False Break of the High!

In the early days of Port Phillip Publishing, we all used to work in a small office in Fitzroy Street, St Kilda. In the dodgy laneway that our modest offices backed onto, you could often hear the junkies from the nearby Gatwick Hotel screaming at each other.

There was the occasional murder back there as well…

Anyway, as we were all in a small room, you could hear everyone and have discussions regularly. Our trader at the time, Murray Dawes, would often have his own conversation going on. This was usually directed at his screen or ‘the market’, as represented by the charts on his monitor.

One of Murray’s favourite sayings was ‘false break of the high!’ Although directed at no one in particular, it usually generated some good conversation.

In traders’ jargon, a ‘false break of the high’ means that a stock or index had tried to break out to a new high, and failed.

For the short term trader, this was a bearish sign. When a stock price or index moves to a new high (or ‘breaks out’ to a new high) it’s a bullish sign. But when that breakout fails, it’s bearish.

The reason I mention this is because the ASX 200 looks to have just experienced a ‘false break of the high’. The question is, just how bearish is it?

For some context (and so you can see where my bias lies) I’ve been bullish on the Aussie market all year. I’ve written here and in my Crisis & Opportunity advisory that at some point you’ll see the ASX 200 break through resistance at 6,000 points.

But when that breakout happened last week, I decided not to write anything about it. I was conscious of Murray’s ‘false break of the high’ playing out.

Why? Because the market had simply rallied too quickly. As you can see in the chart below (which doesn’t include today’s down move) stocks had been on a tear since October.

A convincing breakout should always involve a strong move higher. But in this case, the rally above 6,000 fizzled pretty quickly. That’s because stocks had already rallied strongly during October. There just wasn’t much short term buying power left.

ASX 200 15-11-17

Source: Bigcharts

[Click to open new window]

In addition to that, there was a bit of hype around the move above 6,000. When that happens, you’re better off keeping quiet and seeing what unfolds.

Ideally, you want to see a move higher on scepticism, not optimism. That didn’t happen.

So now you’re seeing the reaction. Stocks are retreating and the ASX 200 is back below 6,000. 

What does that mean for the Aussie market?

I don’t think it’s that big a deal. The market isn’t ready for another move higher. Maybe the index will correct a few hundred points before making another move towards 6,000?

Maybe the failure at 6,000 points (again) is an ominous sign. Maybe we’re heading into a bear market?

The truth is that no one knows. You have to keep your mind open to all possibilities.

For now, I’m still bullish. But I know that the recent market action is a setback to that view. I could be wrong.

Having said all that, why worry about the market anyway? It’s only an index.

That’s true. But getting the overall movement of the market right allows you to position your portfolio for maximum gains.

It allows you to see corrections for what they are — pullbacks within a larger upward trend — rather than the start of a bear market. You need a framework to invest.  Having a view on the overall mood of the market is — for me at least — a part of that framework.

But you don’t need the market to go up to make money. Yesterday, for example, two of the larger stocks in the Crisis & Opportunity portfolio had standout days, despite the broader market having a shocker.

Computershare [ASX:CPU] announced a profit upgrade for FY18, and the stock finished 4.5% higher. We’re now up 42% on that trade.

And Incitec Pivot [ASX:IPL] also announced healthy results for FY17 and a $300 million on market share buyback. The market liked it and IPL finished up nearly 5% for the day. We’re up around 15% on the trade, and I think there’s more to come as the depressed fertiliser business slowly turns around.

The point is you don’t need the market going up every day to get good results. Unless you’re in the banks — they are the market! You just need to search out companies with good prospects and reasonable valuations.

But it does help to have a bull market tailwind. And right now, I think the bull market is still intact.


Greg Canavan,
Editor, Crisis & Opportunity

Greg Canavan is a Feature Editor at Money Morning and Head of Research at Port Phillip Publishing.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Crisis & Opportunity. As the name suggests, Greg sees opportunity in a crisis. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines traditional valuation techniques with charting analysis.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the basic, costly mistakes that most private investors do every time they buy a stock.

To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Money Morning here.

And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here.

Official websites and financial e-letters Greg writes for:

Money Morning Australia