ASX breakout on RBA rate cut

By Colin Twiggs
February 3rd, 2015 6:00 p.m. AEDT (2:00 a.m. ET)

Advice herein is provided for the general information of readers and does not have regard to any particular person's investment objectives, financial situation or needs. Accordingly, no reader should act on the basis of any information contained herein without first having consulted a suitably qualified financial advisor.


Performance Update

Research & Investment's S&P 500 Prime Momentum strategy returned +22.65%* for the 12 months ended 31st January 2015, compared to +14.2% for the S&P 500 Total Return Index.

S&P 500 Index

The ASX200 Prime Momentum strategy returned +7.6%* for the period, compared to +12.5% for the ASX200 Accumulation Index. ASX stocks have underperformed over the past year, but macroeconomic and volatility filters continue to indicate low to moderate risk and we maintain full exposure to equities in expectation of a recovery.

Divergence between the ASX 200 and S&P 500 may continue and investors should consider splitting their investment between the two markets.

* Results are unaudited and subject to revision.

ASX breakout on RBA rate cut

Australia's ASX 200 broke through resistance at 5660, signaling a fresh primary advance after several months in the doldrums. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Retracement to test new support at 5550/5650 is likely, but the target for the advance is 6150*.

ASX 200

* Target calculation: 5650 + ( 5650 - 5150 ) = 6150

The surge was driven by an RBA rate cut to a new low of 2.25%.

The cut was largely unexpected. My view was (and is) that a cut is unnecessary, given that falling commodity prices (especially crude oil and LNG) are weakening the Aussie Dollar. Now that we have one, further cuts are likely.

US Markets

The S&P 500 continues to test support at 2000, but rising 13-week Twiggs Money Flow indicates long-term buying pressure. Breach of 1980/2000 is unlikely, but would warn of another correction. Recovery above the descending trendline would suggest the start of a fresh advance.

S&P 500 Index

* Target calculation: 2000 + ( 2000 - 1800 ) = 2200

CBOE Volatility Index retreated below 20%, but only breakout below the triangle would reassure that the recent up-surge has passed — and risk has reverted to 'low' from 'moderate'.

S&P 500 VIX

Europe

Germany's DAX is heading for 11000* after breaking resistance at 10000. A 13-week Twiggs Momentum trough above zero confirms the primary up-trend.

DAX

* Target calculation: 10000 + ( 10000 - 9000 ) = 11000

The Footsie continues to test long-term resistance at 6900/7000. Breakout would signal a fresh primary advance, with a long-term target of 8000*. 13-Week Twiggs Money Flow is rising, but it will take considerable buying pressure to break through the 1999/2000 high.

FTSE 100

* Target calculation: 7000 + ( 7000 - 6000 ) = 8000

China's Shanghai Composite Index is retreating from resistance at its 2009 high of 3400. A small decline in 13-week Twiggs Money Flow indicates medium-term buying pressure is weakening. Reversal below 3100 would warn of a correction. Breakout above 3400 remains as likely, however, and would signal a fresh primary advance. The stimulus effect of lower energy prices may allow the PBOC scope to rein in monetary expansion, which would have a dampening effect on the current stock boom.

Shanghai Composite Index

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~ Thomas Jefferson

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