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If you have been following the SPI over the past 6 months you might have been getting a bit frustrated trying to determine which way it was going. Every time it breaks a previous bottom or a previous top it reverses. In between it has often made good trends, but they have not been lasting.
At times like this it can be useful to turn attention to the major stocks that comprise the Index. Remember that an Index is an average of stocks, so if some are going up and others are going down it will end up going sideways. In such cases the individual stocks will often show the trend more clearly.
In this case we will take a look at the 4 major banks and see what information can be gleaned from them.
Chart 1 – Commonwealth Bank
click chart to enlarge
CBA made a top in October and then pushed above it in January. Currently it has formed a double top.
Chart 2 – ANZ
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Here we are getting some different information. In January you would have seen this stock as weaker than CBA, as it made a considerably lower top than its top in October. Then it broke its December low in early February, again showing relative weakness. However, a substantial rally then followed to a top around the March seasonal date. Depending on your tolerance, you could call this a double top with the October top, the difference being 2%.
While there has been no reversal since then, the trend has definitely changed from up to sideways, which suggests either accumulation for a further advance or distribution for a fall. Wait to see which way it breaks out.
Chart 3 – Westpac
click chart to enlarge
Westpac and ANZ are tracking each other fairly well, except that the March top has broken higher above the October top in Westpac and you might not call this a double top.
Chart 4 – NAB
click chart to enlarge
Here we are presented with a decidedly different picture. The top was most definitely made in October 2009. The January ‘top’ is hardly worth mentioning, and the current rally from the February low could be stalling just short of the 50% level.
So how can you draw all of this together to help you form a view on the market? Firstly, you would note that CBA has formed an exact double top, ANZ is also sitting in a double top pattern and appears to be having some distribution on the side. Westpac is possibly bullish, as it has pushed further above its previous top. NAB is by far the weakest of the four.
If you wanted to go long, which stocks would you be confident in? If you wanted to go short, would you feel any more confident? Certainly the potential reversal signals are there on at least some of these stocks. The signals to trade them are not there yet, and our analysis has been limited to a very cursory look at the overall patterns. Also we have not considered the major resource stocks like BHP and RIO, which are the other major component of our Index.
But hopefully you get the idea that following some of these major stocks and keeping tabs on their position would give you more confidence to predict where the general market is going next.
Knowledge is Power!
Tim Walker
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