Follow us on our Journey

If 2022 continues as it has for the first week, we’re in for a wild ride. Last week we had the biggest daily rise in 5 years followed by the biggest daily fall since the GFC - and the XAO made a new all-time high.

What else has happened in the last 3 weeks since my last report? Not a lot is the short answer. The market has continued the sideways action it has been locked in for the past 6 months. I had hoped the mad rally in prices early last week might have been maintained and we would have seen a break out of a pennant pattern the XAO has been building for several months. Below is an image of how I saw this pattern a couple of weeks ago, where a break above the upper boundary of the pennant (blue dashed line) would suggest a rally towards 8,000.

XAO pennant7Jan22

However, price has fallen back from that potential breakout and if it can’t claw its way back to another all-time high and confirm a break up out of the pennant pattern, then it could fall back to 7,500 again. If that fall precedes another move up from 7,500 then the shape of the XAO pattern is more likely to be a rectangular flag pattern (both pennant and flag patterns have the same meaning – they are just different shapes).

XAO flag 7Jan2022

Both are more likely to break up and lead to a rally than break down into a correction, but a flag pattern would need to see prices break above 7,900 to suggest a good rally.

The other alternative is that price falls and breaks down below 7,500 and we would then be on the road to a correction or even a bear market - but until the market shows its hand, this is all just speculation.

I had a quick look at some of our sector charts and in summary - Energy, Financials, Resources and Materials all have bullish charts – but of course that doesn’t mean all stocks in those sectors will rise. Consumer Discretionary looks to be rolling over after a strong Covid stimulus run up (no surprises there). Gold has a very bearish chart but would seemed to have bottomed a little over 12 months ago and may be heading for a recovery – although it remains in a downtrend and therefore it may be a bit premature to buy in yet. Health Care has gone nowhere for a couple of years and is currently in a formal downtrend. IT is also in a sideways action and a downtrend.

Interest rates and inflation are potentially the ‘elephants in the room’ and were cash rates to move up to combat inflation, a fall in equities is possible. You only need to look at what a spike in US bond rates and the Federal Reserve suggesting that rate rises are on the horizon did to prices this week. Yes, the initial dip recovered but sometimes these dips are how corrections start. They take on a life of their own as spooked investors blindly bolt for the door.

The old supposed Chinese curse (although there’s no evidence of the Chinese being its source) - ‘may you live in interesting times’ could apply to share trading in 2022.

Any step back by the market will hurt speculative stocks with sky high valuations more significantly than blue chip stocks and sticking with good solid companies that are ideally nearer their lows than their highs is potentially a good defensive plan. A stock forum I belong to asked members to pick 4 stocks they felt would do well in 2022. These sort of contests are usually won not by chartists but by fundamental analysts who back speculative stocks with good but unproven prospects. Those that kick a goal make huge gains – but for every one that performs I suspect 10 more fall by the wayside.  

Anyway, I scanned the XAO and came up with the following stocks that were coming off significant lows and showing potential signs of moving up again – ie buy the break above downtrend theory.

A2M, ABC, AGL, CGC, CGF, DUB, FLT, NCM, NUF, PDN, RRL, SPL and WEB.

Only being able to pick 4 stocks meant it was something of a ‘pin the tail on the donkey’ exercise but I ultimately settled for the last 4 of those stocks (PDN, RRL, SPL and WEB) to be put forward as my 2022 picks.

Looking back at my old posts I realised that I also picked 11 stocks that I thought might do well at this time last year. The results were a mixed bag as the table on the left of the chart below shows.

ASX Sectors 2021

Of my picks, 70% rose but of those that fell 2 did so very badly. Would a trader in those 2 losing trades (BPT and IFM) have escaped damage by exiting? Probably not, as both had large one day falls that would have caught most traders out. BPT did recover 50% of its losses and made a pattern predicting same, so a knowledgeable chartist might have cut their losses then. IFM’s fall from grace was closer to the end of 2021 and while still well under water, it is making a comeback and for a trader prepared to work out this damaged trade, they may yet recover their losses.

My last Stocks to Watch in mid-December have generally done well with all but 1 rising (I haven’t kept stats of by how much). The losing pick was HUB, and having last week made a lower low I’ve removed it.

TLX has almost achieved target and with little upside left has been removed. PLS blasted past target and could be one to take profit on – so also removed.

To Stocks to Watch I’ve added PDN (potential pennant break out), TRS (an ‘on again, off again’ pick over the past year), and ADO (potential resistance break). ABR was a close contender for listing for those who want to check it out.

Good luck for 2022 – you might need it!

Contact

Robert Norman

Phone: 0428 346 951
Email: robert@sharecharting.com.au

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