The Australian stock market appears poised to head lower this week and there are signs that the rally which started in the middle of 2012, is turning into a decent sized correction. Over the next week or so the key areas to watch will be the mining stocks, banking stocks and gold prices. But already if we look at some charts in these areas we can see a trend developing.
The first trend that is developing is a fairly broad-based stock market correction which we can see in the 3 month candlestick chart of the S&P/ASX 200 Index below.
S&P/ASX 200 Index 3 month candlestick chart
Towards the end of February the rally started to come under pressure but it regained ground into March only to give up these gains plus some. We are now getting close to a support level around 4800 which I expect to be tested soon.
To see what is dragging the S&P/ASX 200 (XJO) down, let’s have a look at the stock price charts for Commonwealth Bank and BHP Billiton since the ASX 200 is basically moved by banking and mining stocks.
BHP Billiton vs Commonwealth Bank 1 year chart
A few aspects of the chart above are worth pointing out. Firstly we can see how CBA and BHP shares trended upwards from mid-2012 until fairly recently, as did most mining and banking stocks within the ASX 200.
But in February the mining stocks started to come under pressure for reasons such as the continuing economic saga in the EU and some questions about the economic numbers coming out of China..which I personally always question. Thus the fall in the mining stocks started to put the ASX 200 Index under pressure, however for a while the bank stocks kept heading upwards which limited any falls.
However once the banking stocks started slipping back (which we can see reflected by the CBA stock price above) then there was only one place for the ASX 200 to go…and that was down. This downwards trend will continue as long as the bank & mining/resources shares keep slipping backwards.
If we now look at the 3 month candlestick chart for CBA shares we can see clearly how the fall in the stock price developed.
Commonwealth Bank (ASX:CBA) 3 month stock price chart
This chart suggests to me that the overall market has further to fall because I expect the banking stocks to slip back some more. Why? Simply because I see no reason for them to keep heading higher since by my reckoning, they are now in the over-bought range. As for the mining stocks, well I turned bearish on them a while back and believe they will remain under pressure for the rest of this year at least.
Next I will look at gold prices in Australian dollar terms using the chart for the Exchange Trade Fund ETF:GOLD.
ASX ETF:GOLD vs All Ordinaries Index 1 year chart
The chart above shows ETF:GOLD versus the ASX All Ords Index and clearly gold has not done well this year compared to stocks. However over the short term we may see gold do better than stocks if the stock market correction we are seeing drags on for a few weeks.
Over the last two years, ETF:GOLD has also done very little while over the same period the Telstra (ASX:TLS) stock price for example has risen about 60%. (see chart below) This illustrates that even when the stock market is struggling, the right stocks can provide investors with healthy returns. Of course picking the right stocks is a challenge and that is easier said than done!
ETF:GOLD vs Telstra (ASX:GOLD) 2 year chart
So over the next few weeks I expect the market to drift lower, but during this time some buying opportunities will arise. At this stage my own strategy is to just sit back and see how the correction plays out for now. I will review this stance if the 4800 support level is broken and the market enters what I judge to be the over-sold range again.