Market Outlook 8-1-21
Monthly Charts, Seasonality, BPSPX, Bitcoin, Ethereum, Coal, Volume analysis
Good evening,
Before I get into the Market Outlook, I need to clarify the Portfolio post. I indicated that I was raising one (1) stop in the subheader, which is NFLX.
For the portfolio position, I will also use the same level as the new options stop-loss level: $504.66
Market Outlook:
As usual, the monthly charts are in, and I have gone through what seems to be a plethora of them this weekend. In general, I am seeing strong trends, some of which are nearing the tops of their respective channels. But there are some excellent setups on this long-term timeframe.
As we enter the August seasonality, I am very cautious. I’ll state it bluntly: August has historically been a terrible month for returns in the years after elections. The stats don’t lie, and there’s no way to get around it. Nothing is guaranteed, but I still need to be cognizant that we are entering some historically bearish and very weak markets—more on that below.
Let’s dig in.
Monthly charts
Major Index/ETFs
S&P 500:
Right up against the supply line of the trend channel
Still quite a bit of room to run before reaching major targets at $5.2k and $6.1k
SPY:
Not quite at the supply line yet - there’s still about $20 between Friday’s close and a tag of the supply line.
NDX 100:
Wicking off the supply line of the long term channel
Similar to SPX, there is quite a bit of room before reaching the major target at $27.6k
It’s been a while since I last shared this chart, and NDX achieved the target at $12,662 back in May. It is time to hide that target and clean up the chart...
QQQ:
And similar to SPY, there’s still room within the trend channel before tagging the supply line. There’s about $20 before the primary (bold) supply line and $40 before the secondary (dotted) supply line.
DJI
There is no monthly channel here, but I do see some more room to run (~30%) before the target at $45k.
RUT
This is actually the channel that looks most appealing to me, with a good distance to go before tagging the supply line.
IWM
The IWM pitchfork chart.
It’s no secret that small caps have been struggling relative to the other majors, but it is reassuring to see the very long wick off the pitchfork quadrant (near the 9-month SMA).
Other charts
Oil
Target at $70 was achieved (very nice), time to take that off the chart and look for what’s next.
So far, I have really been pleasantly surprised with the resilience after reaching the 2018 highs.
From the July 5th post:
Oil:
Coming up to some 2018 resistance at the $76.80 level
I would not be surprised if there were some type of reaction lower, and if so, how the price manages to hold up will be telling
So far, after tagging that $76.80 level, there was a strong reaction lower (a 15% drop over a two-week period), followed by a sharp snap-back in price as the bulls stepped in. This is encouraging for the energy names.
Oil vs. SPX
It’s hard to ignore the deep levels from which this ratio is rising. The Oil target at $103 remains active, and as long as this holds above the rising 9-month SMA, I like the energy sector for a continued outperformance vs. SPX.
Energy Sector (SX90 on TC2000 Platform)
XLE
After Oil hit the $76 level, there was a reaction across the board in the energy sector. It is promising to see this long wick off the 9-month SMA and a close above the $48.56 level.
XOP
A much steeper pullback in the more speculative group, but still holding above the rising 9-month SMA.
NOTE: This is below the selling climax zones from 2008 and 2016. I do not like this weakness.
AAPL
I do like this longer-term channel (a lot, actually). Coming into the seasonality, the way this holds up will be VERY telling.
There is still quite a bit of room before that target is achieved at $325
DIS
I have this one back on my radar again; I’m looking for a break above the dashed orange line, which is at $186.29.
There is still plenty of room before the target at $313 is achieved
NUE
Another portfolio name, which comes from the Basic Materials sector, put in a sneaky +8% month.
This has lots of room to run
Basic Materials
Most of the longer-term members know this has been a favorite sector of mine for a while now. This started catching my attention last July before the massive breakout from the ascending triangle:
The Basic Materials Weekly chart is showing an ascending triangle pattern spanning over 12 years, that may be on the verge of breaking out much higher! Here’s the chart:
I’ve included the 30-wk MA. There are two prior areas (2009 & 2016) where price was in such a rapid rise that it forced the MA to make a rapid U-turn and rise higher. Soon after, price was able to back-test the MA and continue on to much higher prices
The PnF Objectives that I can generate would represent some very nice % gains from current prices (see PnF chart below). Should price begin its breakout from this ascending triangle pattern, I would look for an entry around a tag of the rising 30-wk MA somewhere down the road
Here is the PnF chart with the objective (Using $DWCBSM DJ U.S. Basic Materials Total Stock Market Index as a proxy)
The objective is currently at $10,000 which is about 140% higher than current levels ($4168)
The relative strength vs. S&P 500 is starting to show:
I will be watching this sector closely going forward and will be monitoring its industries and their respective leaders.
This sector has seen incredible rallies in the Lumber, Copper & Steel sectors (to name a few). Now I have my eyes set on Coal. From June 6th:
Coal
I like how this is back above a prior long-term resistance level and showing a deep relative strength crossover.
While the media hates on this industry, it could be a sneaky play
A leading name from this industry that I’m adding to my watchlist is Arch Resources Inc. (ARCH)
For me, it is not ready for a buy yet, as it remains below a key resistance area.
But the deep relative strength crossover is something I like to see
I have an alert set for $62.19, and if it should trigger, I’ll re-evaluate for an options or portfolio position.
Last week I had an alert go off for ARCH. It is now above that key longer-term resistance level. Here’s an updated look:
Deep relative strength crossover
I like this above $62, especially with a continued relative strength outperformance in the sector.
Coal
Coal looks poised for higher, from a long term chart perspective
Deep relative strength crossover
I would expect the media to hate on this for sure, but my goal is maximizing returns, not listening to some talking head on the TV.
I will be considering a position in ARCH for the portfolio, as the option chain doesn’t offer many liquid choices.
Seasonality
S&P 500
As mentioned earlier, the month of August (post-election years) has been brutal. This isn’t a fun period for the bulls, historically.
I’ve highlighted the period between Aug 1 - Sept 25, which has a historical return of -2.88%, which annualized to -17.7%
The damage hasn’t been limited to S&P.
Nasdaq 100
Over the Aug 1 - Sept 21 period, the historical returns have been slightly worse than SPX, coming in at -3.43%, which annualized to -22.2%.
Again, nothing is guaranteed when it comes to seasonality, but it is important to be aware of these periods. I would not be surprised if there were some decent pullbacks in the equities over the next 1-2 month period. Respecting stops will be very important.
Bitcoin
I love the monthly chart this just put in.
Rising 18% on the month, this also closed above the June high wick. I love to see this.
2-hour PnF chart, Box size = 250:
Just last week, this broke through the bearish 45° at the $34k level:
Bitcoin:
Bitcoin has broken the 2h PnF chart bearish objective:
It shot straight up to $42k. As this broke through the bearish trend, there was lots of talk around social media that this rally was on “low volume,” and prices were likely to go back lower. I was scratching my head why that mattered and why people always cite low-volume rallies as bearish. The way I see it, springs of the low-volume type are the ones I like to see. To me, it indicates the bulls have absorbed the supply that the bears offered, and the strong thrust off the lows was evidence that the sellers were getting run over. I’ve accepted that there will always be people with large audiences saying things that don’t make sense in the market. It’s just part of the game. The tape doesn’t lie, and someone with 100k followers can say whatever they want, but in the end, it won’t matter.
Right now, looking at the tape, I see a lack of conviction from either side. The decreasing volume & volatility on the pullbacks seem to give an edge to the bulls (absorption of supply). The tape is coiled for the next move, and it should be an explosive one.
Volume
Quick side-track to low-volume rallies. Let’s take a look at SPY from 2009, which I’ve heard plenty of bearish characters cite low-volume rallies more than once.
Here is the same monthly chart from above, with volume added. The volume that came in around 2008-2009 was MASSIVE. The volume that comes during periods that follow recessions shouldn’t be compared to the recessions!
On the same note, market analysts shouldn’t compare the volume after high volatility periods to the volume that came during the volatility!
Why did the volume decrease on the way up? Well, for one, as the price rises, it takes more dollars to be the same unit. If you wanted to purchase a “lot” (100 shares) of SPY in March 2009, it would only cost around $6,000-$8,000. Now try buying 100 shares; it’s going to cost you $43,850. Another factor that decreases volume is the lowered volatility relative to the Mt. Everest type volume of 2008. This is like the Himalayan mountain range on the left compared to the Appalachian mountain range. There are much fewer shares exchanging hands now vs. then.
These periods where the volume looks like massive mountain ranges are usually signs of major market bottoms. What the tape shows after those high volatility periods should be calmer, naturally. There should be a decrease in feverish activity. The analysts should be looking at what happened BEFORE the rally for their clues.
So now, there was an obvious resistance at the $42k level, and the price has pulled back a couple thousand as I type this. What I’m looking for is the current pullback leg to be shallow, perhaps on light volume, and then the next pivot to the upside would be labeled as an “LPS” in the accumulation structure.
Ethereum
Here is the monthly chart with the Bitcoin pattern overlaid on it.
The bears tried but failed to drop this below the $1,500 level. This was always an important test, and the bulls have passed (so far).
I like this for higher, and I’m looking forward to the next 6-12 month period.
BPSPX
Back on July 18, I shared the BPSPX chart at the time:
BPSPX:
A note about BPSPX:
This has been a handy indicator when trying to gauge the bigger picture market moves. In bull markets, bounces off the 47-53 area are common. The way I learned it, deep moves from below 30 straight up to 70 are good indicators of new bull markets. The confirmation comes on a pullback to the 47-53 area, followed by a bounce-back above 70. All of those things happened after the March 2020 selloff.
BPSPX recently dropped back below 70, on its way towards the 47-53 area. It doesn’t need to get all the way down to the 50 level, but it is quite common to do so. I’ll continue monitoring this and update if/when that bounce happens.
A break below 47 usually indicates trouble lies ahead.
Back then (only two weeks ago), the indicator was at 63 and heading lower. It did find its way to the top of the 47-53 range, finding support and bouncing off 54. That is step 1 to recovery.
Currently, the indicator is back at 63.
BPSPX (Weekly)
BPSPX (Daily)
As we head into August, I’m looking for a break back above 70 to confirm all is well or a break below 47 to indicate trouble lies ahead. Between now and either of those, it will just be noise.
That is all for me today. This was a long post, but I think there’s a lot to look at coming into a historically difficult period for equities. Longer-term, there are still many strong setups, and if there are any big pullbacks, I think it would only add fuel to the fire for the next massive bull rally.
Should there be any drastic pullbacks, I’ll be on the lookout for long setups. I am more excited about the crypto space now than I have been for about 2-3 months. The bitcoin $42k level will be a big one to stay above. Let’s see what the bulls can do over the next month.
Have a great week!
Trace