Momentum Monday 19 December 2022

Welcome to the last Momentum Monday newsletter before Christmas and global investors are minding their P’s and Q’s as we eagerly await the much expected Santa rally.

Though if 2022 was the year of the Lithium stock, perhaps Santa’s sleigh requires a recharge as we are sputtering to the line.

Much in the same way we had a solid positive period that ran out of puff following the June lows, so too is the market now retracing back from November highs. My experience with Australian investors is that we are genetically disposed to worry.

• When markets go down, obviously we are worried.
• When markets go up, we worry that they will eventually go down
• When markets go sideways, we worry that if it is going to go in any direction it will likely go down.

This is one of the reasons why technical analysis can be so effective, as it helps control our internal bias. Using price charts takes the decision out of our hands, alleviating a great deal of angst and stress. The only exception to this rule is when markets whipsaw, which is what they are doing now, and hence why we are all a little worried.

Before we continue, remember, In Stockopedia momentum doesn’t just mean price moves (though it is a big part of it.)

Just to refresh your memory Stockopedia’s Momentum Rank is a ranking system based on a blend of price momentum and earnings momentum in the form of upgrades, positive revisions to earnings and earnings surprises to learn more read here

In this report we pay no attention to the factors of Quality and/or Value. However, when combined with either of these two factors, an analysis of the charts can be a powerful strategy, if applied with discipline.

Also if you want to see which stocks are discussed in this week's addition, scroll down the list on the right hand side.

Week ended 16 Dec 2022

A second consecutive down week for overseas and domestic markets has put the global situation back under the spotlight. Really, it never went away. However its amazing what a positive run in prices can do to one’s sense of stock picking ability, especially when there is a risk that our best laid plans could potentially come unstuck

* I start this contribution as always with a look at the US S&P500 alongside the S&P/ASX200 as it plays such a large role in the sentiment of our stocks and therefore it can’t be excluded from broader consideration.

Once we look at the broader market, then we drill down to a selection of stocks to see what is happening.

S&P500 - US Market

It's amazing what two weeks on the market can do. This time two weeks ago for the S&P500 we were hoping for a break of the downward channel and shift in enough sentiment to get us back to the August lower higher.

Instead, after two consecutive down weeks and bouncing once again off the upper line on the downward channel, traders need to prepare themselves for a possible retest of the base of the downward channel (3300-3400).

S&P500 Weekly Chart

For the last few weeks we have been reminding investors that the US Market is still in a downtrend (series of lower highs and lower lows) and that we weren’t out of the woods just yet.

Three reasons why last week was concerning.

1. The index fell below what I had flagged in the previous weeks as a mini-suppot level of 3903. While no guarantee, this could mean a short-term negative run could be expected
2. Last week the weekly price action saw us briefly pop-up above the down channel, but it rapidly fell back into it, and actually closed the week down on the previous.

3. While typically I don’t look at broader markets on a daily chart, I notice that Thursday’s action actually moved the index below the 50 Day EMA. While of itself not a strong indicator for possible price direction, it does highlight the indecision that we are witnessing.

All hope is not lost. (Author note: Remember I don’t try to predict where indexes/prices will go, I simply identify points of significance which have a higher probability of something occurring.)

Another mini-support range sits at 3700 - 3740. It was last tested recently between 23/10 to 6/11. Prior to that 26/06 to 10/07. If price can hold this level and bounce off it there is a good chance we could have a new higher low established, and therefore the commencement of a potential uptrend. Hope springs eternal.

However, if it breaks below this range then it becomes more likely the bottom of the channel will be tested once again..

On the other indicators I look for, they too reflect the recent price trend as RSI continues to fall below 50, indicating a short term pullback and the MACD also contracting. The good news is that it is still positive, though the last two weeks have diminished their luster somewhat.

In conclusion, I suspect this week’s price action should be significant, however as it is the last trading week before Christmas, anything could happen.

S&P/ASX200

A second consecutive down week for the S&P/ASX200 is adding to the nervousness surrounding fears of a predicted global recession, and its potential impact on Australian businesses (and their share prices).

S&P/ASX200 Weekly Chart

It further entrenches the sideways move our market has been experiencing and it remains a source of frustration for many (including myself). Particularly as I am sure you will all attest, those stocks in the smaller end of town have experienced wilder swings.

On the chart, despite the tough week, we are still above our first key level to watch which was 6760 - 6830 range. As previously mentioned, a nice orderly pullback to those levels would be good for supporting the index for another run (though it won't feel like it).

On another positive note, while normally I don't look at indices from a daily perspective, I have noticed something interesting in the interaction between the 50 / 200 Day EMA. The 50 Day EMA has crossed above the 200 EMA for the first time since the two lines touched in late May 2022 In fact the recent clean break above is the first time the 50 line is above the 200 line since March 2022.

S&P/ASX200 Daily Chart

Many know the opposite scenario where the 50 day average crosses below the 200 day average. This is known colloquially as a “Death Cross” and it is frequently mentioned in the press when it occurs. However the opposite scenario and in this instance where the 50 day average rises above the 200 day average it is known as a “Golden Cross” and can signal the exhaustion of downward market momentum. Fingers crossed (pardon the pun) it works.

It's important to stress here that Moving Average crossovers are lagging indicators, and I only personally use them to benchmark the current price against the longer term price action. It would not surprise me to see the two lines cross back over again. Symptomatic of a sideways market.

The RSI is above 50, and the MACD likewise is positive (though smaller this week than last). Therefore this is one of the markets where (doing) less is more.

This may seem confusing, however it is clear the broader market is a little directionless and will be waiting for clear breakouts to confirm price moves in either direction.

My view on trading this market remains the same as last week. We can remain comfortable in the short-term allocating funds to stocks.However just look for the right set-ups.

Stocks of interest

Author note: These stocks are considered purely for the purposes of education. There are some promising charts, coupled with ones under pressure. Be sure to read all relevant commentary to understand the context from which a chart is presented.

ASX:AMP AMP Limited

This company needs no introduction. It is infamous for investor disappointment and capital erosion.

However, since the breach of resistance at $1.265, The price has gone on a gallop. It has all the factors I look for in a stock.

• Price above ATR
• Price above the 50 Day MA
• Moving Averages getting wider apart (on the way up)
• OBV rising in unison

AMP Daily Chart 1yr

While it seems obvious in hindsight, this an example of where investing biases can stop us from acting, even on the most obvious of signals.

If you have missed the boat, a possible entry on a retrace to around $1.32 could work. The stock is just as infamous at providing false signals so any stop loss should be tight. For those that hold it now, that level would be $1.295.

ASX:GNC GrainCorp

Despite the strong sector performance (Agriculture) GNC has missed much of the party.

Investors who have held the stock have seen it quite resilient in the face of floods on the Eastern seaboard of Australia. But for all intents and purposes, the high of May seems well and truly behind it.

GNC Daily Chart 1yr

The company, after delivering a recent record result, mentioned they are not expecting a repeat in fiscal year 2023 due to floods impacting the current crop, which may pressure earnings.

The impact may be cushioned if grain prices remain high. And if the price stays above $7.48. If it breaks below that level, then extreme caution is warranted. Therefore this level would be a good stop loss level.

Given the protracted move sideways a clean break of $8.65 would be needed to possibly consider a position.

ASX:MTS Metcash

MTS is encountering some solid resistance at the $4.30-$4.35 mark.

If the price is able to break above this level it could go on a run. Therefore MTS should be on traders watchlist as the price is above all of the ATR, the 50 day EMA and 200 EMA and OBV is supporting the recent movement

If it fails, there is a risk the price could fall back. It would need to hold $4.14 or it could keep falling to $3.79.

MTS Daily Chart 1yr

ASX:NWH NRW Holdings

NRW is the engineering and mining services firm that has lived through many a boom and bust cycle for the sector and is a reminder why we need to look at stocks from a longer term view to gain perspective of where the current price is.

Looking at the one year chart, things look ok. The price has had a very good year. Currently it is above the ATR and there have been a series of higher lows supporting the step up in price. Further supporting the strong run, the price is above the 50 day MA, which itself is above the 200 day MA average and the OBV has been rising.

This looks like it is a chart ready to retest the recent highs of September this year, and therefore creating a new 52 week high (a bullish indicator).

NWH Daily Chart - 1yr

However when we zoom out, say to a 10 year chart. It's clear the price has risen over the 10 years, What is also clear is that there have been some big swings. The largest over the 10 years being the COVID correction. Since then price has been recovering but it has never quite reached the peak of January 2020.

NWH Weekly Chart 10 yrs

In fact we have seen three attempts to return to that high. Once in January 2021 and the other September 2022 and now.

Each time it failed to reach that level and pulled back. You can see that each of the pullbacks stopped falling at higher lows. So what we are seeing now is a symmetrical triangle. The triangle has significance on its own, however what price does next will determine how significant it is.

Basically, if the price breaks above the upper range of the triangle it will further validate the comments under the 1 year chart, and a retest of $3.15 could be underway.

If it however fails to break through, then a trader needs to be aware of the bottom range of the triangle. All of a sudden a price of $1.80-$1.90 becomes the target, especially if price breaks below $2.42. 

But there is more to the triangle than that. Triangles are also known as either a “continuation” pattern or a “reversal”. In the instance of NWH, if the price breaks above the upper range of the triangle, it will be known as a “Continuation” pattern.

If however it breaks below the bottom range of the triangle, it could be classified as a reversal as the price may be headed in the opposite direction that it has taken for the last 10 years..

We don’t know which way it will go. As momentum traders you simply lean the way the price is going. You wait for the signal to occur, and then you act appropriately.

So in conclusion, the price of NWH is currently at a pivotal position on a number of different timeframes. What happens over the coming months will have a big say on the longer term price outlook. But a break to the upside will be bullish.

ASX:AKE Allkem

The South American lithium miner has seen its share price reflect many in the space as it has aggressively fallen off recent highs.

AKE Daily Chart 6mths

Prices have come off quite aggressively since the November highs. To a point where we have seen a sequence of lower highs and lower lows. AKE is in a short term down trend, and it will remain that way until the price crosses back above $14.50. If the price keeps falling, then this level may change.

For those looking to exit the stock (if they missed the break of support at $13.21 there are options.

1. Prices zig and zag, so even when they fall there will be a point where it does rebound. If the price stops falling and it rebounds, however it fails to get above $14.50 then you can possibly get out at a better price.
2. If the price closes down again on Monday then exit the position

Remember, just because you sold a stock, it doesn’t mean you can’t buy back in. You can.

Even if it is at a price higher than what you sold it at. If you buy when the price pattern is working in your favor, you enhance the odds of it still going up. This is the same with stocks going down. If the price has a pattern showing it is headed south, it will often continue that way.

ASX:SPK Spark New Zealand

The NZ telecommunications carrier has had a very strong 2022 with much investor support. Like AMP discussed above, the chart has all the right elements.

• Price is at 52 week highs
• Price is above the ATR
• Price is above 50EMA. And that too is above the 200MA. (Both MA are also moving in the right direction.
• OBV supports the recent rise

SPK Daily Chart 1 yr

It hasn’t been a completely smooth ride for SPX this year. You will see on the chart the two red circles. These were heavy selling days where the price gapped down.

However you can see that the market has supported it each time, filled the gap, and saw the price continue on its positive trajectory. This signifies much investor support for the business, and underpins its latest rise.

This provides added comfort to investors that SPK for the moment is a stock investors want, which is the perfect condition for a stock to keep going up.

ASX:CBA Commonwealth Bank of Australia

Long touted as the “best bank” of the big four, The price has butted its head against resistance which coincides with the all-time high for CBA. The price has bounced off $109 twice and is preparing for a third run at it. 

CBA Daily Chart 1yr

There are a few things to note:

• A break above $109.00 would be very bullish
• Even if the price pulls back, should it stay above $94 that too would be a bullish signal
• Traders should be careful because though the price has only moderately pulled back, the OBV has fallen away quicker indicating that there is more volume on down days than up indicating the general bias may be to exit the stock.

However, if you have held the business for a very long time, ignore what I just wrote, and enjoy the dividends!

ASX:ORG Origin Energy

ORG is the subject of a takeover from a consortium with the offer price at $9.00 per share.

However, since the offer was made, the Federal government, along with its state counterparts, have responded to community pressure and are seeking to introduce a cap on gas and electricity prices.

Such a policy would detract from the value of ORG and therefore reduce its attractiveness as a takeover target. Though the price is still well above the price before the offer was made ($5.85) the market has cottoned on to the immediate risk that a lower offer will be put forward, or it could be withdrawn altogether.

At the very short-term we have support at $7.24 and a close below that would be a strong warning signal. It may be a good point for holders to have a stop loss to protect recent gains in the company.

ORG Daily Chart 1yr

ASX:APM Human Services International

Another lesson on the power of resistance/support levels. APM has been range bound for a year with the price stuck between $2.40 and $3.50. The fact the price tests these levels so frequently means these are very strong support/resistance levels.

Some traders will trade this channel and the most recent bounce off the low on 15/12/22 saw significant money come in to support the price.

APM Daily Chart 1yr

There may be some traders tempted to jump in with the hope the price will get back to $3.50. However note, either a break to the downside below $2.40, would likely see the stock price continue to fall further. This is because in the past it has been such a solid support point (tested 4 times), if it fails the flood gates could open.

Therefore, any position around here needs to have tight stop losses.

ASX:NEU Neuren Pharmaceuticals

In 6 months the price of NEU has more than doubled and peaked at $8.62 towards the end of November.

Since then the expected retracement has seen the price fall below the ATR trailing indicator and price now sits on the 50 day EMA.

NEU Daily Chart 6 mnths

Under my trading strategy when a stock falls below the ATR I set a stop. In this instance it is set at $7.14. That level has been tested a few times which indicates to me that should the price hold it could set the stock up for another run to all time highs.

If it fails, I will be out to protect the capital earned.

ASX:CTD Corporate Travel Management

In a recent webinar I was asked about CTD.

My response at the time was the stock was priced with a premium and therefore it was not unusual that a bit of steam had been released.

I think this is still a correct explanation, however the chart has told us this is the case for some time. Since entering a new downtrend, on 14/06, the price stabilised for a bit, made a new lower high, but then the downtrend continued. Such charts are pertinent for stocks like AKE discussed above.

You ignore that a stock is in a downtrend at your own peril. Sure the rebound to the new lower high created a more elegant exit for those who were shrewd enough to get out. But the price has continued to fall and reminds us that we ignore these types of patterns at our own peril.

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Information in this commentary is current as at date prepared unless otherwise stated. However, please bear in mind that investments can go up or down in value, and that past performance is not a reliable indicator of future performance. For more Important Information please refer to the Disclaimer section of this website.

This communication may contain general financial product advice. It has been prepared without taking into account your personal circumstances, and you should therefore consider its appropriateness in light of your objectives, financial circumstances and needs before acting on it.

If our advice relates to the acquisition or possible acquisition of a particular financial product, you should obtain a copy of and consider the Product Disclosure Statement (PDS) before making any decision.

The author holds interests in the following stocks mentioned in this article: AMP, NEU, NWH. This position can and will change at any time without notice.