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All Ords Report 15 September 2015

While speculation this week was around Energy sector (XEJ) heavyweight Woodside Petroleumís (WPL) possible takeover bid for Oil Search (OSH), the real question on the lips of savvy investors is whether such corporate activity signals the end of the sectorís slide.

The Energy sector is one area of the market that you would not want to have had exposure to over the past twelve months, as the XEJ has declined by around 44 per cent in that time. Given this, you can appreciate how holding investments in this sector over the period would have a dramatic drag on your portfolio return.

Looking at the bigger picture, the monthly chart of the XEJ shows how over recent months, it has fallen below the low it formed in late 2008, and is now down by around 57 per cent from the all-time high in 2008. Whereas, the market (XAO) has instead recovered from its low in early 2009 by more than half of the prior decline from the all-time high in 2007.

Whilst my analysis indicates that the XEJ may be close to making a low, as it is trading close to a major level of support, the low isnít as yet confirmed. And WPL may have further to fall, which means that a takeover offer from WPL to buy OSH would not be in the best interests of OSH shareholders if it is comprised of WPL shares.

While some investors may be attracted to WPL shares at the moment because of the dividend yield, which is currently at around 8.2 per cent fully franked, I would never buy a stock just to get a good dividend. Why?

Put simply, if you arenít making the capital gains then someone else is. Also, as a general rule of thumb, if the analysis indicates that a stock is more likely to fall than rise over the medium term, and itís currently trending strongly down, you are likely to be putting at risk much more than the value of the dividend being offered.

WPL has been falling heavily over the past twelve months and has broken two important support levels; one at around $35, the other close to $30. While it may find support at around $26, based on my current analysis the risk is high for a fall in 2016 to at least $20.

Given this, WPL must jump a number of hurdles, including some very solid technical entry rules, to assist in minimising risk before I would consider it an opportunity.

Learn how to determine the most important levels on stocks on your watch list or in your portfolio by getting a quality education.

What do we expect in the market?

Prior to last week, the All Ordinaries Index (XAO) had fallen back below 5100 points which came as a surprise to some investors, however, such a move is common following a significant decline; the fall represents a decline of around 17 per cent from the April 2015 high. That said by mid last week it was again rising strongly well above 5200 points.

The next hurdle for the XAO is for a break clear of 5200 points, which is likely over the coming four to six weeks. Once we see the market rise for a couple of weeks above this level then itís more likely to continue towards 5400 points.

Negative news about Chinese growth and storm clouds that are supposed to burst soon if the US Federal Reserve Bank (FED) proceeds with a rate rise, are among the major causes for much of the volatility. While China continues to release data that disappoints the market, the FED are due to meet mid-week.

Often when markets have been falling heavily, as seen recently, before a major announcement like this, typically much of what it means has already been factored into share prices. Whilst I am preparing for the market to dip again slightly on the news, remember that itís not the first time that the FED have prepared markets years in advance of a change to policy and the sky hasnít fallen in, and markets have held up better than the masses expected.

Warren Buffet himself is not concerned about what lies ahead and has been buying good quality companies. He knows that when most people have been selling it is time for him to either buy or to prepare to buy. Buffet knows that when the market is testing a low it is likely to remain somewhat volatile for a number of weeks and can be more reactive to news until the low is confirmed.

The good news is that many of your favourite stocks are trading at much lower levels and this means now is the best time in twelve months to be watching for opportunities and waiting for confirmation of lows. So while you are waiting, consider the rules to use to select the best stocks for your portfolio for the coming twelve months. Those already educated will be doing the opposite of the herd and instead of being fearful will have a plan for when the market turns.

If you haven't as yet gained the knowledge to select stocks, to time your entries and exits, to minimise your risk, and to understand where stocks are likely to find support and meet resistance, then now's a good time to learn how.

Dale Gillham is Chief Analyst at Wealth Within

All Ords Chart 15 September 2015

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