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One Last Step Before The Correction

Here we are. The main Australian stock index (ASX: XJO) is about to reach the main target identified since the rebound has started in last March. Actually there is one final step to climb, and this could occur today (Friday August 14). The index closed yesterday at 4,436 points, 100 points below the objective. This objective is the level around 4,550 points. Maybe a bit lower.

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As mentioned several times in previous updates published in regular Money Morning, there are several indications that clearly argue for a correction after the price action will hit this target. As I am currently writing this update, the Index is approaching the level of 4,500 points. This is probably the last bullish session before the correction. The last step is almost done.

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It’s an actively traded soft commodity and benefited of a speculative bullish trend during more than 2 years and a half, between June 2004 and early 2007. Orange juice futures are quoted and traded on the ICE (Intercontinental exchange, previously NYBOT, New York Board of trade).

The weekly chart first: prices jumped by 287% between extreme points (A and B) of the bullish trend started 5 years ago. The correction drove back the price of the high of $209 to a recent low posted at $64 in last February (point C). As well as the other commodity futures, the orange juice future has bounced back sharply and is now trading around $96. What are the perspectives now?

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“Legacy stocks” are ones you believe in – income generators and slow-growers you’d like to think you’ll pass on to your kids one day. There’s no harm in owning a collection of legacy stocks on the ASX. But there’s no harm in maximising the returns they give you, either.

Take the BHP Billiton example I showed you earlier in the week. Remember I gave you the example of two types of traders: one who will steadfastly remain “long” on BHP. He loves the stock and will never let go. The other also likes BHP long-term, but is keen on limiting losses on corrections and profiting from rallies.

Fundamental analysis may help the first investor in picking BHP outright. But it will be much less useful to the second investor – the one who wants to track and profit from movements in the underlying price.

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This consumer good stock (ASX: PBG) soared during the months of March and April. It has retraced roughly one third of the huge decline posted between September last year and last March (between points A and B on the chart). During those 6 highly bearish months, PBG had plunged by 94%, from a high of $2.38 to a low of $0.14.

Actually this plunge was “only” the second wave of a larger bearish trend that really started nearly two years ago, in July 2007, when the stock was trading above $3.50.

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