long and either bonds or commodities should sell off. Seeing who wins the tug of war should provide a dynamic view on the markets perceptions of the double dip – recovery debate.”

Just when you thought all traffic lights are changing from red to orange to green, technical market analyst David Goulding in The Sextant Report on Friday (today) reports he remains of the view that any market rallies won't extend much beyond mid-August, when the next downswing is projected to take place.

Goulding, as so many bearish chartists, is a fervent user of Elliot Wave counts. The most famous user of this technique, Robert Prechter, recently hit international headlines with his prediction the Dow Jones Industrial Average might be on its way to 1000 from a level above 10,000 now.

Closer scrutiny of Goulding's market analysis reveals that were the ASX/S&P200 to reach beyond the recent June high of 4622, this would send him back to the drawing table redoing his wave-counts.

So it's head-and-shoulders versus Elliott Wave counts. Who'll win the battle of the technical signals?

My personal bet is on the H-and-S, even though this doesn't mean it'll be all plain sailing from here onwards. I think that, adding everything up, the odds are gradually falling into place that we may have seen bottoms in May-June.

P.S. I – All paying members at FNArena are being reminded they can set an email alert for my Rudi's View stories. Go to Portfolio and Alerts in the Cockpit and tick the box in front of 'Rudi's View'. You will receive an email alert every time a new Rudi's View story has been published on the website.

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