From the desk of Tom Bruni @brunicharting
South Africa ETF To Rally 25%?
With global equity markets looking poised for a tactical bounce in the week(s) ahead, one market in particular looks ripe for a potential squeeze higher.
South Africa has been in a strong downtrend since breaking down from a symmetrical triangle late last August. Selling quickly accelerated after a major support level near 51-52 broke shortly after the breakdown from, and retest of, the symmetrical triangle. Last week prices traded through another major support level near 40 and swiftly reversed to close the week back above it while momentum diverged positively.
Although the main structural downside target lies near 32, current conditions suggest a counter-trend rally may be in the cards. As long as this failed breakdown holds, prices look like they could retest the broken support level near 51, which also corresponds with the 38.2% retracement of the 2015-2016 decline and the downtrend line from the 2015 highs.
With oil prices bouncing nearly 20% off of last Wednesday’s lows, many are once again asking whether or not the bottom in Oil is truly in. My answer to that is simple: “A” bottom is in. Whether or not it is “The” bottom in oil will only be obvious in hindsight.
With prices roughly 58% from their 200 day moving average and public pessimism at levels not seen since 1998, the occurrence of a counter-trend rally is far from surprising. As history has shown us, some of the fiercest rallies occur during bear markets, of which Crude Oil most certainly remains.
With that being said, let’s look at where oil prices are currently indicating this market could be headed… assuming “a” bottom in oil is in.
From a structural perspective Crude oil remains in a strong downtrend and continues to be a “sell-strength” type environment. What’s important on the weekly chart is the potential failed breakdown below the 2009 lows that is setting up. Prices made new lows last week and quickly reversed with momentum putting in a bullish divergence on multiple time-frames. Prices also remain extended from the downtrend line drawn from the October 2014 highs, suggesting that if prices can close back above the broken support from the 2009 lows, the mean reversion in this market could accelerate and possibly retest that downtrend line. Some big “ifs” currently.
Crude Oil – Weekly Chart
This is a great piece from the desk of Tom Bruni @brunicharting
Approaching Tactical Bounces In Bear Markets
During market corrections, correlations tend to go to one across asset classes, but more specifically global equity markets tend to move together. Throughout the global equity markets and U.S. sectors I follow, many tactical downside targets were met with momentum diverging positively, suggesting a relief-rally may occur over the next few weeks. Many of these markets followed up their mid-week reversals with follow through to end the week, which adds to the case for additional upside over the short-term. It’s important to realize though that most of these moves are occurring within the context of structural downtrends / bear markets, which means this bounce is just that for the time being. Significantly more time will be needed to repair the long-term structural damage these markets have experienced.
How you approach this type of scenario will depend on your plan as a market participant, but for me it really boils down to two main scenarios. Either you can choose to take tactical long positions to capitalize on these bounces, or you can simply wait for them to play out and re-enter on the short side at higher levels. Some people will do both, others may do something different altogether.
If you’re looking to participate in these counter-trend rallies, how do you figure out what’s the best way to express the theme of counter-trend rallies occurring throughout the global equity markets when almost everything seems to participate in one capacity or another?
I’m sure there are a million schools of thought on this, but for me, I like to look for stocks / sectors / markets where the risk is well defined and the weight of evidence suggests that the probability of a bounce is high, relative to the other setups out there. I find that this occurs most often in names that have found support at levels where both structural and tactical downside targets were hit, with momentum diverging on multiple time frames. This means often passing on the more beaten down sectors where mean reversion could occur in rip-your-face-off fashion, in favor of a trade where the weight of evidence suggests there is a higher probability of success, but less potential reward. Some may be comfortable taking the lower probability trade in exchange for a higher potential reward, but I tend to lean toward what I view as higher probability trades.
To illustrate exactly what I’m talking about, I’ll outline an example of each from the current market environment. I’ll also list a few other names I’m watching / doing more work on toward the end of the post, but won’t post the charts of them here for the sake of space.
From the desk of Tom Bruni @brunicharting
Potentially Time To Fade The Natural Gas Rally
With Natural Gas futures up roughly 48% since the December lows, the urge to call a bottom in this asset class is quite strong. However, history tells us that the most vicious rallies occur during bear markets, which may suggest that current levels offer a decent risk/reward on the short side.
Before taking a look at price, it’s important to be aware of current sentiment and seasonality data within its proper historical context. In terms of sentiment, the recent rally has allowed a number of things to occur.
- Commercial hedger net long positions are slowly backing off all-time highs.
- Public sentiment moved from multi-year levels of pessimism to the a more neutral reading and the most optimistic since late 2014.
- Momentum as measured by a 14 period RSI across multiple time frames has reset from deeply oversold to a more neutral reading.
In addition to that, seasonality data from the past thirty years suggests that Natural Gas tends to struggle in the early months of the year, with average returns of -5.7% and -0.2% in January and February, respectively.
There was no doubt that sentiment was stretched to extreme levels late last year, but the recent rally allowed sentiment and momentum to come back toward more neutral territory; possibly setting up for another leg lower.
In terms of price, structurally Natural Gas remains in a downtrend. After a failed breakdown below the 2012 lows sparked a vicious rally December into January, prices are back at overhead supply and potentially putting in a failed breakout above the downtrend line from the late 2014 highs. Momentum did not put in a bullish divergence at the recent lows and remains in a bearish range.
Shares of Twitter (TWTR) broke the $20 level on the downside and declined as low as 19.60 before recovering some of the day’s losses. The move brought TWTR stock to new 52 week lows and continues its recent slide.
Below is an updated stock chart for Twitter (TWTR) as well as a few bullet points based on what I’m seeing across time-frames.
Currently the TWTR stock decline is taking a pause at the 161.8% Fibonacci extension of the October 2015 rally. The stock is oversold but this appears to be short-term. Either way, it may lend a hand to a bounce.
On a macro level, Twitter stock price remains in a downtrend and below the 200 period moving average on all the major time-frames.
The structural target on the weekly chart remains $13.15 based on the 161.8% Fibonacci extension of the April – July 2014 rally (not pictured).
As of now, momentum remains in a bearish range and a lacks any signs of a positive divergence on the weekly, daily, or 65 minute charts.
The stock could bounce in the very short-term, but there is not any evidence to suggest a longer-term bottom is near. Overall the weight of evidence continues to suggest fading strength toward resistance near $22.00 and 23.50, as shown by arrows on the daily TWTR stock chart.
Twitter Stock Chart (TWTR) – Daily Bars
Thanks for reading.
The author does not have a position in any of mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
For a full disclaimer, click here.
This post originally appeared on SeeItMarket.com on 01/08/2016.