We continue to watch the XJO consolidate in a tight band that has been in place since May this year.
This chart pattern is known as a “pennant” formation.
The chart below illustrates the lower high formation and the likelihood of a break to the downside.
XJO
In a recent analyst review, the forward pricing on BoQ has been gauged at 12% overvalued and adjusted lower from current levels to $11.50 over the medium-term
The note focused on the bank’s balance sheet being skewed towards residential mortgages and that a rise in bad debts will put downside pressure on operating margins.
We agree with the initial downside target of $11.50 and see scope for some range extension into the low $11.00 handle.
Bank of Queensland
The ALGO engine triggered a sell signal in Pilbara Minerals at 56 cents on the ASX close on Friday.
Shares of the WA-based lithium producer jumped over 40% last week following a report that China plans to ban new petrol and diesel engines by 2030.
We don’t believe this timetable is realistic and that some form of clarification of the policy is likely to be forthcoming from the Chinese government.
In the meantime, investors holding shares in PLS should look to take profits on long positions and look to re-enter back in the 40 cent area.
Pilbara Minerals
Amcor and Caltex are now at price levels where we’re buying the stock and selling covered calls into June 2018.
These are income trades as the payment of the Feb/Mar dividends, combined with the call income, is generating in excess of 10% cash flow whilst allowing for moderate capital growth.
We feel both Sonic and Ramsey Healthcare are now reaching oversold price levels.
Our Algo Engine has flagged the higher low structure in MFG, BTT, SUN and MQG.
Traders may want to take a closer look at these names and place sell stops below the low formed in the past few trading sessions.
This coming Tuesday and Wednesday, the FOMC will meet to discuss the next move in US monetary policy.
Over the last several months, it’s been well-telegraphed that this meeting will focus on unwinding QE and shrinking their balance sheet. The amounts and the mechanics have already been announced. Now it’s just a matter of announcing a starting date.
US financial markets have been brushing off the Fed and have done the opposite of what the Fed has set out to accomplish.
The Fed wants to tighten US financial conditions. It’s worried about asset prices and that these inflated assets, which are used as collateral by the banks, pose a danger to financial stability.
The FED has mentioned several inflated asset classes by name, including equity prices and commercial real estate, which backs $4 trillion in loans heavily concentrated at regional banks.
The FED has raised rates four times since December 2015, including three times over the past nine months. As the chart below illustrates, the relationship between the DOW Jones Index and the FED’s balance sheet is highly correlated.
As such, the FED’s decision could be a prime driver of US equities next week.
Our Algo Engine has triggered recent buy signals in SHL and RHC, we feel both of these names are now trading into an oversold price range and buying support will soon develop.
We’re now watching the price structure in energy related names as we feel Iran’s ambitions in the Middle East may develop into a flash-point to greater confrontation.
The standoff between Qatar and the rest of the Gulf Cooperation Council continues and should a conflict involving Iran occur, the risk to crude oil supply is significant.
If there is a disruption of crude oil from Iran and Iraq, the oil market goes from balanced, which it is now, to a shortfall in supply.
The graph below illustrates the potential for demand to begin outpacing current production.
RIO is likely to free up additional capital through the proceeds from the complete exit of coal and high cost aluminium smelting.
We estimate that this could raise more than $7.5 billion, potentially more than doubling shareholder cash returns in FY19
Recent sentiment around iron-ore and aluminium have helped drive RIO’s share price. We consider RIO near the top end of the valuation range.
However the share price should remain well supported, and when complimented with a covered call, we’re delivering 12% annualised cash flow.
FY 18 EBIT forecast of $9.8 billion, EPS $4.50 and DPS $2.45, places the stock on a forward yield of 4%.
Rio Tinto
Level 17 Chifley Tower
2 Chifley Square
Sydney, NSW 2000
1300 614 002
Investor Signals Pty Ltd
ABN 44 143 555 453