Insert fear chip and get ready for the next bull market

It's getting tough out there. But there's an old saying: Don't get bitter, get better! Let's conduct a quick status check of where we are, and were we're headed.

Highlights:

 

Key take away points from the last 12 months

1. Cheap money is forever blowing bubbles
Bull markets are way easier when there’s a piles of helicopter money raining down on markets. Too much money forces down the cost of capital and forces up valuations investors will tolerate on stocks, particularly those without near-term earnings. Case in point, our very own ASX 200 Information Technology Sector Index which hit a 1-year forward PE peak in this cycle of 78 times earnings. Prices and investor confidence skyrockets. Helicopter money inevitably ends up in the hands of a new generation of investors who haven’t yet had their fear chips inserted. So, really, they’ll pay anything for anything and tell themselves and each other it’s different this time (cue the hoodied finfluencer!). Prices go up because prices are going up. This is not a bad thing – this is the best time to be invested. Hot trends are everywhere, and they just keep going up. Don’t fear these times, embrace them!
 
2. The charts will tell you...
Long before the market tanks it’s time to pull your head in, and certainly well before 6 o’clock news readers are telling you it has.
 
3. Investing isn’t supposed to be easy
Otherwise everyone would be driving Lambos! What’s happening now is normal, fear chips are being forcefully inserted. It’s all good. Even in the worse market, there will be opportunities if you know how to spot them, and the market won’t go down forever.
 
4. What happens after the drop is unknown
Perhaps we get the punchbowl back, i.e., central banks break the economy too much, strap on their backpacks full of cash, and jump back into their helicopters. Cue the next crazy bull market. Or, probably, they don’t repeat the mistakes of the past and show some restraint this time. They let the economy and investors tough it out a bit. In this case we just get a normal market which meanders gradually, often zig-zaggedly higher over the long-term. Whilst it won’t be as easy and as fun as the first scenario, it’s still going to be a place where you can make some good money.
 
5. In all cases, learn how to read a chart!
The trend is your friend, really it is! But don’t be ignorant to when it bends…and certainly not to when it ends! If you didn’t happen to do it this time, it’s okay. Don’t get bitter, get better as it were…
 
Let’s look at some charts!
 

Nasdaq Composite (COMP) (i.e., the chart which predicted about 5 months ago what was going to happen to the ASX this week!)

The left half of the Nasdaq Composite (COMP) chart is all about buy the dip. The candles tend to be of the demand-side variety (white bodies and or lower shadows), and the price action tends to be higher peaks and higher troughs. My short-term trend ribbons (short-term = light green zone, and long-term = dark green zone) regularly act as a cushion, and in some cases, a trampoline, pushing prices back up.

The right half of the chart is all about sell the rally. The candles tend to be of the supply-side variety (black bodies and or upper shadows), and the price action tends to be lower peaks and lower troughs. The trend ribbons (short-term = light pink zone, and long-term = dark pink zone), having now swung to the downside, impede upwards price movement. They act as an invisible hammer knocking prices down each time they are reached.

I can’t answer Whippersnapper’s question as to when the COMP will make a new high, but I can say with absolute confidence the next bull market will start by demonstrating the tell-tale signs the balance between demand and supply has swung back to the demand-side. So, as per two paragraphs ago, demand-side candles, higher peaks and higher troughs, light green and dark green trend ribbons. Until then, trust the prevailing downtrend. To see some case studies of exactly what to look for at the start of the next bull market, check out this previous blog post.

Since our last update, the COMP has continued in trend, and cracked through key support at the 20 May low of 11,035. It appears to be finding some tentative demand at a previous key demand point in the 24 Sep 2020 low of 10,519. Friday’s volume spike is likely solely related to stock and index options expiry on 16 Jun, and therefore is unlikely to indicate the commencement of a capitulation phase. It’s hard to find a shred of bullish intent until we see such a capitulation by ways of a long lower shadow with accompanying massive volume spike. The pre-COVID crisis bull market high of 9,838 set on 19 Feb 2020 is a potential candidate for where a capitulatory move lower may probe.

To the upside, the short-term trend ribbon is going to continue to nag away at both demand and confidence. It’s going to kick in around the 15 Jun peak high of 11,244. I’d prefer a close above the 2 Jun high of 12,320, however, before even contemplating calling this COMP bear market over. View: Bearish, sell rallies until a close above 12,320.
 

S&P ASX200 XJO How high can a Gruber bounce?

Last week, we pondered whether the Australian stock market was about to get Grubered. Well, yes, it did – splat! Not only did the potential demand point of the 27 Jan low at 6,758 go, so too did the 2021 low of 6,517. A small bounce by Friday’s close, even though accompanied by some decent volume, is unlikely to signal the end of the new short -and long-term downtrend.

Vertical moves down are not the norm. They occur when motivated supply meets a demand-side vacuum, i.e., holders of shares want out but there’s very little money looking to get in the way of their selling, even at increasingly lower prices. Usually, lower prices entice out the bargain hunters, but not in this case. So, think just how bearish last week’s scenario is – no price looked attractive to step in and take on the risk!

Considering just how convincing last week’s supply-side candles are, my tip is that even if we do see a reprieve in the selling, it’s unlikely there will be enough demand flooding in to trigger much of a bounce. A big drop, followed by a relatively muted bounce, is often referred to in the markets as a “dead cat bounce”. As in, if you drop a dead cat from a great height, how high does it bounce? Not very high. If any bounce in the ASX200 does occur, is likely to be hampered around the short-term downtrend ribbon which is going to kick in between 6,900 and 6,950. Note also, the 6,758 previous demand point will now likely act as a supply point. Supply side candles at either of these levels will indicate the likely limit of the dead cat’s bounce.

Potential points of demand usually line up with historical points of demand. In this respect, watch out for signs of excess demand around the 19 Oct 2020 low of 6,248. For a rally to perpetuate, you’d want to see a cluster of decent demand-side candles down there, preferably with an influx of volume. Still, I couldn’t get too excited about a meaningful low until I also saw higher peaks and troughs, and ideally a close back above 6,758 as well as the short-term trend ribbon. View: Bearish, sell rallies until a close above 6,758.
 

It was the worst of times, it was the best of times

I didn’t want to make this week’s post all doom and gloom. When markets tank as they did last week, I am always fascinated by those stocks which bucked the trend. Stocks which meet all of my buy criteria regardless of the carnage. This is called Relative Strength Comparative (RSC, not to be confused with the popular technical indicator Relative Strength Index (RSI)). I only look to buy stocks which demonstrate sufficient excess demand in their charts. But think about how confident the demand-side must have been in the following charts to keep buying despite the broader market selloff. Similarly, consider just how devoted the sell-side must have been to hold on whilst everyone else panicked. It speaks volumes about the prospectively of these companies. So, for your charting pleasure, I list my five most interesting RSC winners from last week below.
 

Anteris Technologies (AVR)

Anteris is a biotech company focused on clinical solutions for heart disease. There's nothing wrong with Anteris' ticker, however, its chart is the picture of health: bottom left, top right doctor! The worst the recent pullback in the broader market could do is push the Anteris price back into its short-term trend ribbon, which duly offered dynamic support. The lower shadows in the ribbon demonstrate buy the dip activity, and the large white candle Monday 21 Jun demonstrates a decisive move back to excess demand. Anteris' next task is to tackle the supply evident in the system around $24. Candles look good the next break of this level is successful. View: Bullish, buy pullbacks until a close below the 17 Jun low of 20.15.
 

Australian Agricultural Company (AAC)

Another bottom left, top right chart, just a picture of excess demand. It did start last week with a push below the short-term trend ribbon – but which stock didn’t get belted last Tuesday? That corresponding 14 Jun candle is everything you want to see after your stock has had a minor pullback. Wednesday 15 Jun, solid. Thursday 16 Jun, excellent. Friday, amazing! This week, is more likely to be a story of consolidation of those gains, but the trend is your friend here. Also, note market meltdowns tend to be easier to navigate if Twiggy Forrest just snapped up another 10% of your stock!

If you own AAC, I cannot see any reason in the chart to sell it. If you don’t own it, I can’t see any reason in the chart why you wouldn’t. View: Bullish, buy pullbacks until a close below the 14 Jun low of 1.84.
 

Diatreme Resources (DRX)

You wouldn’t know the ASX200 was in a long-term downtrend looking at this chart. Diatreme resources is working towards a Definitive Feasibility Study for a potential mine at its Galalar Silica Project in North Queensland. Things I like about this chart: Excellent short-term trend developing since April, including a major demand event on a huge influx in volume in late-May; This removed a great deal of dead wood supply, which judging by the shallow nature of the pullback to the short-term trend ribbon since, is now angling to get back in; Friday’s candle is a monster in terms of excess demand. The long-term trend ribbon staring to gather some upside momentum. Things I don’t like about this chart: Socceroos vs Peru…Nil-Nil! View: Bullish, buy pullbacks until a close below the 17 Jun low of 0.029.
 

Ricegrowers (SGLLV)

You and millions of Australians probably had a Ricegrowers product for dinner last night. Another double green chart, as in short -and long-term trend ribbons both nicely skewed to the upside. If Ricegrowers closes above 7.45 by end of trading Friday, it will be its highest all-time close. As a trend follower, this is exactly the kind of sign I love. People with cash want to own Ricegrowers shares more than ever before. People with Ricegrowers shares are more reluctant to sell them than ever before. What could make both parties so bullish...they're called fundamentals dummy! 😁 View: Bullish, buy pullbacks until a close below 6.90.