At its meeting today, the Board decided to raise the cash rate by 25 basis points to 3.25 per cent, effective 7 October 2009.

The global economy is resuming growth. With economic policy settings likely to remain expansionary for some time, the recovery will likely continue during 2010 and forecasts are being revised higher. The expansion is generally expected to be modest in the major countries, due to the continuing legacy of the financial crisis. Prospects for Australia’s Asian trading partners appear to be noticeably better. Growth in China has been very strong, which is having a significant impact on other economies in the region and on commodity markets. For Australia’s trading partner group, growth in 2010 is likely to be close to trend.

Sentiment in global financial markets has continued to improve. Nonetheless, the state of balance sheets in some major countries remains a potential constraint on their expansion.

Economic conditions in Australia have been stronger than expected and measures of confidence have recovered.  Some spending has probably been brought forward by the various policy initiatives. As those effects diminish, these areas of demand may soften somewhat. Some types of capital spending are likely to be held back for a while by financing constraints, but it now appears that private investment will not be as weak as earlier expected. Medium-term prospects for investment appear, moreover, to be strengthening. Higher dwelling activity and public infrastructure spending is also starting to provide more support to spending. Overall, growth through 2010 looks likely to be close to trend.

Unemployment has not risen as far as had been expected. The weaker demand for labour over the past year or so nonetheless has seen a moderation in labour costs. Helped by this and the earlier fall in energy and commodity prices, inflation has been declining, though measures of underlying inflation remained higher than the target on the latest reading. Underlying inflation should continue to moderate in the near term, but now will probably not fall as far as earlier thought.

Housing credit growth has been solid and dwelling prices have risen appreciably over the past six months. Business borrowing has been declining, as companies have sought to reduce leverage in an environment of tighter lending standards. But large firms have had good access to equity capital and access to debt markets appears to be improving, helped by the better-than-expected economic conditions and increased willingness on the part of investors to accept risk. Share markets have recovered significant ground.

Interest rates facing prospective borrowers on fixed-rate loans have already risen to some extent, as markets have anticipated a higher level of the cash rate. For many business borrowers, increases in risk margins will still be occurring for some time yet. In addition, the exchange rate has appreciated considerably over the past year, which will dampen pressure on prices and constrain growth in the tradeables sector. These factors have been carefully considered by the Board.

In late 2008 and early 2009, the cash rate was lowered quickly, to a very low level, in expectation of very weak economic conditions and a recognition that considerable downside risks existed. That basis for such a low interest rate setting has now passed, however. With growth likely to be close to trend over the year ahead, inflation close to target and the risk of serious economic contraction in Australia now having passed, the Board’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy. This will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead.

Timing Your Entry into Long-Term Blue Chip Holdings

Buying and holding a particular stock over years does not mean being passive on the markets. Many investors would love to be able to determine exit and entry points on stocks that they want to hold. It means that instead of buying and staring at your screen without any action, you take advantage of the trends that constitute a price development and offer you highly favourable entry and exit prices.

This means, for example, being able to exit the stock when an uptrend has completed, when the stock is clearly overbought or when a chartist pattern suggests a trend reversal. Why would you exit it? In order to buy it back lower and then lower your initial entry average price. It’s a stock you want to own. But if you can use a chart to help you but it cheaper with better timing, why wouldn’t you?

Let’s take an example with the chart below from BHP Billiton (ASX:BHP). And let’s assume two different investors, happy owners of BHP stocks bought at $12 in 2004. The first one wants to remain “long” BHP over the long-term. He bought them and he wants to hold them without any action. The other one also wants hold BHP over the long-term, but is worried about corrections and interested in the idea of profitably trading any identifiable trends in the stock’s history.

Does the chart help the trader? From 2004 to 2007, it was an easy, quiet and profitable investment as the stock rose from $12 to $47 (October 2007). Buying and holding was sensible. However the last two years have been stressful and bearish.

However, there were clear signals that could have been very useful for this investor willing to take advantage of sharp moves. If he was willing to trade the stock rather than simply to buy and hold, profits were there for the taking (provided he timed his moves correctly).

In other words, a successful strategy could have been to sell BHP when the bullish trend was exhausting itself before buying in back it later, on lower levels. Not all investors may want to do this. But my aim today is merely to show you that it IS possible.

I’ll show your more in a moment how to use charts and technical analysis to time your moves. But let me be clear that market timing is not about doing short-term in-and-outs on stocks that you don’t care about. That’s fine. But that’s speculation. Market timing is about making additional gains from stocks that you want to keep in your portfolio for the long haul.

A timing service that combines chart patterns with basic technical analysis (and some discretionary judgment) may help you limit your downside risk in blue chip stocks while making gains from regular trading patterns possible. It also turns a problem into an opportunity.

This tactic of putting yourself in the right place to make a profitable move is not available to most institutional fund managers. A fund manager whose strategy is to be “long-only” knows that he will have to face negative monthly returns. He cannot sell.

Most of the time, his job is to deliver a better performance than the benchmark of reference, typically a stock index. Even though he can’t short-sell, he can add some value (returns) to his fund by using market timing to reduce the exposure of the fund during bear markets, while being fully invested during bull markets. Market timing is indeed essential to lower volatility and increase returns through risk exposure modification. It sounds complicated, but it really comes down to riding in the stock’s slipstream and timing your move, whether it is bullish or bearish.

Retail investors are less familiar with this as they don’t have time or the tools to manage their portfolio efficiently. They usually don’t manage their portfolio very actively. For instance, you may reckon that you want to hold BHP over the long-term as it should take advantage of the commodities boom. But with a little analysis from the charts and the technicals, you can ride in the stock’s slipstream and could have avoided a significant part of the plunge occurred last year when the stock fell from $50 to $20 in six months.

Blue Chip Trading

In a normal market, you would not think of trading the blue chips. But this is not a normal market. Some stocks are up. Some are down. But there is no real underlying trend that gives you confidence about the general direction of stocks.

That’s why using some tools to put you in the right place to profit from moves in blue chips can be surprisingly profitable (I hope). The idea is very simple: in a volatile market, buffeted by uncertainty, being in the right place to make your move can boost your investment returns AND save you from losses.

I believe “Slipstream” trading (as I call it), based on accurate trading patterns and technical indicators, can help you make surprising large profits in a short period of time off a blue chip. And this is on both the long and short side! Trading opportunities can be identified on stocks that you don’t consider as long-term investments.

To summarise: “Slipstream Trading” can give you portfolio optimisation and discrete trading opportunities. It’s based on medium and long-term technical indications and chartist patterns, it aims to detect, trend completions, overbought/oversold configurations, support and resistance levels on blue chip stocks. Its objective is simple: identify optimal entry and exit points on the most popular Australian stocks (among the S&P/ASX 200).

“Investing Collectively” for Large Cap Profits

Above, I’ve emphasised the importance of market timing to your investment portfolio. Yes, it’s not easy to do (some would say impossible!). But knowing when to enter and then exit stocks isn’t just for speculators.

It can benefit large cap investors too - spectacularly-if you get it right. I’m not talking about telling you what to buy or how to build your portfolio. Rather a sharp bunch of indicators that provide the right entry and exit points on ASX 200 stocks that YOU want to trade.

Take the BHP Billiton (ASX:BHP) example above. I showed that - even if you want to be a long-term holder of a stock - you can still profitably trade its ups and downs over months and years.

But there’s another benefit: by taking advantage of information provided by both the price and the volume actions translated into a chart, you can also pick optimal entry points into stocks you’ve never owned but want to buy into.

Say you’re looking at Paladin Energy (ASX:PDN). You would be amazed how useless it can be to spend hours analysing the fundamentals (the financial ratios of the underlying company and the macroeconomic trends of the sector and of the global economy) when you can get all the synthetised information in a chart.

Not everyone agrees with this of course. But I do. And the chart confirms my analysis! In November last year, my scans indicated a “double bottom” in Paladin which was preceded by a decline that set in well before the October sell-off. Further analysis indicated that this was the optimal time to open a position in Paladin at $1.68. Eight months later, the stock trade above $4.73.

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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On a weekly perspective, it sounds quite bullish. Most of the indicators fell to low levels at the beginning of the year and have strong potential upside. The MACD, for instance, has been bullish since early January this year, therefore before the actual rebound generated later in February. It has also just found some support recently on its moving average when the price action sharply corrected during the month of June.

On a daily basis, it’s a different story. A sharp and fast rebound followed the correction of June and drove the price from $73 to $105 in less than a month. That’s a 44% jump with a surging volume. As a result, the commodity has been clearly overbought and the indicators turned bearish last week. The RSI surged and reached its overbought zone. It has already crossed below its signal line and is now plunging. The Chaikin Money Flow illustrates quite well also the rising volume that created this upside move in July. It has peaked and is now slightly curving downward. This suggests that a deleveraging is probable, which means profit-taking and therefore further price retracement.

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The current level is an intermediary support but should not hold. The next target may be the level of $90, which is actually the last significative one before the low of $73.

On longer term, the price objective is clearly on the upside, probably around $120, which is the 38.2% Fibonacci retracement of the 2-years decline occurred between 2007 and 2009 (see weekly chart).

Macmahon Holdings Limited (ASX:MAH) operates as an engineering contractor focused on delivering specialised services to clients in Australia, New Zealand and Malaysia. The company’s core businesses comprise open mining and crushing, underground mining and civil engineering.

The stock climbed from less than $0.10 in June 2001 to $0.97 in February 2007 at a regular pace. However it really took off in early May 2007 as it was trading around $0.80, to reach twice the level of $2 a few months later, in November 2007. It’s a 150% rise (between point A and point b on the chart).

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The stock has corrected this large increase and has been trading since within a consolidation phase. The first retracement move drove the price until the 50% Fibonacci ratio (point C) and towards the 61.8% ratio one month later (point D). The fact that the price action eventually bounced back on this level means that the outlook is still positive on the long-term, and that new attempts to test the historical highs may be possible.

Recently, on August 13 and 19, two lows have been posted on the long- term support line (through points A, D and E). As a result, the price rebounded and should test now the long-term resistance line (through points B, F and G). The trading envelope is narrowing.

The MACD has triggered a bullish signal as it curved upward and crossed above its signal line. Other oscillators confirm this therefore a further move on the upside is likely.

An interesting complement to the MACD is the TRIX indicator. TRIX displays the percent rate-of-change of a triple exponentially smoothed moving average of the security’s closing price. This triple exponential smoothing is designed to filter out “insignificant” cycles.

Here the TRIX changes direction and crosses above its signal line. It confirms the MACD indication. The stochastic oscillator is also positive but shows that extreme levels could soon be reached. The theory behind is that in an upward-trending market, prices tend to close near their high.

Therefore the level of $2, the historical high price, will be probably a strong resistance to the current bullish price action. Today the stock is trading at $1.825. A jump to $2 is a 9.6% further rise. At this level the stock would be probably overbought on the short-term so a pull-back would be expected.

The stock would need to clear this resistance and cross above $2 to get new fresh bullish momentum. On the downside, the main support line is set around $1.55.