Posts Tagged ‘Trader Dealer News’

    • Stock Market Analysis: 2011 Q1 Quarterly Review – Part 2

    Friday, April 15th, 2011

    Q1 2011 Quarterly Review Part 2: Australian Market Performance by Market Capitalisation

    The first quarter of 2011 provided some major challenges for investors and the market. Floods and cyclones across eastern Australia, geopolitical unrest in the Middle East and North Africa, sovereign debt concerns in Europe and of course the Japanese earthquake, tsunami and nuclear crisis have produced major volatility throughout the quarter and changed investor confidence.

    In Part One of our Q1_2011 Quarterly Review we examined the market on a sector-by-sector basis and gave our forecast of themes for the investment landscape for Q2 2011.

    Today we’re reviewing the ASX market’s first quarter performance as measured by market capitalisation. This performance is illustrated in the chart below.

    ASX Performance Market Cap_March 2011

    ASX Performance Market Cap_March 2011

    Chart: ASX Market performance by Market Cap for the Quarter Ending 31 March 2011.

    Why Consider Market Capitalisation?

    There are a number of reasons why investors and traders will look at market cap as a criterior when selecting stocks. Depending on the size of the investment portfolio liquidity may be an issue, and options traders will likely only consider the ASX 20 for liquidity reasons. Large cap, mid cap and small cap market segments will perform differently at various times in the market investment cycle.

    Large caps tend to outperform when investors are more cautious or bearish, while small and mid caps are more likely to outperform when the bulls are in control, as this is when traders are more likely to accept the inherent risk.

    For the purpose of analysis we have defined large caps as: ASX20 (.AXTL), ASX50 (.AXFL), ASX100 (.AXTO), ASX200 (.AXJO) and ASX300 (.AXKO). Mid caps: ASXMidCap50 (.AXMD), ASXMidCap_Industrials (.AXMD), and ASXMidCap_Resources (.AXMR). Small Caps: ASXSmall_Industrials (.AXSI), ASXSmall_ORDS (.AXSO), and ASXSmall_Resources (.AXSR).

    Note: codes in brackets are for use in the Market Analyser software. Use these codes to review indices, and drill down to examine the stocks within. If you are not a Market Analyser user, sign up now for a free software trial.

    Rolling Year-on-Year (YoY) Performance

    The rolling year (YRRolling) performance (as shown by the black bars) illustrates just how difficult this market has been for long term investors, who tend to concentrate on large cap stocks. Annual performance has been generally negative, with the clear exception of mid and small cap resource stocks both segments rose over 26% for the YoY. The stocks making up the Small Ordinaries index also outperformed, up 10.6% YoY, while the Small Industrials and MidCap Top 50 eked out gains of around 2% YoY.

    The other indices examined had negative performances of around -2% YoY, with MidCap Industrials the worst performers, down over -5%.

    So investors or traders who ignored the mid and small cap resources (and the Small Ords) segments of the market will have underperformed for the year.

    Monthly Performance

    We saw the market volatility spike in March due to the Japanese disaster, but the market has undergone a stellar recovery from the lows of the severe sell-off. March performance (Mth (MAR)) (as shown by the green bars) has been flat across the board, which is surprising given the huge sell-off triggered by the Japanese disaster. However the small caps and mid caps underperformed and finished in the negative, indicating that investors are becoming more risk-averse due to the market volatility. For the month of March the S&P/ASX 20 and the Small Caps Industrial managed to finish over 0.5% higher for the month.

    Quarterly Performance

    The quarterly (QTR_11Q1) performance (as shown by the blue bars) has revealed strength in the market leaders (measured by market cap). We highlighted in our report last quarter that investors would likely be taking profits on their small and mid cap resource stocks, moving their funds to the larger cap, more liquid stocks. The market volatility has been a catalyst for this rotation of funds. The top ASX 20 to ASX 300 stocks rose around 2% for the quarter. This performance was similar to that of the previous quarter, but performance of other market segments has turned around significantly.

    The quarterly performance of the mid caps was relatively flat, however this is a significant turnaround for the mid cap resource stocks which were down -0.7%, down from 28% in the December quarter.

    The small caps have also experienced a turnaround with small cap industrials managing to stay in the positive, up 0.9%, while the Small Ords and small cap resources finished down -1.9 and -5.3%, down sharply from 10.7 and 19% in the December quarter.

    So investors or traders who failed to take profits in the small or mid cap resource segments of the market will have been hurting this quarter.

    Weekly Rolling Performance for April 2011

    We have analysed what has happened in the market for April so far. The weekly rolling (WkRolling) performance (as shown by the red bars) illustrates that the new quarter has begun with some selling/profit-taking, with under performing sectors last quarter leading to the recent sell-off lower. Only the ASX 20 and ASX 50 stocks have managed to eke out gains in early April, up 0.8% and 0.4% respectively.

    The ASX MidCap 50, MidCap Industrials, and ASX SmallCap Ordinaries have all pulled back are least 1%, while SmallCap Resources have pulled back nearly -2%. The market closed at its lowest level in nine trading sessions overnight which points to weakness in the near term.

    Conclusions

    Again investors who trade larger cap stocks could have simply concentrated on the S&P/ASX 20 and still have generated a similar performance to those who used the S&P/ASX 300 as their stock investing universe. This is something that longer term investors should note, as it is much easier to keep track of 20 stocks versus 300 stocks, and investors can boost performances through the use of options on the top 20 stocks.

    There has been a big turnaround in the stellar performances of the small cap and mid cap resource stocks, which is pointing to investor risk aversion. The market has experienced fantastic gains since the turnaround from the GFC in March 2009, but now markets globally are trading near key resistance levels and investors are becoming more cautious. Investors need to take advantage of the cheap insurance being offered through the options market to protect long-term positions. There is still M&A activity in the market as evidenced by the recent takeover bid for Equinox, so nimble traders can still profit.

    The Trade

    The market remains a stock picker’s market as shown in the market performances over the past quarter. Those subscribers who follow the recommendations of MDS Financial Research get timely recommendations of trading opportunities as individual stocks start to move.

    In summary the ASX20 and ASX50 stocks have outperformed. M&A activity will be a key driver going forward, particularly if we continue to see a pull-back in the resources sector, after Goldman Sachs recently made a call to take profits on commodities, given their spectacular performance. Aussie interest rates are likely to remain on hold for the near-term and the Aussie dollar being at record levels will impact corporate earnings.

    Given the market performances over the past quarter and year-on-year, there are a number of strategies traders and investors can use, including relative strength comparisons and mean reversion.

    1) Investors who use relative strength comparisons and look to trade strong stocks in strong sectors should concentrate on the larger cap stocks from the S&P/ASX 20 through to the S&P/ASX 300 universe of stocks. Using relative strength we would expect Small Ordinaries and SmallCap Resource stocks to continue to under-perform.

    2) Investors who use a mean reversion strategy may want to concentrate on the SmallCap Resource and the MidCap Resource stocks, which have been underperforming the broader market, and if they are looking for the market to pull back, then they may look to the larger cap stocks to retrace.

    Investors should gain confidence from the larger cap stocks holding on to their performances, but they may be tested with the indices trading around the 5000 level in 2011.

    The investment themes for the next quarter will be:

    * the economic recovery from the domestic floods and droughts
    * the global economic recovery from the Japanese disaster
    * geopolitical unrest in the Middle East and North Africa
    * commodity supply constraints and pricing
    * the strong Aussie dollar
    * corporate earnings – can companies pass on higher input costs?
    * interest rates and inflation
    * continuing M&A activity

    Stay tuned for further analysis of performances, as next time we will examine the performance of commodities in relation to stocks.

    By Michael Hevern
    Head of Research

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    Pre-Alert Indicators in Market Analyser

    Friday, April 8th, 2011

    Pre-Alerts are custom indicators designed specifically by the Market Analyser team to highlight aspects of share price and volume behavior that are likely to lead to a continuation of, or a reversal in the share price movement. These indicators have stood the test of time and have been rigorously tested to verify their performance. Pre-Alerts are exclusively available in the Platinum version of Market Analyser.

    The Pre-Alerts have been performing very well lately. Looking at the Westpac chart below you can see clusters of dots at each of the turning points in the market. The dots are symbols indicating when the Pre-Alerts have occurred.

    Pre-Alert indicators have triggered in this Market Analyser - Westpac chart

    The black dots with an ‘A’ are the Accumulation indicator, showing an increase in volume which often occurs near the end of a downtrend. The grey dots with a ‘D’ are the Distribution indicator which shows strong breakouts that are accompanied by high volume. As can be seen here a reversal often eventuates soon after.

    The red or green dots with a ‘C’ show the Conductor indicator. This identifies turning points as these occur in real time and can work very well to identify short term reversal points. And the symbol ‘TP’ shows reversal points in red or green identifying when a significant peak or trough forms.

    The Market Analyser Pre-Alert indicators are based on a unique pattern-recognition concept that has proven to be one of the most effective charting and analysis tools available. The Pre-Alert indicators are designed to alert you to trading opportunities prior to conventional charting indicators and therefore give you a greater chance of profiting from market trends.

    To apply the Pre-Alerts, select the Pre-Alert you wish to use from the Pre-Alert menu located at the top of your charts. Type in the parameters or use the default settings and click OK.

    Pre-Alert Indicators in Market Analyser Platinum

    Pre-Alerts are even more powerful when combined and utilised as part of an overall trading strategy, as each Pre-Alert indicator helps assist in supporting alerts from the others. Pre-Alerts are designed to assist you in building a much clearer picture when reading the charts. There is no question that the Pre-Alerts are a superior way of assisting you to trade the market.

    By Jeff Cartridge
    Education Manager

    Sign up for a free trial of Market Analyser Gold, then call us to upgrade to Platinum to view the Pre-Alerts in action!

    For more on Market Analyser take a tour of the software.

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    Trading Book Review: The New Sell and Sell Short

    Friday, April 8th, 2011

    The New Sell and Sell Short

    Author: Dr Alexander Elder
    RRP $52.95

    Trader Dealer clients receive FREE freight!

    Trading book review by Janene Murdoch from the Educator Investor Bookshop

    A detailed look at one of the most underestimated aspects of trading-selling, In The New Sell and Sell Short is the second edition by Dr. Alexander Elder.

    In this book he explains how to exit a stock at the right time and how to initiate a short position to profit from a stock that is showing weakness. Often overlooked, selling properly enables a trader to cut losses and maximize profits. Moreover, short selling in a weak market can generate big profits and should be a part of every trader’s arsenal of tools. The new edition contains numerous examples of short selling stocks from the 2008-2009 bear market, demonstrating very clearly why traders do themselves a disservice by only focusing on the long side. In addition, the new edition contains an extensive study guide to help readers master the material prior to trading.

    This book is available from the Educated Investor Book shop. If you would like to order this book please visit The Educated Investor Bookshop website.

    By Janene Murdoch
    Educated Investor Bookshop

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    Stock Market Analysis: 2011 Q1 Quarterly Review – Part 1

    Friday, April 1st, 2011

    Australian Market Sector Performance

    The first quarter of 2011 has thrown up some major challenges for investors and the market.

    The year began with major floods and cyclones across the eastern seaboard of Australia, geopolitical unrest in the Middle East and North Africa, the simmering European sovereign debt concerns, and most recently the Japanese earthquake and tsunami and the subsequent nuclear crisis. All these factors have combined to cause some major volatility throughout the quarter.

    Global Roundup

    The major driver of market volatility has been the devastating Japanese earthquake and tsunami, and the nuclear crisis which followed sending markets plummeting. Most markets have since rebounded sharply as investors look to the post-disaster rebuild as another catalyst for demand on commodities and construction.

    Investors have generally been able to focus on global growth, putting the chaos to the side. The Aussie market has underperformed China, which is up 4%, and the US markets are over 5% for the quarter, while the S&P ASX 200 has risen 1.8%.

    Another key issue for investors will be the need to monitor the Aussie dollar which has again reached post-float highs of $US1.0372, the highest level for 29 years.

    Inflation remains a concern near-term, with interest rates expected to rise in China and Europe, and even the US is talking about rises in the future. The key driver for the US markets next quarter will be the reaction of investors when the accommodating quantitative easing is withdrawn (planned for June), and the jobs data. In Australia the RBA is expected to leave rates on hold for the near-term.

    In the commodities space crude oil has outperformed for the quarter due to the geopolitical unrest, up 16.8%, while gold ended up 0.6% and copper fell -3.8% over the same period.

    Global economic news has remained supportive of the view that the economic recovery is still intact. Nevertheless investors will need to continue monitoring interest rates, the geopolitical unrest in the Middle East and North Africa, the Japanese nuclear crisis and the European sovereign debt issues in the near-term.

    Australia

    The Aussie market has underperformed the US and has been very much a stock picker’s market. The energy sector remains the key driver for the ASX. There is an old adage “sell in May and go away” which should serve as a warning for investors this quarter.

    We have taken this opportunity to review the Australian market’s quarterly performance to date by analysing the performance on a sector-by-sector basis. This performance is illustrated in the chart below.

    ASX Market performance by Sector for the Quarter Starting 1 January 2011

    Chart: ASX market performance to date by sector for the quarter starting 1 January 2011.

    Year-on-Year Performance

    The year-to-year rolling (YoY) performance has been negative for all sectors except Energy and Materials (as shown by the black bars). The chart illustrates that it has been a tough 12 months for all other sectors. Now we see that for the rolling-year (YoY), Energy (up 6.7%) and Materials (up 11%) have shown strength for the year, with all other sectors under-performing.

    The serial under-performers continue to struggle, including Consumer Discretionary (down -9.2%) and Telecoms (down -6%), though through Telstra the telcos are making a comeback. The tech sector on a YoY basis is the biggest under-performer, down 18.4%, while Industrials and Financials have also been under-performing on YoY basis.

    Monthly Performance

    We have seen the market volatility spike this month due to the Japanese disaster, but there are a number of sectors that have recovered into the positive. The performance for the month of March (as shown by the green bars) has been subdued, with the exception of the Energy sector which has managed gains of over 3.3%, while the Materials, Healthcare, Telecoms, Utilities and Healthcare sectors have managed to eke out gains for the month. The key turnarounds have been the Financials and the Telecommunications sectors which were helped by the progress on the NBN. Poor retail sales figures and consumer sentiment have impacted the under-performing sectors for this month, which have included Consumer Discretionary, Consumer Staples and the Info-Techs, which are all down for the month.

    Quarterly Performance for 2011 – Q1

    The quarterly performance (as shown by the blue bars), has been subdued with the exception of a number of key sectors. Growth sectors have remained in the positive, with Energy (up 5.3%) and Materials (up 0.9%), while Financials staged a turn around (up 3.5%) from last quarter’s under-performance as they run up to their dividend payment period. Meanwhile other defensive sectors have plunged for the quarter, including Info Tech (down -8.8%), Utilities (down -3.7%) and Healthcare (down -0.5%). Consumer-related sectors actually recovered, with the Consumer Discretionary and Consumer Staples sectors flat the quarter.

    The Trade

    The market remains a stock picker’s market, as shown in the sector performances over the past quarter. Those who subscribe to MDS Financial Research get timely recommendations as individual stocks start to move – sign-up for a trial to see try it for yourself.

    In summary, the Energy sector continues to outperform and there has been a clear improvement in the performance of the Financial sector. On the other hand there’s been significant under-performance in the Info-Tech sector, and the shine has been lost from Materials.

    Consumer-related stocks have been suffering but did manage to recover in the last quarter. Aussie interest rates are likely to remain on hold for the near-term and the Aussie dollar being at record levels will impact corporate earnings.

    Given the sector performances over the past quarter and year-on-year, there are a number of strategies that traders and investors can use, including relative strength comparisons and mean reversion.

    1) Investors who use relative strength comparisons and are looking to trade strong stocks in strong sectors should concentrate on the Energy, Materials, Financials and Telco sectors for trading into the second quarter of 2011. Using relative strength we would expect the Info-Tech and Utilities sectors to continue to under-perform.

    2) Investors who use a mean reversion strategy may want to concentrate on Info-Tech and Utilities, which have been under-performing the broader market. If looking for the market to pull back, then look to the outperforming sectors, Energy and Financials to retrace.

    Investors should gain confidence from the Financials sector which is starting to participate in the ASX performance as it pushes towards new yearly highs, beyond the 5000 level in 2011.

    The investment themes for the next quarter will be:

    * the economic recovery from the domestic floods and droughts, and the Japanese disaster
    * geopolitical unrest in the Middle East and North Africa
    * commodity supply constraints and pricing
    * a strong Aussie dollar
    * corporate earnings
    * interest rates and inflation
    * continuing M&A activity

    Note: ASX_200 [.AXJO] Energy [.AXEJ], Materials [.AXMJ], Financials [.AXFJ], Utilities [.AXUJ], Discretionary [.AXDJ], Staples [.AXSJ] and Healthcare [.AXHJ]

    Codes in brackets above are for use in the Market Analyser software. Use these codes to review indices, and drill down to examine the stocks within. If you are not a Market Analyser user, sign up now for a free software trial.

    Stay tuned for further analysis of the quarterly performance, as next time we will examine the Australian market’s performance with stocks broken down by market capitalisation.

    Bu Michael Hevern
    Head of Research

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    Stock Market Analysis: Gold Stocks Set to Shine

    Friday, March 4th, 2011

    The price of gold has surged higher in the past month but gold stocks have lagged. In today’s article we identify some key stocks that investors and traders should have on their radar.

    Gold is trading as a reserve currency and has been trading strongly higher for the past two and a half years. This week it again traded at all-time highs as the political unrest in the Middle East and North Africa continued to escalate and the central banks in Europe and the United States reaffirmed their commitment to continuing economic stimulus. This has put pressure on the fiat currencies. The chart below shows the strong uptrend in gold.

    gold-prices

    As we can see, the gold price has been consolidating since November last year and looks to be setting up for another high run.

    Gold Stocks

    We last highlighted gold stocks in early September 2010, and they proved to have a great run into the end of the year. However since late last year they’ve underperformed the precious metal and if gold remains at these elevated levels, the producers are being set up for a re-rating near-term.

    Those subscribers who follow the recommendations of MDS Financial Research should have received some healthy gains in these stocks of late.

    We are taking this opportunity to review the Gold Mining sector, and have highlighted key outperformers. In the analysis we have looked at stocks that have good Return on Asset and Return on Equity, and also stocks that have some room to move on a price earnings growth. The results are tabulated below:

    ASX gold stocks

    Gold stocks that are showing good Return on Equity and/or Return on Assets figures include:

    * Focus Minerals Ltd (FML)
    * Kingsgate Consolid (KCN)
    * Medusa Mining Ltd (MML)
    * Newcrest Mining (NCM)
    * Norton Gold Fields (NGF)
    * Perseus Mining Ltd (PRU)
    * Ramelius Resources (RMS)

    Another key fundamental measure is improving earnings. Stocks that pass on this measure include:

    * AngloGold Ashanti (AGG)
    * Cga Mining Limited (CGX)
    * Kingsgate Consolid. (KCN)
    * Medusa Mining Ltd (MML)
    * Newcrest Mining (NCM)
    * Ramelius Resources (RMS)

    Once a portfolio manager decides on the sector of the market they wish to be exposed to, then they should look to identify stocks that are exhibiting superior relative strength. The above table highlights the performance of key gold stocks over a weekly and monthly timeframe. Gold stocks that have returned positive share price performances in the past week and (rolling) month include:

    * AngloGold Ashanti (AGG)
    * Allied Gold Limited (ALD)
    * Beadell Resource Ltd (BDR)
    * Focus Minerals Ltd (FML)
    * Gold One Int Ltd (GDO)
    * Greenland Min En Ltd (GGG)
    * Norton Gold Fields (NGF)
    * Perseus Mining Ltd (PRU)
    * Ramelius Resources (RMS)
    * Saracen Mineral (SAR)
    * St Barbara Limited (SBM)
    * Silver Lake Resource (SLR)
    * Tanami Gold NL (TAM)
    * Talisman Mining (TLM)

    Investors also need to be mindful of the liquidity of the stock.

    The Trade

    Gold has had a good run in the past month and is now testing all-time highs. A breakout to the upside would give the Australian gold sector added impetus to move higher. On the other hand if gold backs off from these levels then it may provide investors with an opportunity to trade those outperforming stocks on any pullback.

    Gold stocks have underperformed the gold price for the year-to-date, but it now appears that they’re set to play catch-up.

    Keep the stocks that have been highlighted here on your watchlist.

    By Michael Hevern
    Head of Research

    Sign-up for a trial of our MDS Financial Research Report

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    Trading Book Review: Shares to Buy and When

    Thursday, March 3rd, 2011

    Shares to Buy and When – 2011

    Jim Berg
    RRP $29.95

    FREE freight within Australia for Trader Dealer newsletter subscribers

    Trading book review by Janene Murdoch from the Educator Investor Bookshop

    This book takes all the hard work out of the analysis and gets you on the road to investing in a fraction of the time!

    Over the past 12 months it hasn’t been easy for traders and investors alike to make money on the sharemarket. I have had thousands of investors and share traders coming through the doors of my shop wanting information to further their knowledge on how to evaluate shares using both fundamental and technical analysis.

    Few books discuss both disciplines in detail, leaving the final, time-consuming analysis to the individual. I have found that time is the enemy of most of these investors and share traders, so I was delighted to have ‘Shares to Buy & When’ to recommend.

    I was overwhelmed by the huge response to Jim’s book. The consistent message from all who read the book, was that Jim took all the hard work out of the analysis, and allowed them to get on with what’s important – family, work and the markets.

    It is again with great pride that I am associated with the 2011 edition and I have a feeling that each edition of Shares to Buy & When will become a must-have in all traders and investors libraries.”

    This book is available from the Educated Investor Book shop. If you would like to order this book please visit The Educated Investor Bookshop website.

    By Janene Murdoch
    Educated Investor Bookshop

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    Traders and Triggering Bull Traps in this Market

    Friday, February 25th, 2011

    The Aussie market has had a strong run since the early July trough, with the recent peak in the S&P ASX 200 rising 18%. Traders are finally starting to take profits and appear to be heading for the exits as the deterioration in the global macro economic environment starts to bite. We are seeing a turn in the momentum for the ASX market near-term, and this has given rise to a number of bull traps being triggered.

    Traders have been pushing stock prices higher since the Santa Claus rally materialised in November. Up until this week traders have chosen to ignore the global headwinds that have been simmering in the background, such as geopolitical tensions in the Korean Peninsular, political unrest and violence in the Middle East, the continuing issues of European sovereign debt in the so-called PIIGS economies, global concerns over food inflation, struggling consumer spending, and China’s struggle to control its runaway inflation.

    Central banks around the world have been taking measures to address the economic issues including: the US Fed Reserve’s commitment to another round of quantitative easing (QE2); the ECB in Europe committing to support the indebted PIIGS economies; and in China the central bank has moved to raise the capital reserve requirements for its banks and increase rates in an attempt to reign in its inflation.

    Traders have been looking for an excuse to take profits, and the violence and unrest in Egypt, Libya and the Middle East has provided the trigger to sell. The spike in the crude oil price has the potential to derail the global economic recovery, if energy prices remain at these elevated levels for any length of time.

    A number of stocks in our local market have set up and/or triggered “bull traps” as they have recently backed off key levels. Traders have used this reporting season to reassess their view on particular stocks, and use any positive move in the stock resulting from their earnings report as a chance to liquidate part or all of their positions.

    Bull Traps

    A bull trap occurs when investors take on a long position when a stock is breaking out to new highs, only to have the stock reverse and shoot lower. This counter-move produces a trap for the bulls and often leads to sharp sell-offs.

    The criteria for a bull trap set-up:

    1. A prevailing long-term down
    2. A sharp correction that has moved quickly from its lows
    3. Resistance where investors look for price rejection setting up a long squeeze

    The Bull Trap Set-Up

    The bull trap set-up is fairly basic. Look for a trading range to be broken to the upside, preferably with high volume. The stock will need to get back below resistance within five trading periods, then explode out of the bottom of the range. The last component of the bull trap chart pattern is that the stock should have a wide price trading range. This increases the odds that the stock will have room to trend lower in order to book quick profits.

    The Market Psychology of Bull Traps

    Selling in the first wave will occur when the most recent swing low is exceeded. This occurs because of the number of shorter-term traders who have their stops slightly below the most recent swing low. The second wave of selling comes into play once the medium term traders realise that this is not just a slight retracement and the move is likely to be more protracted. This produces the second round of selling.

    Bull Traps Trading Examples

    There are a number of prime examples of recent bull traps, including Toll Holdings (TOL) in October, IAG Insurance (IAG) in December, Cochlear (COH) in January and WesFarmers (WES) in February.


    Figure 1: Bull Trap – Toll Holdings (TOL) October 2010

    Back in October Toll Holdings (TOL) broke to the upside to a 3-month high, but the bears then stepped in sending the price through the recent trading range within a few trading sessions, completing the bull trap. The volume did not provide confirmation for this trap but the selling continued with the stock dropping -20 percent in the following 3 months.


    Figure 2: Bull Trap – IAG Insurance (IAG) December 2010

    IAG Insurance (IAG) recently broke to the upside to a 4-month high in December, but the bears then stepped in sending the price through the recent trading range within a few trading sessions, completing the bull trap. The stock has dropped -11 percent in past couple of months. The sellers persisted until the stock broke the key trading range support and the bears appear to be firmly in control now.


    Figure 3: Bull Trap – Cochlear (COH) January 2011

    Cochlear (COH) recently broke to the upside to close at a 2-month high in January, then saw follow-through buying the next day as the bulls pushed the price higher. But then the bears stepped in, sending the price through the recent trading range within a few trading sessions, completing the bull trap. The stock has dropped -8 percent in the past month. The sellers have pushed the stock below its key support level and the bears appear to be in control.


    Figure 4: Bull Trap – WesFarmers (WES) September 2010 and February 2011

    WesFarmers (WES) recently broke to the upside trading at a 2-year high in February, then saw sharp pullback as the bears stepped in, sending the price through the recent trading range within a few trading sessions, completing the bull trap. The stock has dropped -5 percent in six trading sessions. The sellers have pushed the stock below a key support level and the bears appear to be in control at these levels.

    The Market Analyser software offers Pre-Alerts which are proprietary indicators that identify impulses in volume accompanied by a decline (D) in price. As shown in the accompanying charts these Pre-Alerts, used in conjunction with the standard Bollinger Bands, are very accurate for identifying bull traps.

    Conclusion

    Bull traps can develop in markets where there is panic buying or overconfidence, as the stock prices move into key resistance levels. The bulls are trapped because they are typically chasing the big moves in the market and are buying new highs as the price meets resistance. Once the market starts to fall, these new bulls try to extract themselves from the trap by selling. That selling pressure feeds back into the bear market and amplifies the subsequent move back to the downside.

    The question of course is whether a given reversal is really a bull trap or a legitimate reversal to the upside. The way to trade these set-ups is rather than attempting to pre-empt the market by shorting or covering immediately, you should typically wait for the market to begin rolling over to the downside.

    Use the Market Analyser’s proprietary Pre-Alert Distribution Indicator to identify when a setup is imminent (refer to the sample charts for examples).

    A change in market momentum and sentiment appear to be underway and bull traps are not just an opportunity for swing traders looking for a trigger to trade the short side of the market. They are useful for longer term traders as a signal to apply some risk coverage to their long positions, either through hedging their positions or stepping to the sidelines.

    Click here for a 14 day trial of Market Analyser!

    By Micheal Hevern
    Head of Research

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    Stock Market Analysis: Is the Australian Market Overbought?

    Friday, February 18th, 2011

    The Australian market has been climbing strongly higher during the last two weeks, but is it overbought at the current levels?

    The term overbought simply means it has climbed too high, too fast, and in this situation there is the possibility of the market pulling back. We can use some of the indicators found in The Bourse to answer this question.

    The indicators that are used to show overbought or oversold conditions are known as oscillators. These fluctuate backwards and forwards between two extremes, often 0 and 100, or -100 and +100. When the indicator is at the lower level it shows an oversold condition and when it is at the top it shows an overbought condition.

    Oscillators that are widely used include Relative Strength Index (RSI), Stochastic or the Williams %R. In The Bourse, when you click on the IND button at the top of your chart, you can select the indicators you want to use from the menu. Click on the Oscillators heading to display the indicators available.

    The list includes RSI, Williams %R, Price Oscillator, Momentum, Stochastic and MACD. I personally use the MACD to identify trends, and not as an indicator to identify overbought or oversold conditions.

    The Relative Strength Index (RSI)

    The RSI shows the relationship between up movements and down movements in the share price. The more up days that occur, the higher the RSI value. Typically the indicator is calculated over 14 days. When the RSI hits an extreme, which is measured as below 30 (oversold), or above 70 (overbought), then look for a reversal in the current trend. By applying the RSI on to the chart of the Australian market (XJO) we can clearly see an overbought condition with an RSI of 84. This is well above 70, which is considered overbought.

    The Stochastic (Cstats) Indicator

    The stochastic is a fast moving oscillator that identifies whether the share is closing closer to its highs or lows. Time frames used can vary, but here we use 14 days and the slow stochastic is normally smoothed by a period of 3 days. The extremes in the stochastic are typically identified as 20 (oversold) and 80 (overbought) from which a reversal is expected.

    Adding this to the chart shows the stochastic is also in overbought territory with a reading of 96. Clearly the market is overbought at current levels, but this does not mean we are about to enter a new bear market. It simply means the risk reward favours a trade in the downward direction or locking in some profits. A similar setup in mid December led to a small decline in early January, while the peak that occurred in early November resulted in a more substantial decline through November.

    You can use oscillators in The Bourse to identify overbought conditions. These can be a useful guide to assist you to know when to take profits or even to sell short. The same indicators can be applied to individual shares as well as the market as a whole.

    By Jeff Cartridge
    Education Manager

    Sign up for a 14 day free trial of The Bourse and try using oscillators to identify overbought conditions yourself!

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    Ramp Up Your Portfolio With Dividends

    Friday, February 11th, 2011

    Research has shown that dividends deliver a significant portion of long-term performance in equities investments. Dividends can also offer tax effective returns through dividend franking credits, especially when the franking credits are delivered to a super fund. Today we’re going to scan the ASX for some dividend-paying stocks to help you ramp up your portfolio’s performance.

    The goal of the dividend growth investor is to build a portfolio with steadily increasing income, which is seeking to outperform the market via equity growth through increasing earnings and capital gains.

    Last year the dividend-paying stocks underperformed the overall market, as is clearly illustrated if you pull up any property trust charts.  This underperformance is due to investor concern over the effects of the GFC when dividend-paying stocks were hit hard, with companies reducing or even cutting their dividends in order to preserve capital in the tight money market conditions that prevailed at that time.

    Market Rotation

    In our recent Quarterly Performance Reviews we identified that investor portfolios could have performed in line with the index even if investors confined themselves to the ASX Top 20. We also noted that the broader market indices significantly underperformed the Small and Mid-Cap resource stocks last year.

    This year we may well see some market rotation as investors take profits from their resource stocks and allocate some of these funds into dividend-paying stocks which have been underperforming.

    Since many stocks will be going ex-dividend by the end of this month and the local earnings reporting season began this week, we thought it timely to look for some stocks set ramp up due to their yields.

    Identifying Dividend-Paying Stocks

    We ran a couple of scans using the Standard and Poors (S&P) ASX leading stock indices as our primary filter.

    In the first scan we searched the S&P ASX50 for stocks with substantial yield and the potential to offer capital growth as their earnings improve.

    Table 1: S&P ASX50 Stocks Filtered for Dividend and Growth

    This list gives us stocks in the Top 50 that are paying dividends above the current RBA cash rate, with reasonable gearing, and that have potential for increasing earnings growth as the year progresses.

    If we ignore stocks that have a weak return on equity or had negative earnings last year, this shortlist can be trimmed further to: Telstra, QBE Insurance, Westfield, NAB, Westpac, AMP, CBA, ANZ, GPT, Leighton and CNA (in order of dividend yield).

    In the second scan we narrowed the search to the S&P ASX20 in light of what we observed in the Quarterly Performance Reviews. With stocks in the S&P ASX20 investors also have the opportunity to write covered calls over their stock to boost their performance even further.

    Table 2: S&P ASX20 Stocks Filtered for Dividend and Growth

    Again this list gives us stocks in the Top 20 that are paying dividends above the current RBA cash rate, have a solid return on equity and have potential for increasing earnings growth as the year progress.

    If we ignore stocks that have above average gearing or had negative earnings last year, this shortlist can be trimmed further to ANZ, CBA, NAB, Telstra, Westpac and Westfield.

    As part of the service Trader Dealer provides on this blog we monitor upcoming dividends and list the details of dividend payments as they are announced.

    The Bourse Software Screening Tool

    If you use The Bourse software you can screen shares via the Bourse Research tool. When you open The Bourse, go to the Bourse Links menu, select Bourse Research and then click the Screening Tool link.

    The Screening Tool can make the stockmarket fundamentals scan a simple task, by allowing you to quickly scan the market for your specified selection criteria. You can save the query for easy access when you next need to scan.

    The Trade

    Today we have suggested a shortlist of stocks that you may want to consider if you are looking to ramp up your portfolio performance through dividend-paying stocks.

    The MDS Financial Research service monitors the market daily and highlights stocks such as these dividend payers when they are ready to run. Sign-up for a 14-day trial today.

    By Michael Hevern
    Head of Research

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    Trading Book Review: Trading With Candlesticks

    Friday, January 28th, 2011

    Trading With Candlesticks

    Michael Thomsett
    RRP $39.95

    Trader Dealer Price $33.95

    Trading book review by Janene Murdoch from the Educator Investor Bookshop

    This book shows you how candlesticks work, how to interpret them, and how to use them.

    It is packed with visual examples, definitions, checklists, and charts and shows how to identify emerging price movements, trend reversals, confirmations, and impending signal failures. For investors at all levels of experience.

    Want to consistently outperform other traders?

    Candlestick charts represent one of the most valuable tools available to you. As savvy traders around the world have discovered, candlesticks can help you more effectively anticipate stock price trends and improve the timing of every buy and sell order you place. In Trading with Candlesticks, best-selling author Michael C. Thomsett completely demystifies candlesticks. Using plain English and easy-to-understand visuals, Thomsett shows how they’re constructed, how to decode them, and how to apply them in real trades.

    You’ll start with the absolute basics, and then discover how to recognize subtle moves and patterns you never knew existed. Next, Thomsett reveals how to combine candlesticks with other technical indicators to sense market signals even more reliably. Whether you’re a day trader, swing trader, speculator, or long-term investor, candlesticks offer you a powerful edge and this book makes them easier to use than ever before.

    This book is available from the Educated Investor Book shop. If you would like to order this book please visit The Educated Investor Bookshop website.

    By Janene Murdoch
    Educated Investor Bookshop

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