All Ords Report 13 April 2016
The Reserve Bank of Australia (RBA) is likely to remain stuck between a rock and a hard place, after the decision to dig its heels in and leave the cash rate on hold.
This month the RBA kept the cash rate on hold at 2 per cent. Perhaps you were disappointed, hoping quietly that if the cash rate was cut, you would see this trickle down as a saving on your home or investment loan interest?
If the Australian dollar (AUD) keeps rising, the RBA will feel further pressure to cut, so as to create a buffer for the economy and as the fallout from the mining sector appears to intensify. While the dollar may come back temporarily, there is a risk it could head closer to $0.80 this year.
At the time of writing, the AUD was trading at $0.76.
A couple of interesting points about the dollar are:
- Currently, it is trading just below 50% ($0.793) in price of the all-time range. This is one of the most important levels on any stock or market and you will often see prices turn at or near these levels.
- Approximately every eight years the AUD makes a significant low.
If you know this, and have a good set of rules to trade it, just imagine what difference this knowledge will make to your finances?
What does the chart indicate?
Just as I teach my students when they study our courses, I encourage you now to look at the entire history of the AUD on a monthly chart. See it for yourself. Amazingly, the AUD is right in the time zone for a low to occur. Therefore it is possible that the low occurred in January 2016.
If this is the case, the AUD will take a short breather and then continue to rise this year to between $0.80 and $0.83. This would force the hand of the RBA to drop the cash rate.
If the low is yet to come in, it is likely to meet resistance just below $0.80 and fall into the second half of 2017. This would allow the RBA to sit on the current cash rate. Therefore, watch the AUD as it trades towards this level to determine what's more likely.
Last month, the AUD closed up very strongly, having traded in a range of approximately 6 cents, which is greater than what typically occurs in a Ďnormalí month. This move increases the probability that the low is likely to be in.
As you can see, it is so important, if you want to make money in any stock or market, that you are able to confidently read important levels in price, as well as periods in time. The great thing is, this knowledge is available to you.
In my opinion, the RBAís decision is right, for now, despite calls to cut to 1.75 or even as low as 1.5 per cent.
The risk is, with the cash rate so low, will a further cut have the required effect, and how long could they keep it lower? There are lots of questions and no clear answers, despite the commentary.
Just because this approach helped the US economy recover, it doesnít mean that a further cut will provide the stimulus needed here. Remember, the cash rate in Australia hasnít been this low before, so we are in unchartered territory.
If you are searching for topical information around the share market, and trading or investing, you are welcome to listen to our latest podcasts.
What do we expect in the market?
It is true to say that there is never a dull moment in the share market. Last week was no different. The All Ordinaries Index (XAO) fell back to the support level I mentioned in a previous report, between approximately 4900 and 5000 points.
In my opinion, this is actually a good sign, to see the market come back to test this level at this time. Remember, without a proper test of this level how do we know that it wonít fall through it and continue the decline? From strong levels we see great rises.
Since August 2015, this strong support zone has held our market from a further decline. Therefore, a further test is likely to increase its strength. If you have observed the market over this time you may agree that watching the market has been akin to watching a bouncing ball. Except to say that the market will soon increase its momentum, one way or another, rather than losing it, as the ball would.
Watching the market during one of these transitions indeed requires patience, and the knowledge and experience to allow the market to tell you what it will do, rather than attempting to second guess it. Traders will do well to follow rules carefully, and in some cases, you may have chosen to increase the hurdles for your trades to minimise false triggers while the ball continues to bounce.
As is the case with the AUD, the All Ordinaries Index (XAO) is in the time zone for a low. It is important to remember that while the market may be close to commencing its next rise, the short sellers are still looking for opportunities where there is weakness, which means volatility can change quickly, and therefore itís important to be prepared.
Dale Gillham is Chief Analyst at Wealth Within