Good afternoon,
As I was flipping through the charts this weekend, I noticed a common theme amongst most of them— They are trying to carve out bottoms at critical support levels.
Below I’ll piece together my observations over the last month.
Technical Support + Bearish Sentiment: A Combo Deal
One of the main things I’ve been looking for and observing is a technical bounce as the sentiment remains bearish. This has been a theme I’ve been looking forward to over the last month or so, and below are several excerpts I’ve shared from the recent Market Outlooks.
For example, at the start of the month (the 4th of July party), one of my neighbors volunteered information about her and her husband pulling out of stocks and going to cash. I took note because it wasn’t even a topic we discussed previously; she felt compelled to share that information with the group voluntarily. She cited “the recession,” the rising gas prices, and inflation levels.
Since then:
NDX is up 7%
SPX is up about 4%.
Gas is down about $0.50/gal
Interest rates have continued to drop from the June peak
That came shortly after the bearish sentiment observation I shared in June.
Sentiment
From the 18-Jun-22 Post:
The sentiment is noticeably bearish, and as the momentum indicator pulls back to the extreme levels seen in prior major market bottoms, I will not be surprised at a strong attempt by the bulls to put in a relief rally.
I have seen or heard the word “recession” probably 100 times over the last week.
Google Trends projects this June to be the highest ever month for the search term “recession,” surpassing March 2020 by a wide margin.
So yeah, the sentiment is pretty weak out there. People are scared. A good relief rally should help reset the extreme bearishness.
Market psychology is a natural phenomenon; people get whipsawed easily, whether they know it or not.
Technical Support Levels
From the 26-Jun-22 post:
Possible Scenarios
With all of the above considered, I’m not going to make predictions but want to know what some possible scenarios are. Markets have the potential to bounce here based on the monthly channel (NDX), the extension from 30-week SMA (SPY), and the futures charts.
There might also be some aid from interest rates hitting a wall (soonish) and perhaps an oil decline into the 2024 election.
Either way, I believe the markets must put in some recovery bounce now, or else they will show extreme weakness, as seen in the Dotcom and GFC eras. If the markets were to save themselves from further disaster, now is the time to put in the bounce.
As always, respect the charts and block out the noise. The tape will be the ultimate judge.
Here are some updates on the above-noted items:
NDX Channel
Up 7.8% in July
SPY extension from the 30-week SMA
Strong pivot off the June extension readings
30-Year Mortgage Rates
Halted at the extreme momentum level
Oil
Down about 10% for the month
“Speculative” Assets Leading
From the 02-Jul-22 Post:
I believe BTC is closer to a low than most people think. There’s a solid case to be made that the 18-Jun-22 lows are it for this bear cycle.
Bitcoin is often viewed as a “speculative asset,” and rightfully so. It typically has much more significant volatility (via the ATR%) than most of the high beta names I follow. The fact that it is up about 15% this month vs. the majors being up around 4-7% is telling.
Circling back to the sentiment:
You can often see extreme bearish sentiment in Twitter posts from people who haven’t done the necessary homework to have an educated conversation on the topics they are commenting on. Sometimes I’ll engage in talks to get a feel for the sentiment and test the waters.
I did not need to post on an anti-Bitcoin thread that went viral in early July, but I had some time and wanted to see what kind of reactions I would get.
It is undeniable when people regurgitate headlines and fall victim to echo chambers. These Twitter threads are usually good times to confirm theories on the general population’s expertise (or lack thereof) on specific topics.
I don’t want to pick on anyone, but I had a Twitter exchange with someone in early July who did not spend any time trying to learn about Bitcoin.
Here is how the chart has developed since then:
Yes, BTC is up 20% from that Twitter post.
And yes, that was made on the third lowest wick dating back to 2020.
All of this stuff adds up. Technical support was in. The sentiment was extremely bearish. Easier to see in hindsight, but it was a screaming signal at the time.
And for the record, there are people out there eager to learn. Case in point:
Continuing on…
Regaining the 10-week SMA: First Step to Repairing Charts
From the 10-Jul-22 Post:
The major ETFs are generally consolidating under the declining moving averages, with stretched momentum indicators.
From this point, there is potential for strong moves in either direction. I think IWM will be a good clue as to how things will go. If it breaks below the pre-Covid highs, I think it returns to the anchor weight that pulls markets lower— similar to what I observed in 2021.
However, if it can clear the 10-week SMA, that would be the first positive step of many required steps to repair the charts and provide opportunities for bullish positions.
Two weeks later, IWM has indeed closed above the 10-week SMA. The first step to repairing the chart is completed.
From the 16-Jul-22 Post:
From a bullish perspective, I want to see each significant ETF close above the June 27 weekly candle highs. That would accomplish two things:
Close above the local resistance
Close above the declining 10-week SMA
Check and check.
Rallies starting from “Doom and Gloom” predictions: Seizing the Opportunity
The first steps to recovery are in. The markets have an opportunity to sneak in a strong rally, especially with the deep levels it started from. Based on real-world conversations and what I’m observing on Twitter, the sentiment is still negative.
Here’s another data point on the sentiment from which this current rally started:
Now consider people like that, being on the sidelines, waiting for lower prices because they are convinced lower prices are coming. When do they finally change their mind? +15%? +30%? +50%? It will surely be a mental battle. They won’t be buying anytime soon; when they eventually do, it will only add more buying pressure to the next leg up.
The opportunity is there for the bulls; now, it is up to them to seize the moment.
Have a great week,
Trace