Tom
Scollon
 Much profit conversion has been taking place over the last three weeks. This has been most marked in defensive stocks like the banks with attention turning to "growth" stocks especially resource stocks like BHP, WMR, RIO and others. Mind you I am not convinced this trend will gain any great momentum yet.

Banks have been deserted in the last couple of weeks with ANZ, NAB and WBC now looking particularly soft short term. Surprisingly CBA has avoided the banking chill so far, along with some of the smaller banks.

In the chart below I have used a simple trend line on an ANZ daily chart to illustrate the change of trend. Some would argue that the trend line should touch at least three points. I have little time for such esoteric debate because as far as I am concerned it is a major break and for me that would be the last signal for me to be out if I was trading the stock.


Click for a more detailed view of the image

But as early as mid June I would have been a little concerned as the oscillator diverged and failed to make a new high. Simple but effective analysis. In mid June I spoke about contrarian trading and this was an ideal set up time that would have enabled options traders to more than double their money on the banks by using long puts - limited risk with unlimited profit. What more could you ask for? If banks continue to fall in coming days then I will be considering taking yet another contrarian trend - looking at long calls on the banks.

If you are a long term bank investor then there is no need to panic as the long term trend is still in tact - on both a weekly and monthly chart but expect ANZ to test new lows like $16.50.

Incidentally one of the great features of the Video Series Software, is that once you have set up one bank chart then you can very quickly click though the whole banking sector in a couple of minutes using F4!!

Banks make up a big slice of the Australian market, consequently it will hold the major indices back in the short term and in fact the ASX 20, 50, 100, 200, 300 are all looking bearish short term.

Also looking bearish are Utilities and Property Trusts Sectors so depending on when you entered these sectors you might want to review your positions.

Overseas markets are handling the roller coaster a little better. But all markets are looking a little tired however. This is not surprising given the fast run since March. Fund managers had factored in a solid improvement in the USA economy and are now starting to show some concern that their valuations are a little overstretched and that the growth in corporate earnings may be slower to realize than expected. The USA economy is far from being "out of the woods" and in fact some analysts have the view that the US will not lead the world out of the lingering economic malaise.

So where can we make money in the coming weeks? If you have not taken the dive into options then Consumer Discretionary, Energy, Mid and Small Caps, Materials and Industrials are the places to look - using a great deal of discretion at the same time! In the last week more than 100 industrial stocks increased in value by more than 10%. If you take out some of the quirky speculative once off massive moves by penny dreadful stocks, most of these positive movers were Small Caps. There are still plenty of opportunities to make money!

Enjoy the Ride.

Tom Scollon
Editor