Technical Analysis: Weekly Market Strategy
This is the next installment of a weekly, exclusive, series of technical analyses that DeFinity is proud to share with its community.
The analysis is completed by renowned, experienced financial analyst and successful global podcaster, Paul Rodriguez.
Paul Rodriguez lectured at the City University in London on the subject of Technical Analysis whilst working as an award winning analyst at NatWest Global Financial Markets (Now RBS) in the 1990’s, pioneering and promoting the education and use of technical analysis to City professionals and private investors. Paul set up Think Trading to continue that education and consultancy having appeared frequently on financial news channels seeking his views. He set up the State of The Markets Podcast with fund Manager Tim Price three years ago, which consistently tops the top 50 UK business podcasts and has a global audience. He provides bespoke research and consultancy to market-leading firms.
SUMMARY:
We discussed the market psychology of a 75bps hike last week — which has caused uncertainty as to whether the Fed have finished hiking (more on that later). This incertitude means support for the dollar continues, but we are getting closer to the end of the trend (possibly within two weeks). Signals are mounting- acceleration in the trend, turmoil in the stock market and broadening of the effects of a strong dollar. In the UK much has been made of the tax cuts for causing the Pound to fall, which is of course utter nonsense, but the strong US dollar has been rampant and I’d wager a telephone call from the UK Central Bank (among others) to the Fed to discuss further action.
As equities continue to fall, the chances of further interest rate rises diminish and will paradoxically set up the conditions for the next major ‘risk-on’ phase. Commodities are still diving and next month’s CPI will most likely be much weaker than is generally expected — so although the Fed have raised quicker than I anticipated, they will pause for longer and even have room for a cut if the sell-off warrants it, which I suspect it will. When rates are on the floor, there’s nowhere to go, but if nothing else, the market is getting the feel for a normalisation. The question here is; Is this the same as 2007 when the stage was set for a major collapse? No because back then the idea of a crash was laughable, today it’s expected. Also, oil was trading at $147 and the Bank of England was merrily raising interest rates oblivious to the damage it was causing and the carnage set to come. That doesn’t preclude a major correction, only that it makes it more likely that this is a correction that will be bought into before the year is out (and hopefully long before). Usually moves of this fashion are characterised by a sharp sell-off, followed by a strong bounce (known as a ‘spike’ in technical terms). Naturally we will highlight the major signals as they appear.
Crypto assets remain under a cloud, but are holding in well considering. The risk-on phase discussed above may not come in time to prevent a new 2022 low in BTC, but the lack of downside progress thus far given the strong dollar and level fear sentiment (BTC as a safe haven perhaps?) is encouraging.
DXY
We anticipated 114 as a potential target as an outside probability and we are now within the upper end of the estimated sell zone. There are mounting signs the dollar is nearing the end of the trend, but until a conclusive reversal signal is obtained, an overshoot of the trend is possible (118 is a final resistance level) but ending here would be fine. One important signal is the market is yet to capitulate on shorting dollars (although the skew is reversing), even though we suspect the top is near, it is inadvisable to short a rising market. We will allow the top to play out and look to ride the potential considerable opposite trend when the top is in.
US 10 Year Yield
A sharp acceleration in trend beyond the 3.72 resistance and increase in vol. point to signs the trend is ready to reverse. Whilst the long term outlook is bullish, we anticipate a correction to allow risk-on trades to be established. Inflation may run hot for years, but bonds are viewed as a safe haven asset and the geopolitical risk favours moving into bonds. The primary signal than yields have temporarily topped will come from a break of the main upward trendline shown.
Gold
Gold is heading back towards 1670, but this is now a key barrier and we remain cautious of picking a low. The main downward trendline/medium term m.a. at 1725 is where a conclusive break would imply the start of a new trend. However, whilst below 1670, we must remain cautious as US dollar strength is driving the move and has yet to conclusively indicate a top. In other currency terms (such as Sterling for example) gold is performing well.
S&P500
We remain bearish short term as the 3636 support acted like a magnet for price action. The muted bounce risks an extension with 3300 the next target. There is scope for acceleration of the downside although we would monitor the extent of late Friday short covering. The market will remain nervous over the weekend as the global news flow causes further concern. We will stay short term bearish, but in the context of a longer term bull market. The S&P is way off the pandemic lows.
Ethereum
Whilst ETH has outperformed BTC, the short term price action is becoming a concern. We would brace for a correction beyond 2022 lows with a test of 677 support in prospect. If ETH can hold above the 2022 lows for the next two weeks, the danger zone will have passed, but caution is required. A recovery through key resistance at 1720 would be a primary bullish signal.
Bitcoin Daily Chart
The longer the base hold here, the greater the upside potential, however, it is prudent to brace for a breach of 17,593 this week as a series of declining highs and bearish sentiment in ‘risk-on’ trades prevails. The next two-weeks will be crucial and at a minimum a two-day close over 19666 is needed to alleviate the danger zone.
Bitcoin Weekly Chart
This long term chart highlights the next potential major support level should the June 18 lows be breached. The zone between 13,880/14,715 represents strategic support if the bear trend takes one more downward phase. We prefer the view that the market has already based, but observing potential outcomes is prudent when the outlook is less certain.
This report is superficial in nature and may contain errors. No warranty is given to the accuracy of the data or text and any reader must understand that it should not in anyway form part of an investment process — that is reserved for that individual/business and an investment professional. No positions should be taken, exited or otherwise considered on the basis of this research. This is a condition of reading this document. The main function is of education into how different chart patterns might indicate a future trend (or lack thereof) and not for the purposes of speculation or investment.
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