On Friday the Australian big banks which make up the majority of the Financials Sector finally were about to break out of its year long resistance, as it finished just above its 6,820 resistance at 6,823. The strong performance from the banks on Friday also lifted the Aussie XJO 200 index higher to 5,359.
Since the US election results were released some 2 weeks, the US markets have been on a strong V like sharp recovery which had lifted most world markets with it. This included the Australian stock index XJO 200 which up till recently had been struggling. The bullish performance of the US markets had also been the catalyst for the reversal in banking stocks higher in Australia. Which in turn significantly helped the XJO index with its recovery.
The Key Questions To Answer Going Forward
Is the Financial sector breakout a false breakout, or will the financials sector hold its bullish momentum going forward?
Can the financials continue to lift the XJO 200 higher out of its downtrend and back into an uptrend?
Lastly will the strong run from the US markets continue and support the XJO 200 index higher?
Can The Financial Breakout Be Trusted?
Since the breakout on Friday for the Financials sector excl A- REIt's was not exactly an overwhelming strong breakout, as it closed 3 points above its year long resistance. The most sensible idea would be to wait for more information from the market.
Overall the technical's looks good for the sector, however it's usually best to wait to see if the sector moves higher and can be supported by the strong momentum. If the sector can than retrace and rests on its old resistance level of 6,820 to form a new support level this would confirm the breakout.
If the sector moves higher from here this week and later reverses to close considerably below the 6,820 level, to say the current 6,580 support level this would confirm it was a false breakout. Considering this is the seventh attempt this year to break out higher there is a higher probability that it will not be able to maintain the breakout.
Note: Why The Financials?
For investors and or traders who are not aware of the significance of the financials sector in driving the overall performance of the XJO 200, I wanted to quickly highlight that financials excl A REIT's sector has the largest weighting on the XJO 200 index. With 4 out the top 5 largest market cap stocks within the XJO 200 belonging to this sector.
Big Picture Review - XJO 200
The XJO index has had a mediocre calendar year so far, however before having a closer look at what's been happening I wanted to quickly review the long term chart for perspective.
The first thing to note is that even though the index is currently been trending lower, the index has been able to hold its 5 year long term uptrend. This is despite being within a mini downtrend inside its longer setup uptrend.
You can see on the chart below that on a monthly basis it touched its trend line 4 times over the last 5 years and respected the trend before heading higher each time.
Currently in the month of November you can see that the index had fallen considerably touching a low of 5,052 which was the day of the US election results. However just like the US markets the XJO was able to rally stronger to close on Friday at 5,359 and is currently up for the month.
Since it respected its uptrend and has completed recovered from its earlier monthly losses it's behaving very bullish on a monthly chart and based on previous history since 2011 it would indicate that the index will be heading higher over the coming months.
To confirm the bullish action and a continuation of its uptrend on a monthly chart, we would need to see a monthly close above its down trend as indicated in the chart below with the rectangle box area. Otherwise its possible we could see a reversal of its uptrend if it its unable to close above the down trend and it respects the downtrend line.
Within a weekly chart (See chart below) the index does not look strong when compared to the strong uptrend performance over the last 5 years.
After reaching multi year highs in March 2015 the index has been steadily heading lower and has now formed a down trend that it has failed to close above on a weekly chart.
I have circled on the chart action the 2 times in the last 18 months where it has failed its uptrend. Once in August last year and again this year in late October. The first time it happened in August you can see the index fell sharply for several months.
Since the momentum on a weekly chart is negative at -156 and the index is still within its downtrend, it's likely we could see the index move higher in the very short term to the downtrend line (shown on the chart) before pulling back.
On the chart I drawn the 2 possible scenarios I see that could happen over the coming weeks.
1. We see the index move higher, than have a slight pullback before continuing higher and closing above its downtrend. (The Financials sector would have to hold its breakout to support the XJO 200)
2. The index moves higher, touches the downtrend line and reverses back down to 5,030 support level.
Daily Chart - Downtrend With Bullish Indicators
Whilst the daily chart is currently in a downtrend and has broken its long term uptrend, the chart has a number of bullish indicators present that could see the index reverse its downtrend.
* The momentum indicator has recently turned positive and is now at 130 after its strong rally from the lows reached on Election day.
* The current price of 5,359 reached on Friday is above the 10, 50 & 200 day moving average.
* After breaking support of 5,195 on the 9th of November the XJO 200 index quickly reversed back above its previous support level the next day, indicating a false breakout of support.
The Key Levels To Watch
For the daily chart of the XJO 200 to continues its strong move higher and reverse its current downtrend, we would need to see a confirmed close above its 5,390 resistance level. If it can close above that level and its downtrend line marked on the chart, we could see the index continue back on its previous long term uptrend.
Failure to close above 5,390 resistance and its downtrend line would result in the index most likely falling back to the 5,195 support level.
To finish the review of XJO 200, I wanted to take a look at the price action of the US S&P 500 index since the US markets usually moves the Australian index with it.
S&P 500 Stuck At Resistance
On Friday the S&P 500 index briefly touched a daily high of 2,189.89 which was just slightly below its current resistance level of 2,190.
You can see on the chart below that the index had reached the resistance 2 prior times already back in August this year before fading lower.
Considering the US index has had a strong rally higher since the Election results came out 2 weeks ago, the likely outcome in the short term is that the US index will pull back briefly over the coming days. Its even possible that after such a string of higher days over such a short period that the index could fall back to the 2,155 support level, before considering another attempt to close at an all time high.
If the S&P 500 index is unable to climb higher in the very short term, it would have a negative impact on the Australian XJO 200 index in its attempt to continue higher.
So to sum up the review there are another factors in play that could effect the XJO 200 direction. The biggest factor in the short term being the strength of the US markets, which directly impact the direction of the Australian financials sector which considerably impacts the bigger XJO 200 index overall.
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Disclaimer: This post was for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.
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I am a private trader and equities investor that loves the trading and investing world, following the markets and everything in between.