As anticipated, the FOMC made no changes to interest rates last week and are unlikely to make any real moves without very clearly communicating it to the market. Our focus now shifts to the Jackson Hole symposium to be held near the end of the month. We think that Jerome Powell will likely use Jackson Hole as the platform on which to start communicating tapering warnings to the market. At some point the FED must admit that the printing is creating inflation. Although it will likely not do so directly, we can watch the language use around the topic. It was interesting to note that Powell essentially admitted that he does not know ‘where’ inflation is coming from. He also stated that inflation is likely to stay around longer than initially anticipated. Understandably, the market is being given mixed signals by central banks, and thus is producing mixed signals of its own.
Interestingly we say the U.S. Dollar weaken during the last week. We’ve been eyeing a break out from below the current resistance for some time, although the break out has not come. Should we see another week of Dollar strength, that could translate into strong performances on ‘local’ stocks such as banks and retailers. An interesting week no doubt lies ahead.
We remain cautious of global equity markets in general as we are seeing a number of mixed signals. To be specific, the tech space has been probably the primary driver behind market performance over the last few years and it is here that we are starting to see conflicting signals.
Offshore trade ideas
S&P 500 (SPY)
Nothing too fancy here right now. SPY has been trading in a small range that could offer a decent risk-reward trade when it breaks. At this stage we are agnostic on which way this might break. Probably a slightly higher probability for a break lower, although we will wait for a trigger of sorts before taking any short-term trades here.
Russell 2000 (IWM)
The IWM is still somewhat of the canary in the coalmine for us. Looking at how it is trading in the range, the fact that it got stuck under the shorter and medium-term moving averages in the middle of the range is something we consider to be bearish. Again, there is no real action for us to take on this index ETF until either one of the range extremes are breached. Momentum is seemingly turing bullish, but there is no high probability entry for us here just yet. So we wait and see.
This is where things start to get a little confusing. Well, not so much on QQQ. Looking at this chart we note some bearish divergence. If looking at shorter timeframes, we will likely be able to find a valid short setup as well. Market Breadth is still somewhat weak and if eventually that weakness catches up to the mega-cap tech stocks, this could get really ugly really quickly.
Philadelphia Semiconductor Index (SOX)
So this is really were the mixed signals start.
On the left, we have a flat top triangle that has triggered a long trade. There are also signs of bullish momentum and the possibility of a buy signal being generated to support the bullish break from the triangle formation. On the right, we have a rising wedge formation with evidence of bearish divergence. So which chart do we trade? We suppose that given the uncertainty, it would be wise to trade neither of them. It will be interesting to see in a few weeks which one was in fact the correct setup.
U.S. Dollar Index (DXY)
The $93 level holds again! There is some bearish divergence too. Perhaps over the coming weeks (leading up to Jackson Hole) we see more Dollar weakness? This would play out well for ‘local’ stocks.
Brent Crude Oil
Oil is still looking very constructive. Interesting to note that the U.S. now buys more oil from Russia than ever before, making Russia the biggest international oil supplier to U.S.. Our view is unchanged. Energy demand is continuing to pick up as the world economy is coming out of lockdown. Supply and demand… as energy demand continues to increase over the next year and supply is not really matching the demand increase… price has only one way to go.
Not much has changed on this chart over the last week. Our view is still somewhat bullish given the ‘inflation is not transitory’ narrative.
We’ve got mixed feelings on the USDZAR as well. When looking at the weekly chart, it appears that we have a decent setup for some longer-term weakness. In the short-term though, should the DXY come off in the coming weeks, we might see a stronger ZAR as a result. In the medium-term though, USDZAR seems to be going through a significant shift of momentum towards weakness. As things are right now, we’d encourage investors to buy USD.
Weekly logarithmic chart.
It might be a little too early to talk, but it looks like after a few fake outs and scary moments, the $35k level held. Onwards and upwards from here?
Weekly logarithmic chart.
Looks like that falling wedge formation is playing out. Lots of buying happening over the weekend. Perhaps phase two of the 2021 general crypto moon rally is about to start?
U.S. stock picks
Advanced Micro Devices (AMD)
AMD had a huge break out last week. We think that this stock, and other semiconductor and microprocessor manufacturers, could continue to see a decent rally on the back of higher cryptocurrency prices.
Applied Materials (AMAT)
AMAT has not broken out just yet, although this setup does look like it wants to break to new highs.
Silicon Motion Technology (SIMO)
SIMO also put in a break away week and earns it’s spot on our bullish watchlist.
Five Below (FIVE)
Texas Instruments (TXN)
Another semiconductor manufacturer, another bullish setup. A break to new highs would trigger a trend following long trade for us.
Global Blood Therapeutics (GBT)
We pointed out GBT as a potential short trade last week. So far so good. Below $26.82 targets $16.59.
Agios Pharmaceuticals (AGIO)
AGIO on the way back to the bottom of the range. Not too much meat left in this trade unfortunately, although aggressive traders could sell below the 89 week moving average with a target price at the bottom of the range.
Wells Fargo (WFC)
WFC could be setting up a nice bull flag here, which in turn could lead to a decent break out from below the 200 week moving average. This is a stock to watch.
South African trade ideas
JSE Top 40 Index (ALSI)
All the way to the top of the range again. In truth, this charts looks rather constructive. The highest probability trade here (with the highest possible risk-reward) would be to short it back to the bottom of the range. Your stop loss will have to be right above the highs made on Thursday though. You don’t want to be caught short if this thing breaks out.
ABSA Group (ABG)
ABG is ticking a lot of boxes for a long trade. A stronger ZAR in the short-term will be a great backwind for this stock (and other banks, financials and retailers in general). Target for the long trade at R150, with a stop loss at R130, makes for a decent 1:2 risk-reward.
Anheuser Busch Inbev (ANH)
ANH dropping like a stone. We like the idea of buying the R880 support.
DSY looks like it is in trouble here. Only a stronger ZAR can save it now (jokes). This chart does look like it wants to go test the R105 level in the coming weeks. Still a greater than 1:2 risk-reward on the table here for the short trade (stop loss above R120, target price at R105).
Retailers have been wonderfully strong of late and SHP is no exception. This looks like it could be a large ascending triangle formation that it building towards a break out. In a strong ZAR environment, retailers might prove to be a good long play.
Transaction Capital (TCP)
TCP is turning out to be one of those stocks that you always want to buy, but always think that it’s run a little hard and you will buy in a pullback… only for that pullback never to come and you sit on the sidelines wishing you had just bought the stock. From a trend following perspective, it does seem that the opportunity to get on the bus is finally here.
The Foschini Group (TFG)
No trigger just yet, but TFG is worth having on the watchlist as a potential break out long trade in a strong ZAR environment.
TKG offering a nice long entry off the primary trend line. Clear stop loss makes for a good risk-reward trade.
TRU also looking like it is going to be a winner in a stronger ZAR environment. Not as clear a setup as TFG, but a volatility based trailing stop loss could be the play here for a small long position.
And that is all we have for this week. As usual, if you would like to know more about trading with us, our very competitive brokerage fees (epsecially on offshore trading) or joining our community, please feel free to contact us and we’ll be in touch.
*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.