It’s been a good few weeks since our last blog post here. Our apologies for the long wait. When last we shared some ideas and views we’d said that things were looking a little more bullish. Now, a few weeks later, things are no longer looking as bullish as they were. Theoretically, the bullish positioning of charts have not really changed all that much, at least not of the headline equities indices. Where the picture for the bulls starts to unravel a little is when you look at Oil and the VIX in particular, and also when you consider that the S&P 500 has not managed to clear resistance. Let’s look at some charts and we’ll show you what we mean.
Bigger picture (Offshore trade ideas)
S&P 500 (SPY)
The S&P 500 (SPY) is the first of the mixed signals for us. We see the makings of a longer-term trend change here. A break of the downtrend, higher highs, higher lows… it all checks out. That said, what we do not see is a third higher high. The market has been somewhat lacklustre over the last week and momentum toward the upside has faded. Currently our view is that unless SPY can clear $420 (or 4200 on the S&P 500 Index), it’s not going to get much higher. Read into those puns what you will, but know that they are based on age old Dow Theory. We think that if the SPY stays below $420, the odds of a short to medium-term pullback is rather high.
Philidelphia Semiconductor Index (SOX)
SOX has acted as a leader of QQQ for some time. Over the last week or so it has been under a little more pressure than QQQ and has made its way down to the bottom of a rising channel. Now, there are two ways to play this. First, you can buy the bottom of the channel with a target at the top and clear stop if the channel breaks. Second, you could wait for the channel to break to the downside and trade the short trade with the stop set at a break back into the channel. Either one should offer a decent risk-reward, although the payoff on a short trade with a trailing stop will likely be higher. Further, the rising channel setup does bode bearish. So, our bias is to the downside here.
Nasdaq (QQQ)
QQQ is a little different to SPY above, in the sense that it has managed to get up above the recent swing high and print a new one. Keeping in mind that it is only the second higher high and not a failure of the third. So, there is a small but not insignificant difference. Longs could stay long here as long as that lateral support holds. If, or when, that support breaks, it will likely make for a good short entry. We think that SOX will lead QQQ and act as early warning for trapped QQQ bulls.
S&P 500 Volatility Index (VIX)
Here is some of the meat and bones of the mixed signals serving. The VIX has been very low for some time now and in fact has pushed a new 52 week low. Each time the VIX has gotten into this region over the last year or so, we’ve called a long. Now, it’s not the world’s most complicated trade to be honest, so it’s not been hard to be right here. Once again, we have a fresh low and a somewhat bearish looking mix of headline equities indices, and thus once again we are calling a long on the VIX. A two-month call with a strike at 24 would pay off really well if things get a little bumpy here. Remember, buy protection when you can, not when you need it.
Gold
Gold has been on tear of late, but has managed to run head first into significant horizontal resistance. $2035 is a strong level that has proven to be a reversal area for Gold over the last two years. Probabilities dictate that Gold remains in the large channel and makes a move toward the bottom end of the range over the next few months. In our last blog post a few weeks ago we’d said that it might be a good time to get out of those gold longs, and we want to reiterate that view. If we see Gold break higher from this channel, then, well, scramble to get those gold stocks back on the book, but until then, maybe it’s a good time stand back and bank some gains.
Brent Crude Oil
Oil is one the reasons we have some worries about equities. Recent softness is, at least in our view, based on the broader expectation of a global, mild recession in the second half of the year. The reasoning here is that if there is less economic activity higher unemployment, there will be less demand for energy in general. Add to that the fact that $87.35 is a line in the sand that Oil just can’t seem to cross… it doesn’t make for a very rosy picture for the energy bulls. We think it is most likely that we see Oil bounce between $80 and $87 for the next few weeks. For now, we don’t think it wise to try glean what might happen further out than that.
USDZAR
We still stand by our call that over the short-term the ZAR should move toward R17.58, and possibly R16.88 to the USD. DXY weakness is likely to be the biggest driver here. Yes, in the long-term the ZAR looks toast. We have to admit though, through all the millions of levels of loadshedding and other issues, it has been rather robust. This leads us to believe that the strength here has less to do with ‘us’ and more to do with ‘global macro conditions’ looking rather weak.
South African trade ideas
JSE Top 40 Index (ALSI)
ALSI giving a very simple trent break short setup here. Easy high risk-reward short trade in our view. We can also see the bulls start to unravel as the stochastic slowly rolls over and momentum shifts down.
Anglo American (AGL)
Welp! Proper bear flag breakout on AGL. R500 as a first target seems about right.
Coronation Fund Managers (CML)
Looking at a longer-term chart on CML does not give a comforting feeling. Many a moon ago we’d pointed out a small inverse head and shoulders pattern, which failed in a blaze of glory! Now CML is riding a support level that was last truly significant all the way back in 2012. A failure here could lead to some panic selling and a push to R20. Honestly, it would probably be a good buy down there, but some patience is likely needed.
Growthpoint Properties (GRT)
The horse has bolted out the stable already here, but the downside target here is around R11.60.
Investec (INL)
INL is still trading in its range. Our bias is still toward the downside, but we reiterate that patience is needed for this pattern to break and provide a confirmed entry.
City Lodge Hotels (CLH)
CLH is actually looking a little more bullish to us, but we have to be open to the idea that things could potentially get worse. Especially with loadshedding getting worse and the prospect of a global recession in the second half. Thus, we wait patiently for the indicated range to break before taking a decision on which direction to trade this stock in. This one is worth keeping on the watch list.
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*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.