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Even when we feel we know what is happening in the markets, we should be disciplined enough to do the analysis.
My first chart looks at the OBV (On Balance Volume) on the All Ordinaries and illustrates the low volume throughout June and July when the market was rising in a slow, chugging channel. This tells us that even the Fund Managers were not convinced this was a sustainable rise. In the last two weeks however, they have taken the view that this rally could have legs and we have seen OBV rise in concert with the market. This does not necessarily mean that the institutional investors (or markets) are right.
click to enlarge
Some good news is trickling out - both in Australia and overseas - but we are at a point where markets are no longer sanguine about good news. The markets are cautious and even the ‘Instos’ know that they are buying at the top end of a run. We can see this in the Bollinger Band illustration below:
click to enlarge
The market touched the upper band four times and, of course, the market rose each time, showing some belief in the action. After touching four times, the probability of a market heading higher is greatly reduced and a retreat is more likely. (These charts are as at 10 August but the analysis is still relevant).
We have seen some soft days recently, despite the good data. But there will be more easing. In times like these, the Oscillator is worth watching:
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I do not expect a major pullback; rather a small retreat as per my hand-drawn lines in the above chart. This falls within the scope of our range trading market.
The risk of a deeper retreat remains - still within a trading range – and this could inflict pain if you bought when the Bollinger was rising.
Be careful about calling the bottom of this retreat. I will be monitoring it closely.
Enjoy the ride
Tom Scollon |