At the moment there is so much confusion across the global markets that is makes me less reluctant to take long term positions. One day we see Chinese trade data which appears good, but there are questions about its reliability. Over in the U.S the economy appears to be improving, but what will happen when the Fed starts to wind back quantitative easing measures? Meanwhile in Japan, Abenomics is shaking up the markets and there is considerable pressure on leaders across the EU to ease up on austerity measures.
So rather than trying to guess what will happen over the next 6 months or so I am shifting to a limited shorter term trading strategy to see if some good returns can be made by focusing on the big banks and big miners. The two stocks I have decided to watch closely at the moment are Rio Tinto (ASX:RIO) and Commonwealth Bank (ASX:CBA)
Firstly let’s have a look at the 3 month and 6 month candlestick charts for the S&P/ASX 200.
S&P/ASX 200 (XJO) 6 month candlestick chart
On this chart we can see clearly the stellar run the ASX 200 had from November 2012 up until around a 5% pull-back in March. At present the market appears to be making an attempt to break out and hold above 5200 so another rally might be forming although personally, I believe another pull-back is brewing.
If we look at the shorter term 3 month chart we can see how robustly the ASX 200 bounced back after the recent pull-back.
S&P/ASX 200 (XJO) 3 month candlestick chart
This is one of those charts which can be used to form either a bullish or bearish outlook for the market. For example it could indicate that the ASX 200 is rallying strongly or a shows a market hitting or nearing a resistance level. I lean towards the view that the S&P/ASX 200 is a nearing resistance level but then again, my short-term market prediction skills are not good!
At this point I need to stress that the trading strategy I am going to outline below is not financial advice and I am not suggesting anyone buy/sell or hold these stocks. In addition please note that I manage a portfolio which contains both Commonwealth Bank and Rio Tinto stocks.
The first part of my shorter term strategy revolves around Commonwealth Bank which has been given a boost over the last few months as investors look for yield. But at just over $70 and a P/E ratio of around 15 I would not describe CBA shares as being undervalued or a bargain.
Commonwealth Bank (CBA) 6 month candlestick chart
On the plus side, CBA shares do appear over the longer term to be trending upwards as the weekly candlestick chart above shows. CBA shares also pay a dividend of around 4.9% (based on the current stock price) and the Return on Equity (ROE) for CBA is a very respectable 17.3%. So it’s certainly a good blue-chip stock however I am inclined to be take profits rather than accumulate more CBA shares at this stage.
Commonwealth Bank (CBA) 3 month candlestick chart
Now if I shift and look at the 3 month candlestick chart which shows the price movement each day, then perhaps my nervousness about the CBA share price can be justified. True the stock could keep pushing higher and I would not completely sell out of CBA (I liked the full franked yield), but I am tempted do a little selling on rallies and a little buying if the share price were to dip say 10% or so,
The next stock that is on my radar is Rio Tinto (ASX:RIO) as it appears unloved and fairly good value with a P/E of around 12 and is currently trading below $60.
Rio Tinto (RIO) 6 month candlestick chart
The dividend yield for RIO shares is just 3% but it’s fully franked and shareholders have been putting pressure on the board to increase dividend payments, so maybe there will be some action on this front at some point. Rio Tinto also does well in the area of ROE which I would rate as very good at around 20%.
Rio Tinto (RIO) 3 month candlestick chart
I moved into RIO shares at just over $55 which according to the daily candlestick chart above looks to have been a reasonable short term entry point for now. Going forward I will buy small parcels on any further weakness and look at taking profits if the Rio Tinto stock price rallies around 20% within six months.
Now for some warnings. Firstly the market is unlikely to do exactly as I want. CBA shares may keep rising for months and Rio Tinto shares may fall for months. Secondly, I am not suggesting anyone follow this strategy and it should be noted that my past ventures into shorter-term trading have been nothing to boast about.
I will review the charts and share prices for both these of stocks in around 3 months.