A momentum trader's view of the ASX

Australia’s ASX index is trading in a range, but keep an eye on breaks of 5250 or 5334. ASX Limited and Greencross are this week’s momentum picks.

Australian Stock Exchange
Source: Bloomberg

The ASX 200 seems fairly comfortable in a 5300 to 5400 range and a focus on the daily chart shows the 20-day moving average starting to flatten out. The two-hour chart (below) better shows the bids coming into the market around 5300 since 9 May (as circled). There was a brief period last week where price moved through support, but the buyers have stepped back.

I’m happy to stay neutral on this index, turning more bearish on a convincing break of 5250 and even more so 5200. A closing break above 5334 (the 38.2% of the recent sell-off) would be positive and suggest a stronger rally into 5400 and the top of the range. 

The forward price-to-earnings ratio for the ASX pulled back a bit from its extremes last week, but this was fully driven by the pullback in the index from the 5405 level to 5320.

The long and short of it

Bank of Queensland did not have a good week last week. It lost 5.4% and saw the biggest weekly increase in short positions of any stock in the ASX index. Much of this appears to have been precipitated by a Goldman Sachs report about the Australian banking sector.

Goldman lowered its rating on Bank of Queensland to 'Neutral' from 'Buy'. The investment bank expects two more rate cuts from the Reserve Bank of Australia this year, in August and November, with the policy rate ending the year at 1.25%. These lower rate expectations are going to impact the net interest margin of Australian banks, and are set to hit Australian regional banks the hardest.

Sirtex Medical Ltd provided a market update on 1 June and lowered its full-year sales growth forecast to 15-17%, from a projected 18-20% previously. It still expects North American sales to grow at 18-20%, but EMEA and APAC growth is set to drag on its previous forecast. The stock lost 8.1% on the week, and plenty of short positions that had accumulated throughout May looked happy to close out around A$29.00.

Unfortunately for the stock, even after a big decline in short interest, a number of investors are still holding onto open short positions looking for a drop to A$27.00.

Momentum picks

ASX Limited released its monthly activity report and showed a 23% increase in year-to-date cash market volume compared to last year. This helped it finish up 3.1% on the week and close above its key resistance level of A$45.00. If volumes continue at this pace throughout the year the stock is set for further gains.

Greencross on Friday managed its highest close since 2 April 2015. The stock has continued in a steady uptrend since 26 April and looks set to continue higher. Despite sitting on quite a high forward price-to-earnings ratio of 21.2, the analyst consensus is still very bullish on the stock with four buys, five holds and no sells. GXL, the pet care company, does not look like its heading for a Pets.com demise just yet.

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