Weekly game plan 7 June 2020

It is amazing how having a bias in the market can work against you as a trader and investor. We’ve been holding onto a view that the market, particularly the U.S. market, had bounced too hard on false hope and that it was due a second leg down. This view in itself might not have been misplaced as there is a strong logical case to be made as to why equities/asset prices are currently not representative of the global economic reality. It was a firm case that we’d backed, for the most part, and one that fitted the narrative that we’d clung too.

This is evidenced in the weekly game plan 17 May 2020 post as we’d outlined a large variety of short setups on the local market. Up until this time we’d been looking for Rand strength and a move back toward the R16 to the Dollar area, which would have been more in line with looking longs in the market in general as Rand strength would indicate ‘risk on’. However, on the 17th, we switched that Rand view to a bearish one as it was the only signal that was actually giving us advanced warning that a ‘risk on’ scenario might be on the horizon. Thus, we forced our view onto the market. What ended up happening was of course that Rand strength came into the market and the ‘risk on’ scenario was in play.

Another example would be the weekly game plan 31 May 2020 post in which we incorrectly clung to the bearish outlook on the S&P500. We’d been on the lookout for signs of a bearish reversal from resistance in a consolidation zone just beneath longer-term moving averages, but during the week just before the post on the 31st, both the resistance zone and the longer-term moving averages were bullishly broken. This was in fact a buying signal, however we chose to impose our view that it could ‘potentially be a fake break out’. Again, because it suited our narrative and bias that the world economy was in serious trouble and asset prices were mispriced.

The bearish view that we’ve had may still turn out to be right, but as anyone who has been in markets for long enough knows, being early is the same as being wrong. During the last week we finally capitulated and closed our short positions. Luckily the there was no major damage as we had 3 put options on the SPY ETF that had planned risk-reward ratios of between 1:10 and 1:35, with very little actual risk to the portfolio. Further we managed to close these out at a small loss before the options themselves expired at zero. On the local front we had only one short position pn Sanlam (SLM) which stopped out for a full 2% loss once it breached our hard stop level. A small price to pay for being wrong and we are once again grateful for strict risk management.

We are also grateful for the diverse views of our market strategists who advised offshore advisory clients to be greedy when others are fearful (which they posted to the international outlook blog on the 19th of March 2020). The ETF purchases made mid-March have been very profitable indeed as the strategists managed to almost perfectly pick the bottom and offshore accounts still hold these positions, as well as a number of other oil and related industry ETFs that we’d bought in recent weeks (in accordance to our views as expressed in the 21 May issue of Finweek).

All in all, we’re glad to have the opportunity to sit back and reflect on the errors that we make. It gives us an opportunity to take the lessons they have for us and use them to remind ourselves to remain open-minded and flexible in future, especially when it comes to shorter-term trading.

Now, let’s look at some charts.

S&P500

It is clear now that last week was a buy. We’ve missed the bus here on the short-term trading side of things and do not want to chase it now. We will wait for a clear setup to emerge again before getting involved. In truth, the long out of this consolidation was a great setup! Well done to those who managed to trade it.

Gold

Gold is still in the range that it’s been in for several weeks now. We think that there could be a good break-out trade here once the consolidation breaks. We must mention that this range is rather big and the moves between the two consolidation extremes have been a lot more volatile than what is usually experienced during ‘non-crisis’ times. In the event that markets pair back for a correction next week (which is rather unlikely, but not impossible), Gold could be a good long trade to the top of the range.

USDZAR

We’ve left our incorrect projection for a much weaker Rand on this chart for now as a reminder that getting swept up in the market hysteria is folly. We note though that the USDZAR has had much of the move back down to support that we had been looking for all those many weeks ago. We wonder if it will continue to strengthen to hit the R16.30’s before turning, or it it has the legs to get to the R15.70’s.

Anglo American Platinum

Interesting to see that AMS has managed to get above longer-term moving averages and has formed a consolidation just above them. We’ll be watching the consolidation extremes for signs of a break out in either direction. Judging by recent market action, that break is likely to be toward the upside, but time will tell.

*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.

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