Technically Speaking, July 2022

Welcome back to Technically Speaking.

Consciously or unconsciously, we are conditioned to have certain opinions. They may not be our own to begin with, but they form a part of our decision making. While all ideas have their place, the market is particularly unforgiving. The market doesn’t care what you think should play out for you to benefit, it unfolds independent of wants and needs.

For example, we’re all looking at the same chart. Unless of course we use different types of charts altogether like point and figure or kagi, etc. For the most part we’re looking at similar forms of the chart. Take the Dollar Index for instance. The price had ben testing the level of 103.50 since 2017. In June this year, we got a breakout and follow through in price. Its trading close to 108 now.

But the question is, how many people who could participate in that trade, actually did? With inflation catching up, crude oil making a base and DXY rallying, the average market participant can see the adverse impact of these variables on stocks and commodities. But rather than switching into a Dollar trade, wishful thinking takes precedence. Somewhere deep down there is hope that the DXY will pause and that bonds will catch a bid again and that the stocks will get back on track to moving higher. This here is the inherent bias formed due to unconscious conditioning. Dollar going up – bad. Dollar going down – good. When it really should be about following the trend and taking positions accordingly.

Similarly, take a look at the Chinese market. The Shanghai Composite has been moving higher for the last two months, even as other global indices continue to correct. Chinese Internet stocks (KWEB) as well as large cap stocks (FXI) have been doing well too. But how many market participants bought into that move? Not many, is my guess. There are ETFs to benefit from too, you know?

The point here is that there are opportunities that are missed because of the inherent biases we hold. And these are opportunities lost with a sizable opportunity cost. But the end goal of being a market technician is just that, shedding biases. And boy, that’s not easy! I’ve been a part of the chart world for 5 years now, and there are times when I catch myself with these inherent biases as well.

What are some of the biases that you faced in your journey? Share your thoughts with us at: editor@cmtassociation.org.

 

Until next time,

 

Think Technical!

Rashmi Bhatnagar, CMT

Editor

What's Inside...

President's Letter

by
Brett Villaume

Recently, the Financial Times published an article entitled “Demand ‘falls off cliff’ for CFA financial analyst qualification”, in which the...

Read More

Special Feature: Negative Divergences Often Warn of Impending Declines: Bitcoin Highlighted…. is Gold Next? (Contd...)

by
Louise Yamada, CMT

(Note: This is an extension of the blog published in June 2022 Technically Speaking)

 Negative divergences, occurring in a variety...

Read More

Are Luxury Stocks Recession-Proof?

by
Tea Muratovic

According to Oxford Economics, Americans saved roughly $3.7 trillion during the pandemic. However, approximately $360 billion of that amount will...

Read More

CMT Newsletter

by
Marie Penza

Membership

The CMT Association would like to congratulate the following member on their new positions:

Justin S. Liberti, CMT, Director...

Read More

Indian Markets set for a bounce from highly oversold levels

by
Vinay Rajani, CMT

US benchmark index S&P 500 index closed out its worst first half of a year since 1970 with a drop...

Read More

Favorable Risk-Reward: Are stocks & bonds poised for a strong 2nd half of the year?

by
Shane C. Murphy, CMT

1H ‘22 marked the worst 1H for the 60/40 portfolio since 1932.

The 10-year US Treasury Note Yield started the...

Read More

5 Stocks With Triple Top Breakouts To Higher Highs

by
John Navin

This diversified collection of New York Stock Exchange traded stocks are breaking back upwards and above previous resistance levels. These...

Read More

Intermarket Study and the Indian Markets

by
Kshrey Jain, CMT

All of the world’s financial markets including bonds, equity, commodity, currency and cryptocurrency have an interrelation and do not exist...

Read More

President's Letter

Recently, the Financial Times published an article entitled “Demand ‘falls off cliff’ for CFA financial analyst qualification”, in which the authors pointed to a 40% decrease in the number of CFA level 1 candidates sitting for the exam compared to 2019.

The article suggested that the high workload required to pass the exam, the historically low pass rates, and pandemic-related disruptions had caused more prospective students to rethink whether the qualification was relevant to their careers. An anonymous senior CFA Institute staff member was quoted saying, “People today are turned off by studying for long hours for an exam with a low pass rate that is only valued by employers when they apply for a job, and is irrelevant thereafter.”

Hearing this news, one might get the wrong impression that demand for professional designations is waning.

Without going into an argument about whether or not one should take the “hardest exam in finance”, I want to share with you in this month’s President’s Letter an important statistic, and highlight that the value of the CMT designation is still very much intact.

The number of candidates who sat for the CMT Level 1 exam in the most recently completed June test cycle was up 24% compared to the same period in 2019.

While the CFA may be known as the credential that “helps you get a job”, the CMT is widely regarded as the one that “helps you keep your job”. Among financial professionals, it is widely understood that the CMT designation is valuable because it helps improve your investment performance.

Honestly, I’ve always cringed a little when I hear this saying, as it seems to imply that technical analysis can’t stand on its own as an investment philosophy, which is clearly not the case. Technical analysis predates fundamental analysis, after all!

While we may suffer a bit in popularity, our track record speaks for itself. The marketplace credits us with having specialized skills that add value and benefit us throughout our careers — skills worth acquiring. Technicians have a place at the table, and they always will. That is our legacy as CMT charterholders.

Whereas – unfortunately for the CFA Institute – many financial professionals today consider the primary benefit of attaining the CFA to be simply proving you can pass the tests.

If you are a CFA charterholder, or if you have experience sitting for the exams, you know the curriculum is actually chockful of important and useful information. The curriculum is well respected among financial professionals. But, over the years, the CFA’s reputation of being extremely difficult to attain has apparently superseded the more logical reason one might seek a professional credential, which is to prove you’ve learned something, as the end goal.

I have previously written in this newsletter about the value of the CMT designation and the reasons I believe it is unique among professional designations. But I want to also point out that there is another reason that’s arguably more relevant in today’s turbulent markets.

We are anti-cyclical. Markets go up and down, bull and bear. But as market technicians, we identify cycles across assets and can trade anything. Whether the S&P 500 is at 2,500 or 5,000, whether Bitcoin is $20,000 or $68,000, technical analysis is agnostic about the direction of the trend and consistently adds value regardless of market conditions. This is a powerful advantage that CMT charterholders have when making investment decisions during cyclical downturns. Who does CNBC bring on the show when the market starts selling off? The technician, of course!

In case you missed it, we recently changed our Bylaws to make membership in the CMT Association more accessible for people who want to build a career in Finance and find a job that leverages their technical analysis skillsets. For those who are already seasoned professionals, including CFA charterholders, the CMT designation looks more attractive than ever these days, as we offer a way to navigate market volatility without necessarily having to ride it out.

The Board of Directors and Staff are very focused on maximizing this opportunity in the marketplace and getting the word out about the value of the CMT designation, but you can help too. I encourage you to take advantage of situations over the coming months, when you’re at dinner parties, happy hours, industry events, etc., and you hear people lamenting about how poorly their portfolios are performing, speak up about how the CMT adds value to your investment process and helps you “navigate the gap”.

Contributor(s)

Brett Villaume

Brett Villaume is Past President of the CMT Association, having served on the Board of Directors from 2014 to 2023. Additionally, Brett is a Financial Advisor at Equitable Advisors, LLC (member FINRA/SIPC) based in San Francisco, California.  Brett previously served as Director...

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Special Feature: Negative Divergences Often Warn of Impending Declines: Bitcoin Highlighted…. is Gold Next? (Contd...)

(Note: This is an extension of the blog published in June 2022 Technically Speaking)

 Negative divergences, occurring in a variety of indicators, often warn of impending price consolidations / declines. There are different implications with short- term, intermediate- term or longer-term (more structural) divergences observed versus price action in an uptrending stock, commodity, index, etc.

A divergence occurs when price moves to a new reaction high but the indicator does not, rather failing at a lower high, creating a negative divergence to price, suggesting the momentum is waning.

Referencing here the MACD (moving average convergence divergence) indicator as an example, short-term (daily) divergences can indicate the potential for either a period of consolidation, or of a short-term pull back in an ongoing uptrend. A weekly divergence might suggest a more sustained consolidation / pullback, and even a reversal of trend, particularly if support is violated, offering an opportunity to lighten positions.

The monthly (more structural) divergences generally cover an extended period of time and should be taken more seriously for the potential of a more sustained decline; even an eventual end to an uptrend. These can offer a warning / opportunity to continue lightening / selling positions.

The event of a Sell signal in the MACD (the upper line crossing below the lower line), or a broken critical price support level, offer technical viability of the divergence. Monthly divergences need not always occur, but a monthly MACD Sell signal, even without a divergence, offers a more structural warning to sell.

Is GOLD Next?

Recently, we have been questioning the somewhat similar behavior of GOLD:

The May 2020 price high achieving 2,000, versus the 2022 price peaks also achieving 2,000, as well as the relationship between the two 2022 price peaks with regard to their momentum readings.

The daily MACD divergence to GOLD price is quite visible (Fig. F-5), by the time the 2022 price rallies to 2,000, equating to the 2020 price high, but with the 2022 MACD at a much lower level (see aqua line, lower panel) than that of

  1. (Note: A MACD Sell signal occurred after the 2020 peak, alerting to the possible price decline, which eventually carried to the March 2021 low near 1,700.)

The lower March 2022 MACD peak also registered a March Sell signal, suggesting one might lighten positions.

Fig. F-5 Gold (GOLDS) (Top) and MACD (Bottom) (Daily)

Source: Bloomberg and LY Advisors

In addition to the daily MACD wide divergence between the 2020 and 2022 price rally peaks, there is also a shorter-term negative MACD divergence between the 2 peaks in the 2022 March and April rallies to 2,000 (declining red arrow, lower panel).

This divergence followed the March 2022 MACD Sell signal, and barely recognized the April price rally (declining red arrow, lower panel). The ultimate price decline broke the support at 1,900 (flat aqua line, top panel), broke the short-term uptrend, and slipped below 1,800 before rebounding slightly.

Fig. F-6 Gold (GOLDS) (Top) and MACD (Bottom) (Monthly)

Source: Bloomberg and LY Advisors

The monthly profile (Fig. F-6) depicts a multi-year MACD negative divergence to price (see declining arrow, lower panel) from as far back as the 2012 price peak near 2,000, versus the minimally higher 2022 price peak.

(In 2012, the monthly MACD Sell offered protection from the price collapse toward 1,100, had one followed that structural Sell signal.)

In March 2022, the MACD, registered another major monthly Sell and barely rallied on the secondary 2022 price peak back to 2,000; the MACD now remaining negative and poised to perhaps continue down.

This suggests technically, that Gold may be in danger of a potentially larger decline ahead, especially if support at 1,700 is broken. Such a breach could bring next support at 1,400 into view (horizontal red line) … returning to the breakout level from the 2013 to 2019 basing pattern (see saucer).

It is possible, however, that although GOLD has broken out in many other currencies, the extraordinary current strength in the US dollar may be contributing to the GOLD disappointment.

Contributor(s)

Louise Yamada, CMT

Louise Yamada is the Managing Director of Louise Yamada Technical Research Advisors (LYA), which she founded in 2005. Previously, she was Managing Director and Head of Technical Research for Smith Barney (Citigroup), and while there, was a perennial leader in the Institutional...

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Are Luxury Stocks Recession-Proof?

According to Oxford Economics, Americans saved roughly $3.7 trillion during the pandemic. However, approximately $360 billion of that amount will be spent by the end of 2022. Think twice, where will all the $$$s go?

Looking at the statistics, more than 69% of that spending is by the wealthiest 20% of households. Moreover, what goes hand in hand with wealth, is expensive items.

Luxury goods need no introduction. They are known for strong brand identity, high operating margins and timeless products. But are they also a good investment in the current markets?

During the pandemic these companies have demonstrated cash-rich balance sheets and high profitability. But will they be able to continue their growth in the tricky environment of high inflation, pressured stock markets, supply chain issues and a possible recession?

I found a feasible explanation in a study by the Bank of America, which showed that the correlation between luxury spending and the S&P 500, in the 10 years prior to the pandemic, was less than 30%. Moreover, there was also no correlation found between cryptocurrencies and luxury spending.

So, nothing stands in the way of diversifying one’s portfolio by adding, if not the latest edition of the Hermes bag, then luxury stocks.

However, if you decide to go for long-term investments, or to benefit from short term gains, be aware of timing when entering trades.

Buy me if you can

Burberry Group is the London-based fashion powerhouse, known for its iconic trench coats. It was ranked among the top 10 most valuable luxury brands in the world in 2021, with a brand value of $3.9 billion.

This luxury stock has been following its seasonal pattern from the beginning of the year. However, is now the right time for new investors to come on board? Looking from the seasonal perspective, Burberry does seem to be one of the companies whose stock price starts rising at the end of June.

Seasonal Chart of Burberry Group plc over the past 10 years

Source: Seasonax, click on the interactive link http://tiny.cc/seasonax-burberry to receive more information

Keep in mind that a seasonal chart depicts the average price pattern of a stock in the course of a calendar year, calculated over several years (unlike a standard price chart that simply shows stock prices over a specific time period). The horizontal axis depicts the time of the year, while the vertical axis shows the level of the seasonal pattern (indexed to 100).

From the chart above, it is clearly visible that the end of June until the beginning of August, over the past 10 years, have been reasonably favourable months for this luxury stock. In this time span of 32 trading days (from June 26 until August 9), shares rose on average by 7.3%. Moreover, since 2012 the pattern returns had a high winning strike of 90%, with 2020 being the one exception.

Another stock that you might consider for your investments is Restoration Hardware, that operates in the luxury furniture segment. It has faced supply chain issues like many manufacturers and retailers, that have pulled the stock’s price much lower during the last couple of months (open an interactive data chart to see the best entry and exit levels http://tiny.cc/seasonax-restoration). But this has not discouraged Restoration Hardware customers, hence we are still undoubtedly seeing high demand for this company’s products.

Will this trend continue?

The last recession is already a decade ago, and luxury brands have done their research. This time they are better prepared for uncertain times, thanks to better inventory control and less dependance on third-party retailers.

The time to recover from the crisis has been shortened due to a huge increase in Chinese consumer spending in the last decades. 2021 also saw much stronger demand from US customers, which has continued throughout 2022. The Bank of America aggregated US credit & debit card data showing that luxury spending is up 14% year to date. This should ease concerns over China’s Covid-related shutdowns.

Moreover, digitalization and the rise in e-commerce has led to a more direct relationship with customers that has proven to be strategic during the pandemic.

Indeed, luxury is actually a very interesting market for securing your money.

It is an industry that resists crises: luxury customers, due to their financial wealth, recover very quickly.

Contributor(s)

Tea Muratovic

Tea Muratovic is an accomplished professional in the financial markets with extensive experience in the global market landscape. As a Co-founder of Seasonax, she developed an award-winning analytical tool that identifies promising trading opportunities across over 20,000 stocks, commodities, indices, and currencies...

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Indian Markets set for a bounce from highly oversold levels

US benchmark index S&P 500 index closed out its worst first half of a year since 1970 with a drop of 20.6%. The Nasdaq Composite finished the first half down 29.5% and notched its worst first-half performance on record. The MSCI global stock index was down 20.9% for the first half of 2022, its biggest first-half of a year percentage drop on record.

Back home, markets are also grinding lower. Nifty ended June month ~5% lower and 9.4% lower for the quarter as FPIs continue to be sellers on almost all days.

Nifty has ended the third consecutive expiry in the red where it ended June series with the losses of 2.41%. Nifty witnessed sharp sell off from the start of the June series and touched the low of 15183 level but towards the end the index recovered by almost 700 points. A majority of the fall was contributed by Metals, Pharma, Realty sectors which were the biggest losers in June series.

Experience taught us that higher open interest acts as a milestone around the neck of the market and sinks it lower when any risks materialize. In the Stock futures’ segment, Open interest of 459 Cr shares is far lower than the all-time high Open Interest we have seen in February 2018.

At the beginning of July series Nifty future OI at 1.28 Cr shares is still far lower compared to the last 15-year average OI of 2.2 Cr shares.

FIIs are heavily short on the markets in Index Futures.  At the beginning of the July series the ratio of their long to short positions is at 0.17.

 

We have never witnessed such large short positions from FIIs ever in the history of India’s derivative markets.  Such large short position calls for a cautious approach in building long positions though on the flip side, it should keep bears on the tenterhooks. Any positive development on macroeconomic front or a rally in global markets after recent slump can result in sharp short covering rally in Indian derivative markets.

Maximum open interest in Nifty Monthly Put options (28 July Expiry) is at 15000 strike (26.33 Lakh shares) and maximum open interest in Call options (28 July Expiry) is at 16500 (19.86 Lakh  shares) followed by 17000 (19.70 Lakh shares).

Let us go one step ahead and analyze some other data and developments too. Looking at the data of last 29 years, we find that the month of July has an average return of 1.76% for Sensex, which happens to be the second best, after December.

Of these 29 years, July has closed with monthly gains in 20 out of the 29 instances under study. This translates into a 69% chance of a positive return in this month of July 2022. Important thing to note is that, this time in year 2022, previous 3 months of April, May and June has back-to-back negative returns in Sensex, which has happened for the first time in the history of 29 years. So, this increases the probability of July month performing on the flip side of what happened in previous three months.

Another breadth indicator that I have been following is the Number of stocks above 200 DMA. For the Multicap Index NSE500 this number reached 14% last month, which is the extreme oversold levels looking at the history. In such a scenario we can expect the market to rise in the current month of July.

Following is the weekly chart of NSE500 Index containing the breadth oscillator, which shows the oversold status of Stocks. In the year 2011, 2013, 2018 and 2020 this oscillator (Stock Above 200 DMA) reached near to 14% and reversed north. Recently we saw this number touching that level and bouncing back.

Source : Bloomberg

Here I would like to consider one more indicator known as Disparity Index which supports my argument.

The disparity index is a technical indicator that measures the relative position of an asset’s most recent closing price to a selected moving average and reports the value as a percentage.

Source: Trading View

Above chart is NSE500 Daily Chart with a 20 DMA Disparity index oscillator beneath the price chart . This oscillator has formed positive divergence with good margin against the price chart of NSE500. This development indicates the probable bullish trend reversal for NSE500.

Markets have found support at multiple occasions near 15200 levels in Nifty, and that level should be the line in the sand for the bulls.  I see that oscillators are quite oversold and markets are posed for a short covering bounce. All long bets should be relinquished below that key support. 16500 is the temporary roof for the markets. Do lighten your long commitments if Nifty were to come near those levels in July.

Contributor(s)

Vinay Rajani, CMT

Mr. Vinay Rajani is a CMT charter holder and M.B.A. He has more than 16 years of rich experience in the Financial Markets. He is born and brought up in Ahmadabad, Gujarat, India. He has been working as a Senior Technical and...

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Favorable Risk-Reward: Are stocks & bonds poised for a strong 2nd half of the year?

1H ‘22 marked the worst 1H for the 60/40 portfolio since 1932.

The 10-year US Treasury Note Yield started the year at 1.51%, closed H1 at 2.97%.

The avg. US 30-year Mortgage Rate started the year at 3.10%, closed H1 at 5.70%.

Despite the S&P 500 Index seeing positive earnings growth, stocks declined due to multiple contraction associated with rising interest rates and fear of persistent inflation.

Stocks down, bonds down… If your portfolio lacked exposure to cash, commodities or other alternative asset strategies, you felt a lot of pain in H1.

Your 60/40 backtest results, which suggested reasonable downside protection, have added very little value in 2022. But as the stock and bond market declined over the last 6 months, what new information is available to help guide our decision making?

Let’s start with bonds.

Retail investors tend to gravitate toward bond funds. These funds carry different risks compared to individual bonds. Learn more about the key differences here. Given the rise in interest rates, several fixed income factors are offering attractive total return potential.

Below is a chart from JP Morgan’s Guide to the Markets – it breaks down several bond categories and outlines the potential total return given a 1% rise or fall in interest rates. Their estimate assumes a parallel shift in the yield curve i.e. rates for all maturities rise/fall by the same amount of basis points.

The message is clear; Interest rate risk is more attractive now than it was 6 months ago. Let’s look at the US Aggregate:

  • 10.2% total return based on a 1% fall in rates.

 

  • -2.7% total return based on a 1% rise in rates.

 

That’s an attractive risk-reward given the experiment’s assumptions. Below is a chart of the Bloomberg US Aggregate Bond Index (TR). In 1H22 we saw one of the largest drawdowns on record.

Could rates move higher from here and put even more pressure on bonds? Sure. But the influence of higher rates on total return today is less severe than back in January.

Let’s move on to stocks.

Arguably the most important stock chart in the world – below is a weekly price chart of the Russell 2000 Index. We remain at a critical support/resistance zone ~1,700. This zone marked the 2018 high and the pre-COVID 2020 high.

Included is the weekly Price Momentum Oscillator (PMO) which has remained in a bearish cross since April ‘21. The PMO indicator fell below the zero-line in February ‘22 and is yet to resurface.

Yes, the trend is overwhelmingly bearish – however, the index is trading at a very well defined price zone. As a technical analyst, I appreciate horizontal price levels that assist in defining my risk. You’ll never regret using price and volatility measures to set a protective stop prior to entering a position.

Not only does the ~1,700 zone give us a level to trade against, but it can help with our larger view on the equity market. For example:

 

  • If the Russell 2000 Index is below the 1,700 level, a continuation of the secondary downtrend is more likely, therefore it is safe to assume a bearish short to intermediate-term outlook on stocks.

 

  • If the Russell 2000 Index is above the 1,700 level, a reversal of the secondary downtrend is more likely, therefore it is safe to assume a bullish/neutral short to intermediate-term outlook on stocks.

It’s not rocket science. I use simple if/then statements all the time when reviewing or formulating my core view of an asset class. Call it a mental shortcut if you will, but it keeps things simple and for a guy like me, the simpler the better.

That’s enough out of me.

This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results. Please contact your financial professional for more information specific to your situation.

Contributor(s)

Shane C. Murphy, CMT

Shane Murphy is an Associate at Michael Roberts Associates Inc. an independent wealth management firm located in Syracuse, NY. Prior to that, Shane worked in portfolio construction and research for an independent RIA. He also has experience in municipal finance, working at...

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5 Stocks With Triple Top Breakouts To Higher Highs

This diversified collection of New York Stock Exchange traded stocks are breaking back upwards and above previous resistance levels. These point-and-figure charts tell the story of more demand than supply, that is, enough new buying that sellers give up enough for trend to reverse.

Some are making higher highs. Others are taking out downtrend lines, an early indication of possible change of direction, it it holds. This method of price chart analysis gives a different picture than candlesticks or OHLC (open, high, low, close). Because “p&f” is not as widely used as back in the 50’s and 60’s, this makes it valuable for those looking for the less popular.

Evolent Health

There are not many charts like this showing NYSE-traded stocks almost straight up off of the March, 2020 pandemic lows. Most stocks dipped here and there and then began to sell-off at the beginning of 2022. Evolent Health just keeps going. It’s a healthcare company that provides “clinical and administrative solutions to payers and providers in the United States,” according to its official website.

Earnings per share increased this year by 90.90% and the 5-year rate of earnings growth is 37.00%. Average daily volume is a relatively low (for an NYSE listed equity) 787,000 shares.

NL Industries

Although it remains well below its peak of 14.50 from late 2017, the stock clearly bottomed in early 2020. The triple top breakout took place in early 2021 when NL moved above 5 and the ascent to the current price of about 10 began.

NL’s in the security and “protection services” business with earnings growth this year of 248% and a past 5-year rate of 27.20%.

NeoPhotonics

NeoPhotonics is displaying the kind of triple top breakout that investors would most like to see: a move above the previous resistance at 10 and a break above the early 2021 high of 14. It’s been moving higher since 2019.

The company’s in the semiconductor industry with negative earnings on the one year and 5-year time frame.

SentinelOne

The main thing here is that the price finally closed above the long-term red downtrend line by breaking above the previous 26 resistance. It has a long way to go to make it back to the 74 level last seen in 2021 but maybe this is a start.

SentinelOne is a software company with headquarters in Mountain View, California. Earnings per share are off by 239% this year.

The Travelers

This is another instance of a stock breaking above the red downtrend line as it breaks above the previous resistance level, this one at 170. Even though it’s dropped back below that level this week, the effect of the breakout remains in place until the price drops below the blue up trend line.

One of the best known brand names in the property and casualty insurance business, the Travelers Company has been around for 165 years.

These were a handful of stocks that look interesting in their current setup.

Not investment advice. For educational purposes only.

Contributor(s)

John Navin

John’s a graduate of the University of North Carolina at Chapel Hill. His Marketocracy work is featured in the book The Warren Buffetts Next Door: The World’s Greatest Investors You’ve Never Heard Of by Forbes Editor Matt Schifrin. Please do not ask John to...

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Intermarket Study and the Indian Markets

All of the world’s financial markets including bonds, equity, commodity, currency and cryptocurrency have an interrelation and do not exist in isolation.

Markets namely equities, cryptocurrencies and commodities(industrial base metals, energy commodities likely to follow) have taken a major hit in terms of correction following the inflated prices due to the excessive money printing experienced in the year 2020 in terms of the quantitative easing by the Federal Reserve, followed by the Russia-Ukraine Crisis.

Crypto Market view:

 In 2020, Bitcoin bottomed on 13th March 2020 after the COVID crash.

Cryptocurrencies, being a technology based asset class, have a chance of bottoming out before the equity markets in order to lead the rally across the various asset classes, followed by equities (Nifty 50)and then commodities(crude oil).

Bitcoin has seen a correction of around 72% off the peak and is estimated to bottom around 16150 levels, 76% off the peak or the 50% Fibonacci retracement mark by October 2022.

Figure 1. Weekly View of BTCUSDT with Fibonacci Retracement.

Bitcoin made a low of 3165 on 13th March 2020 and a high of 69000 on 10th November 2021

Equity View-NSE:

The Indian Stock Market bottomed on 24th March 2020, about 11 days  after the Bitcoin bottom.

Now, let’s go over 2 previous downcycles that Nifty 50 Index went through to give us an idea of the pattern discussed above:

The broader market Index Nifty 50 experienced a 28.48% correction in the year 2010-2011.

Figure 2.Weekly view Nifty 50 Downcycle 1 zone. 28.48% correction over 407 calendar days from 8th November 2010 to 20th December 2011.

The broader market Index Nifty 50 experienced a 25.12% correction in 2015-2016 from the peak.

Figure 3.Weekly view of Nifty 50 Downcycle 2 zone.25.12% correction over 362 calendar days from 4th March 2015 to 29th February 2016.

The type of formation in the current market looks similar to these patterns in the past, which lasted for a corrective period of around 362-407 calendar days.

The estimated bottoming of the Indian National Stock Exchange Index Nifty 50 could be around 13150, a Fibonacci retracement close to 38.2% from the peak; or a 29% correction off the peak.

The estimated time for this correction bottoming out could be November-December 2022 period or about  250-300 trading days or 400-460 calendar days.

Figure 4.Weekly view of Nifty 50 Downcycle 3 zone.Expected correction of 29% over 400-460 calendar days.

 

 

 

Figure 5. Weekly view of Nifty 50 with Fibonacci Retracement on the Downcycle 3, to measure the estimated correction level.

Figure 6.Weekly view of Nifty 50 downcycle zones- All the 3 zones mentioned above, in one frame.

 

Commodity View-MCX:

 In 2020, Crude Oil formed a bottom on 28th April 2020 from the COVID crash, 35 days after the equity market index Nifty 50 made a bottom.

In the current decline, Crude oil could be bottoming around 5500 a barrel (a 45% correction off the peak or 23.6% Fibonacci retracement).

Figure 7. Weekly view of Crude Oil with Fibonacci Retracement.

Crude oil made a high of 9996 on 8th March 2022 when US banned oil imports from Russia over Ukraine invasion. On 28th April 2020, crude oil made a low of 795.

Natural gas could be bottoming around 360.8/MMBtu, 50% correction off the peak, or a 38.2% Fibonacci retracement.

Figure 8. Weekly View of Natural Gas with Fibonacci Retracement.

Natural Gas made a high of 749.6 on 8th June 2022 and a prior bottom of 110.5 on 25th June 2020.

Since the commodities are likely to bottom out post the equity markets, an estimated time till February or March 2023 could be the commodity bottom.

CONCLUSION:

“History doesn’t repeat itself, but it often rhymes”-Mark Twain

As per the cycle analysis in the intermarket study we can see that Cryptocurrencies bottom first, followed by equity and then commodities.

As a result of this observation, we can conclude that there is still pain left in the market and we are close, yet away from the bottoms.

Since the market can still experience some discounting, we must take a risk-first approach to the market.

Contributor(s)

Kshrey Jain, CMT

Kshrey Jain, CMT CFTe, is a proprietary trader and investor with over 7 years of experience in equity markets, leveraging a blend of technical and fundamental analysis. His trading journey began during his university days from his hostel room. He holds a...

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