All Ordinaries-S&P/ASX 200 resources index.

All Ordinaries-S&P/ASX 200 resources index.

THE resources boom that has underpinned Australia's remarkably calm journey on the wild seas of financial crisis that have sunk so many other economies in recent years is increasingly having its bona fides held up to question as many resource prices soften and costs at massive mine construction sites blow out.

So it is opportune to look at the performance of the resources index, which includes a good deal of Australia's energy businesses.

This week's analyst, Mark Umansky, a certified financial technician, full-time private trader and councillor with the Australian Technical Analysts Association, says to make sense of markets from a technical analysis view it is necessary to study the short-term (weekly) and medium-term (monthly) charts as well as looking from a longer-term perspective.

''No matter what time frame is traded, the long-term trend is your friend and thus determines whether positions are taken on the long or short side,'' Umansky says. ''The medium and short-term trends, on the other hand, are the mechanisms used for timing of both entries and exits.''

This week we study the long-term (quarterly) chart of the S&P/ASX 200 Resources Index in the context of the All Ordinaries Index. Comparing the two helps determine where the long-term trend is heading,

The chart shows a remarkable correlation between the two indices since late last decade, which demonstrates the power and influence of the resource sector over the economy as a whole during that period. However, on closer observation, we can see movements are not identical and both indices have played a game of cat and mouse, alternatively leading and lagging the other but ultimately heading in the same direction.

We are in a situation that lends some credence to the predictions of slowing for the resources sector.

The All Ordinaries followed the Resources Index down from the highs indicated by the circle on the chart but since then there has been a divergence, with the All Ordinaries making a ''higher low'' before turning upwards. But the Resources Index fell much further, making a ''lower low'' before turning upwards.

This divergence indicates a time of caution, Umansky says. If the Resources Index peaks and restarts its downward path, then the All Ordinaries should follow. Alternatively, if the All Ordinaries continues to move up then the Resources Index should follow. But with the gloomy talk about the resource sector, it may be that the Resources Index is more likely to break downward than to turn and rise, pulling down the general market as the economy suffers with falling mining exports.

Umansky says astute investors should view both charts to determine entry and exit strategies as there is a trend to peaks and troughs in each being replicated in the other. If the long-term trend is moving up for resources then look for buy-in points where short and medium-term charts turn around and make bullish reversals.

Alternatively, if the long-term trend for resources is confirmed down, use bearish reversal signals where a short-term or medium-term up-trend turns down to exit your exposures, he says.

This column is not investment advice. rodmyr@gmail.com