Monday Markets — Around the Grounds…

Monday, 26 April 2021
Melbourne, Australia
By Greg Canavan

[3 min read]

Last week, I made the case that the risk of deflation/disinflation has not gone away. We are in a reflationary period. As soon as the stimulus starts to fade, deflationary forces will return.

Helpfully, I said I have no idea when that would be. And besides, maybe governments and central banks keep their foot to the floor for longer than ever. They want to be REALLY sure they have defeated the spectre of deflation before they think about easing off. 

How about we dispense with opinion today and see what the market is telling us? What assets are in an uptrend, and which ones are in a downtrend?

Let’s start with Bitcoin [BTC], because the tide looks like it could be turning here…

The chart below shows strong divergence between price and momentum. These divergences are often a warning sign that an asset is at risk of not being able to sustain the trend.

While so far this looks like a correction within an upward trend, you’ve seen a sharp decline in momentum, as measured by the relative strength index (RSI) at the bottom of the chart.

Oversold conditions (when the RSI hits 30 or below) usually occur in bear markets. So more weakness here is something to watch for.


Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

While I’m a big fan of the technology that underpins bitcoin, I have no real opinion on price. However, I do know that the market doesn’t hand out massive gains without making you sweat for it. So a deeper correction/bear market here wouldn’t surprise me. If you’ve missed the run so far, it would present a good longer-term buying opportunity.

Bitcoin is an asset for the new, emerging digital financial system. Gold is a similar asset to bitcoin, although it’s still firmly a part of the traditional financial system.

Gold’s price action recently has been good. It’s bounced twice off solid support around US$1,680. In recent weeks it’s rallied above support/resistance around US$1,770. If gold can hold around these levels for the next couple of weeks, it suggests the downtrend may be over…


Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

Gold is rising because real interest rates are moving into negative territory again. That probably reflects the transitory impact of inflation combined with nominal rates that are falling again. After peaking in late March around 1.75%, the US 10-year Treasury yield is back down around 1.55%.

Oil prices still look strong though. The chart of Brent crude below shows oil in a healthy upward trend. It’s currently consolidating after a strong upward move.


Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

Likewise, copper remains very strong. It’s pretty much held on to the 50-day moving average (blue line) throughout this rally. I wouldn’t get too negative on it until it at least traded below the 50-day.

Clearly, commodities like a recovering economy and negative interest rates.


Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

As do stock markets…

Check out the NASDAQ. Despite the sharp sell-off in March, it has recovered and is close to making new highs again. Note that throughout the rally over the past 12 months, the NASDAQ has held the 100-day moving average (red line) on each correction.


Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

The S&P 500 is outperforming the NASDAQ. As you can see below, it’s at fresh all-time highs (the NASDAQ is yet to breach its Feb all-time high) and traders are buying the dip aggressively.


Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

How concerning is this all-round bullishness?

Well, to be honest, we’re not exactly at the euphoria stage. It all looks rather orderly at this point. If I add the RSI (momentum) to the S&P 500 below, you can see that it’s in a bullish trend, but not consistently overbought.


Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

And based on CNN’s Fear and Greed Index, market sentiment is nowhere near concerning levels. Just a month ago it was in fear territory.


Port Phillip Publishing

Source: CNN

[Click to open in a new window]

My conclusion is that this market isn’t exhibiting signs of being near or at a major top right now. In fact, it’s more likely you’ll see a melt-up from here, rather than a meltdown.

That’s because governments are doing their best to debase their currencies, and investors are moving into private assets to protect themselves.

But you want to be in the right stocks and assets to take advantage of this. Furthermore, you want to know if the situation has changed. Which is why we’re putting on a special presentation on Thursday. It’s a way to potentially make bigger returns, with less risk, from stocks you already own.

This market looks strong right now. But it will go through gut-wrenching corrections along the way. Like in March. How do you know if that’s the signal to exit? Or just another buy the dip scenario?

Thursday’s presentation will help you find the answers to that. Click here for more information…

Please continue below for Murray Dawes’ ‘Week Ahead’ update. Today, Murray shows you how often the ASX 200 has broken out to new highs just prior to a sharp correction over the past decade. With prices nudging up against the all-time high, Murray says to beware the false break.

Cheers,

Greg Canavan Signature

Greg Canavan,
Editor, The Insider

[WATCH] Beware the False Break

By Murray Dawes

When you look at a chart of the ASX 200 you would think we are in a roaring bull market, but the reality on the ground at the moment is a bit different.

I monitor hundreds of stocks each day and from where I’m sitting I can’t see much going on.

The banks continue their vertical rise, which is propping up the ASX 200.

But apart from that momentum across the board is lacking.

Many stocks are drifting down on the back of profit taking.

In today’s ‘Week Ahead’ update, I show you that over the past 10 years a false break of new highs has been par for the course rather than a sustained breakout.

The market is great at tempting new traders into positions on a breakout and then brutally shaking them out with a correction.

Prices are approaching the top of the 10-year channel and we are also testing the all-time high from last year.

The trend is still up so there’s no need to exit positions, but beware falling for the bull trap that occurs when a breakout to new highs is confirmed.

Regards,

Murray Dawes Signature

Murray Dawes,
Editor, Pivot Trader