Headlines remain doom and gloom, inflation, interest rates, and recession. I find the most interesting price action occurs when bad news is met by a positive reaction in the market.
Highlights:
- S&P500 (SPX)
- Nasdaq Composite (COMP)
- High Grade Copper COMEX
- West Texas Crude Oil
As positive reaction from investors amidst a backdrop of doom and gloom typically indicates the buy the dip crowd are fishing, it also indicates limited ammunition remaining from the supply side.
White candles can only occur when the price closes above the open, that is, where there is excess demand during a session. I note 12 out of the last 17 candles on major U.S. indices are of the white persuasion! Despite a general news flow over this time indicating higher rates and a narrower window for avoiding a recession.
Investor behaviour doesn't fit the broader bearish narrative. However, one explanation could come from seasonality. That is the tendency for markets to move in a repeatable pattern based upon the time of the year.
July is typically a solid month for U.S equities delivering an average 1.01% gain between 1950 and 2021 - the fourth best monthly performance of the year. It's possible then, we are simply seeing the calm before the storm. Major market lows typically come in October and March, and rarely during summer. If this year is to play out by the book, the worst may still be yet to come!
S&P500 (SPX)
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Focus on those last 17 candles. Note the prevalence of white bodies and lower shadows. These are finger prints of the demand side.
The candles from 30 June, 1 July and 5 July are particularly bullish candles. The hold and bounce in last night's candle, 14 July, at the same point of demand confirms the coordination of a group of investors who are content to buy the dip around 3730-40.
The low on 17 Jun does have a volume influx which is consistent with a modest capitulation from the sell side, but summer lows are rarely reliable, and the accompanying candle is hardly a convincing demand-side signal.
Declining volume since that session indicates both the demand and supply side are relatively disengaged. Perhaps its just a case of the demand side being more motivated for now.
A close above 3946 would be very interesting - especially if it's accompanied by an influx of volume to indicate substantial supply removal (the last of the bears?).
As interesting as the recent surplus of white candles is, I must still heed the overall trend which remains down as per the short-term trend ribbon (light-pink zone), and the long-term trend ribbon (dark pink zone).
The recent strength at 3730-40 is a super valuable indicator if only to tell us the admirable demand in this zone has been zapped should we eventually get another downturn. A close below 3730 would likely yield 3636, and failing that, 3588. Below 3588 is 3233.
View: bearish, continue to sell rallies until a close above 3946.
Nasdaq Composite (COMP)
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Based upon last night's demand-side candle, it feels like the COMP is in the process of forming its second higher trough. It's already in higher peaks phase, so we'd call this "demand-side price action". Clean/strong demand-side price action, however, features a last trough which has formed at or above the second from last peak. It means 10850 should have been above 15 June's 11244. If last night's low of 11005 does end up as the next higher trough low, it really should be above 11678. That's not going to be the case.
So, while the prevalence of demand-side candles and price action is commendable, it's not convincing. The short-term trend ribbon is tending towards neutral from down (orange zone). The long-term trend ribbon (dark-pink zone) is well established to the downside.
Summary, don't be total bear! But, continue to respect the overall trend - which remains down.
A close above supply at 11678 is going to be fascinating - 12320 is the next key supply from there. This kind of move is going to flip the short-term trend.
Black candles around 11678 indicate supply remains in the system, watch then for a push back down to 10850. A hold of 10850 in this scenario indicates more sideways grind - everyone's a loser! A break of 10850 would likely precipitate a test of 10565, and failing that, 9838.
View: Bearish, sell rallies until a close above 12320.
High Grade Copper COMEX (HG)
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It's worth adding this chart to the mix. "Dr. Copper", as high grade copper is also known, is considered to be an excellent predictor of the health of the global economy. Copper is such a widely used industrial metal, that a solid uptrend in its price usually indicates the global economy is firing on all cylinders.
Obviously, the opposite is true. Cue the above chart! When Dr. Copper becomes a patient...i.e., on the table needing to be resuscitated, it's usually a reliable predictor of weaker global economic growth down the track. When copper plunges, as it has done over the last couple of months, it can indicate a recession is on the cards...
There's nothing in the copper chart to suggest its well entrenched short -and long-term downtrends are to end any time soon.
View: Bearish, sell rallies until a close above 3.84.
West Texas Crude Oil (WTI)
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Crude oil is facing the most important test of its bull market which began after it actually
went negative for a trading session in early 2020 as the global economy ground to a COVID halt.
Last night's candle shows demand did kick in at the long-term uptrend zone (dark-green zone), evidenced by the long lower shadow. That tentative demand, and a pullback in supply from a short-side cohort now satisfied they've run some stops below $95, may facilitate a rally to $105.30.
The candles there are going to be all-important. A bunch of white candles, and all is good with the long-term trend, we're going to test higher short-term retracement levels. A bunch of black candles (my tip), and really it's curtains for the bull market in crude. In this scenario, we'll take out $95 for real and head down to test the mid-$80's.
View: Neutral, until a close above $114.10 (move back to bullish bias) or a close below $95.10 (move to bearish bias)
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