The market mechanics are starting to feel broken again… Equities are halfway to completing a V-shaped recovery, Tech stocks in the US are green for the year (this part makes sense actually), Volatility is coming down fast and markets are calming down. All this while the global economy has basically shut down and literally millions upon millions of people around the world has lost their jobs…? It just feels like the market is disconnected from reality at this stage. That said, ‘catalysts’ are often needed before markets really move. That catalyst could come in one of many forms (just not another Black Swan please), although we think the most probable is that the trade deal between the US and China falls apart. Our thinking is that the US and China will both go back on various agreements made late last year, and we likely see the return of an ever-escalating tariff war between the two countries.
As mentioned, the market feels a little disconnected from reality here. The SPX is still in the resistance zone and under the 126 day moving average, with a few more bearish confirmations taking place from a momentum perspective. Our bias here is short and we think that starting to build a short position here is advisable. Stop losses could be placed above the 3020 level with targets around the 2008-highs.
Interesting consolidation forming here between R18.00 and R19.00. Our view is still slanted toward ZAR strength, although note that negative news flow and sentiment around potential escalations in the trade war could create a fair amount of USD strength, and thus could put pressure on the ZAR. At this stage, a break of either support or resistance could be used as a trigger and we see no new trades here until either one of those levels are broken.
Somewhat against our view of a stronger ZAR in the short-term, but this stock is starting to look very bearish to us. We note a number of sell signals starting to form (still to confirm and trigger). INP is also a strong relative underperformer and firmly in a down trend. In the event of a larger scale market pullback we would like to be trading with the trend here.
Kumba Iron Ore
We note a number of reasons to be looking for shorts in KIO. The overall macro-environment, we believe, does not bode well for industrial metals in general (at least not in the short-term). The stock is also in a firm downward trend, there are signs of bearish divergence, momentum appears to be rolling over and turning bearish and the stock is a firm underperformer. We think that using the opportunity to enter into a short position while the stock is above the 126 day moving average could maximise the risk-reward on this trade.
The week ahead brings the much anticipated bitcoin halving! We’re aware of the fact that almost the entire market is expecting bitcoin to hit the moon after the halving, although we worry about whether or not the majority of participants have a realistic expectation of the timeframe in which this “will’ happen. While we are of the belief that bitcoin will eventually land on the moon, we do not think that it will be next week. Exactly how the halving plays out, we are not sure. We are however willing to buy when BTC if and when the support level (bottom of channel line) is tested and/or when the resistance level is convincingly broken. We just want to offer a warning to those thinking that it’s a sure bet here… when everyone is thinking the same thing, chances are that nobody is really thinking.
*Please note that these trade ideas form part of a larger weekly plan and the value of financial products can increase as well as decrease over time, depending on the value of the underlying securities and market conditions. The risk of loss arising from trading in Contracts for Difference can be substantial. You should carefully consider whether such investments are suitable for you in the light of your circumstances and financial resources.