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:
Evidence that equity markets have based continues to mount. Having forced a short-covering rally, there should be considerably more to go on the upside. However, next week the US Fed will raise interest rates by 75bps. Whilst the market knows it already, it will encourage some more equity short positions which should see a squeeze higher into next year. We maintain the normalisation of interest rates is not going create the sell-off feared by the markets and, as we highlight in this week’s chart, food prices have fallen considerably. Coupled with demand destruction, the Fed will move to a more neutral stance — perhaps in language, but certainly in actions.
Similarly the correction in the US dollar has been encouraging. We highlighted the failure to break-higher when the data pointed to increasing dollar longs — this almost always occurs at the end of the trend. Step one is a topping phase, which we are experiencing now, step two is a trend in the opposite direction — which should begin very soon — perhaps after the next week’s rate rise out of the way. Important tops should visually impact the ‘weekly bar’ charts — and so far important upward trendlines are still in place. When these break, the down-draft in the USD will be swift. Until this occurs we can not rule out a last ditch attempt to break 114.78. Even if that attempt does happen, the move should be short-lived.
Crypto markets have had a short term rally and we discussed the possibility last week. The timing matched the inauguration of a new UK Prime Minister, Rishi Sunak (ex-Goldmans) who will no doubt be pro-markets and has already stated his intention for the UK to be the world’s main crypto hub. This is smart and will add to the long term credibility of the sector. It is possible we have seen the base in BTC and ETH, but we need more evidence. We will be able to say with more confidence when the US dollar trend has confirmed a major (as opposed to minor) top.
DXY
Further evidence of a minor USD dollar top continues with the break 110.01 completing a double top formation and crossing the medium term m.a. There is still a support line to contend with in close proximity and support at 109.80 that might hold for a short term rally (encouraged by the Fed hike set for next week and a low reading on the RSI). There are a few larger formations in development, but we will highlight them when they are further along the process. Either way we maintain these are the last gasps of strength for the US dollar and a sustained downward trend is approaching.
US 10 Year Yield
Whilst above the short term trendline, further upside should be considered, but post next week’s interest hike, yield rises should be limited and greater evidence of a top should emerge. There is support at 4.00% which matches the upward trendline — hence a break of this followed by an extended decline through 3.84% would imply a larger correction is on the way.
Wheat
With all eyes on inflation and CPI data, we can see how a dramatic fall in food prices should impact the data and assuage the Fed’s fear of inflation (once they are presented with the data). Rice prices are topping out and Coffee futures have collapsed recently and, whilst there are some pockets of strength, the overall picture is dramatically improved.
S&P500
We maintain the view that equities have seen the low and we will hold that view whilst above 3636 (revised upwards from 3510). Traders are expecting a decline into next week’s rate rise and are positioning for the in the short term, however the longer term outlook implies a more benign interest situation, hence we should see a continued rally into next year. Naturally there will be corrections, but this will be viewed as a buying opportunity.
Ethereum
The prospects that a major low is in and the next bull phase is beginning have been raised by the recent rebound. Despite the strength here, caution will remain until we can confirm a major basing pattern has completed. Macro conditions continue to improve and if they continue at the current rate, we should be able to confirm a major low in the next few weeks. The next major resistance zone is between 1720 and 1795, extending through there would increase the chances of a base dramatically.
Bitcoin Daily Chart
We discussed the prospects of a small nudge through resistance opening the way for a more substantial rally and the current move is encouraging. However, if you look at the impact of the move on the downward trend, it is still too close to major support to call the end of the bear phase. It would take a rally through 25,401 to complete a major base, although we should be able to call a low before then due to improving macro conditions. An extension to 21,868 and then retracement seems likely into next week.
Bitcoin Weekly Chart
This chart highlights the impact of the current fledgling rally on the long term chart. Whilst welcome, it is not enough to confirm a base. Strategic support sits at 13,880/14,715 and should the market break lower, this area would be of great interest. A test of the zone is not required for a trend change, but we have to consider the possibility that one final break lower occurs, even if the long outlook is bullish.
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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