Why might it be helpful for ageing (and other) investors to occasionally study index charts, and not just the charts of the stocks in their portfolio?

One response, applicable to the charts of the various Australian market sectors, might be to compare relative sector performance, looking for out- and/or under-performance as a guide to portfolio management.

Market replicating indices such as the XAO, an index of the largest 500 shares on the ASX by market capitalization, provide an overall perspective of market sentiment. This is particularly helpful to those who use gearing to increase their exposure to the market. In a downturn, gearing magnifies loss. Conversely however, a bullish trend-reversal might signal an end to such risk.

Should small retail investors use gearing strategies?

Many investment products such as options and CFD’s are structured with inherent gearing and risk. Since retiring more than 20 years ago I have discontinued their use, but still access a Commsec. Margin Loan, which enables me to gear an equity portfolio when considered safe.

The loan is variable and tax-deductible, whilst capital gain income within the tax-free threshold is not taxed. It makes sense for me therefore to take some profit when it is ‘on the table’, and to sell if price decline appears imminent.

Whether or not gearing is appropriate for you depends on your risk tolerance, your financial knowledge, and market nous. Whether gearing will help increase, and hopefully not diminish your wealth, will be determined by your vigilance in monitoring your portfolio and following a sound strategy.

Observations from the 6-month All-Ordinaries Chart above.

When it comes to interpreting charts, please remember to distinguish between objective technical observations a chartist might make on the price plot being studied, and the deductions (or interpretive story) one might draw. Inferences one might make as to causation are subjective, and since many price movements are multi-factorial, they may be simplistic, erroneous or over-ridden by subsequent events.

The stand-out chart feature of this chart in my opinion, is the 2-month decline in the index from 20th April 2022 until 20th June 2022. At 16.9%, from a high of 7923, to a low of 6582, it proved to be a significant fall, which could have rewarded short sellers. If an investor with gearing from a margin loan had reduced their indebtedness, up to 2 months interest might have been saved, and more importantly the stock sold earlier might then have been re-purchased more cheaply.

Sell-off at this time of the year is commonly attributed to stop loss selling to reduce capital gain tax liability. If so, one could expect a recovery in the index with onset of the new financial year.

How has the 22/23 financial year started?

Within 6 weeks of the new year, the index had in fact climbed back above 7000 points, reaching 7384 on the 16th of August. Since then, there have been the following technical signals, all bearish:

• A double top trend reversal pattern.
• A large range bearish engulfing pattern with a fall of 174-point, August 29.
• Decline below the 120-day exponential moving average at 7243, August 30.
• A 2nd, large range market decline, to just above 7000 support level on Sep 2.

Such a sudden, widespread market fall inevitably creates investor nervousness, particularly when it comes just before the trading bogey months of September/October for market crashes.

Is this pause in trending a foreboding of further falls to come? Your view of current news events which could have contributed to the loss in market confidence is likely to colour your market perception, and possible change in strategy.

Sensibly however, technical analysts are wary of this, because of the multiplicity of facts and opinions, and the risk of disinformation. Suffice it to say that it has been the onset of global inflation, and two quarters of negative GDP growth that has spiked fears of recession, due in part to the conflict between Russia and Ukraine.

Conclusion

My approach is based on the technical observations only. Eliminate borrowings and reduce exposure to all but two quality fully franked income yielding stocks. This way, there are funds available to return to the market as it recovers.

Categories: Chart Review

Tags: ASX 200 charts, Trading