Resource Bounce A Blip?

This story features TELSTRA GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: TLS

Bottom Line 02/08/12:

EW Trend: Corrective
Price Trend: Down
Trend Strength: Strong

Technical Discussion:

LAYMANS:

We have been quite negative in regard to the Materials Sector ((XMJ)) over the last few reviews and despite the recent market bounce this continues to be the case. There’s no doubting the fact that Banks and high yielding stocks like Telstra ((TLS)) continue to push the broader market forward which is a characteristic that could well continue into the foreseeable future. Our short term target put forward last month hasn’t quite been tagged but as can be seen it came within touching distance of being met. Had we seen higher volume during the recent show of resilience I’d be quite happy to look for a decent bounce here though that clearly isn’t the case.

So the door is still open for further weakness with 8000 [for the XMJ) likely being the next port of call. It would take a push above the minor line of resistance at 10000 before thinking in terms of a more sustainable rally developing though even then the major zone of resistance will need to be overcome before getting longer term bullish. In reality there are plenty of headwinds to overcome before suggesting a major bottom is in position. As I mentioned during the last review the push beneath the triangle target would portend to a continuation toward 8250. That’s looking quite a way ahead and in the current environment we are better off taking one step at a time.

TECHNICAL:

In terms of our labelling, nothing changes with wave-C continuing to the downside. Remember, this current leg should travel at least 61.8% of the whole move down to wave-A which provides our target mentioned above at 8250. The wave equality projection sits way down at 6452 although it’s difficult to envisage those depths being met. At the end of the day the wave structures are lacking clarity meaning we need to focus more on conventional pattern analysis. The headline pattern here is the old zone of support which has now become resistance. Whichever way you look at it it’s going to take some exceptionally strong price action to gain the momentum required to push up through 10500. Not impossible, but it’s difficult to see what the trigger for such a move is going to be.

It’s also worth reminding ourselves that since April 2011 the XXJ has lost over 41.0% in value. Both the longer term and shorter term trends are down which is a fact that cannot be refuted. It also means we have to go with the flow here until there is evidence that a significant turnaround is close by. If we stretch the guidelines slightly it could be argued that a falling wedge completed the recent pivot low but it’s hardly a textbook example. It’s certainly worth noting but I wouldn’t be hanging my hat on the back of it. In normal circumstances price will rotate higher in a very aggressive manner out of these patterns which really isn’t unfolding which only adds weight to my scepticism. One thing’s for sure, lacklustre price action over the next week or so would likely result in the short term target as annotated being achieved in the not too distant future. If that level fails to hold then it’s down toward the next target as already mentioned.

Trading Strategy:

With the likes of Commonwealth Bank ((CBA)) and Telstra continuing to show strength I don’t see any great need to be looking at too many companies within the sector. Obviously the likes of BHP Billiton ((BHP)) and Rio Tinto ((RIO)) are weighing heavily and until they show signs of a resurgence more of the same choppy messy price action with a bias to the downside is going to unfold.  In fact longer term investors are better standing aside until the zone of resistance is penetrated with some vigour.  And that’s assuming that a low is in position which is by no means a foregone conclusion.  In fact it isn’t even our highest expectation. 

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