Share Forum - Discuss JSE shares and join the Investor Challenge

Having some time on my hands again, being winter and all, I thought I would do a weekly (or thereabouts) post on some trading advice. Hope some people might find it useful.

First, some background... I co-founded the global coal market around 1998 in London, UK, becoming essentially an online coal (commodities) broker at the time. Later I moved into trading commodities with a couple of investment banks, returning to South Africa in 2008 post the credit crunch. I now run Thrive Centre in Hogsback where we make compost, grow awesome organic food and teach people how to become self-sufficient. I also run African Source Markets which is commoditising strategic African commodities in much the same way that globalCOAL did. For reference I've traded FX, commodities, stocks, swaps, futures, options and several other private variants as part of corporate finance deals.

I find financial markets (alongside religion) one of the most amazing concepts invented by Homo Sapiens to date. However, I just wish that we could all get our egos in check and learn to live in harmony with Nature, instead of raping her for profit, without accounting for any externalities, although I think that movie is still playing out as climate change starts to make itself felt. Anyway, on with the journal...

Now let's look at Bitcoin ("BTC") to start with.... We start with a monthly chart to get an overall helicopter view.

We can see that we are easily within the Bollinger Bands, indicating that monthly volatility is way down from previous levels. This therefore gives us no indication of price.

However, in the MACD chart, we can see that both the MACD line itself (blue) and the signal line (red) are in positive territory, and have been for the last 3 months i.e. 3 green bars of late. When the current (signal line) and the wind (blue line) are moving in the same direction, and especially when moving in same direction as the long term 200-day MA, then we expect strong moves in that direction i.e. similar to strong, rolling swell in an ocean. When current and wind are opposite to each other then we should expect choppy, sideways price action.

Even though the bulls are clearly in charge in this monthly view, we see that price action has been weak and has failed to break above the 10,000 level again. We also note that an average run above or below the signal line is about 6 months, and we are in the 3rd month now. To me this indicates that BTC is quite a tired market, with many participants having given up on it.

It's inevitable that momentum will break down once more and when it does, we could see major capitulation from buyers finally throwing in the towel. However, for now the monthly chart is telling us to probably hold onto any long position, if already long. For any new position, it's too early to short and probably not wise to go long this late in the cycle.

Following with interest. Not because I want to try, but because I find it fascinating!

Thank you... very interesting.

Momentum has now broken downwards on the Dow. But before the bears get too excited we need to note that the signal line is still nicely in positive territory. This typically means a period of choppy, sideways price action i.e. as the wind blows against the current we get crosscurrent, choppy conditions in the sea.

The best strategy here is to sit on your hands, although short-term longs should probably be exiting their positions and taking profits. Note that we had a similar push downwards starting on 9th June, but that was under much more convincing bearish price action, with the steepness of the momentum fall much sharper. This one is more gentle although we need to see what today actually brings to the table.

We are still in this vital period before month end, which determines if we break upwards on a monthly chart, or shift back down again. That is the medium term trend that we want to be able to get on.

Unlike many other markets, the stock market hardly ever gives you a chance to short it. Aside from the famed Plunge Prevention Team, we also now have Robin Hood traders, day traders, swing traders, bots, funds and of course the monthly splurge from the FIRE crowd, pension funds etc. This is all unprecedented stuff - nowhere in the history of markets has so much firepower been thrown at the market to make it go up. But of course when everyone is long, the speed and depth of the panic when crashes come will only get wilder and wilder.

The market rallied itself out of a fall the other day, and we are now pretty extended to the upside. We only have a week or so to go before printing a nicely positive upside breakout for the stock market on a monthly chart. It's pretty wild to think that by the end of August the market could be back at the level it started the year at, as if Covid never even happened. And yet, the US has thrown trillions of firepower into the market. Of course, with the red signal line now having reached zero, we could see a positive July, Aug and Sep, with a subsequent turn down in momentum come end of year.

Meanwhile, my favourite trade remains gold, although that is quite extended to the upside now as well. It's fascinating how gold and stocks have rallied at the same time - that hardly ever happens as they normally have quite strong inverse correlation.

Although we are due for a short term stocks correction, in the medium term it looks like we should see a good run towards Jan-20 levels on the Dow, at which point the market might get the wobbles again, depending on how Main Street is faring relative to Wall Street.

So, it looks as though stocks are going to keep pushing higher for now. We are about to end July and the monthly chart shows momentum breaking upwards into positive terrain. It may not be a dramatic move higher but I feel it's a fairly safe one now. See monthly chart... This is about to be confirmed by the daily chart also breaking upwards in terms of momentum. So we "should" see some strong moves upward shortly... Of course nothing is ever guaranteed and that's where trading discipline, stop losses, allocation of capital etc. all come in.

On the daily chart we can see the typical sideways movement in stocks, that always happens when you get short term momentum moving "cross-current" to medium term signal / trend line.  As I posted a week ago (23rd June), we have seen a short term correction / sideways movement now when daily momentum broke down over the signal line last week. This allowed us to reallocate capital to other more useful trades such as gold. Now, it appears that stocks want to break up again... Out of interest, this cross-current momentum shifting to an upside breakout is what technical chartists will refer to as a "bull flag". But the bull flag pattern never really tells you when the breakout is coming - you need momentum for that.

- Look to start taking profits on gold, although the theory of big numbers means that traders will be pushing for the $2,000 level - maybe hang on until then...
- Start entering long positions on Dow and/or other stock indices
- Short vol (VIX) index, earning a nice interest carry as well, although tight stops please.... By being long stocks and short vol you're actually highly leveraged to stocks going up - not delta hedged at all...
- ZAR should also strengthen as "risk on" mode kicks in again
- Bitcoin has shot its load now and is over-extended to the upside. As stocks rally I expect Bitcoin to lose its allure, although the $10,000 level should hold as floor support now...

P.S. Now that I've posted this publicly, I've probably completely jinxed everything... Oh well, let's see....

Stock futures a little wobbly this morning... may have spoken a little too early yesterday in recommending to start buying. However, this is always the risk when predicting moves based on momentum.

- Try get in too early by predicting the move and you can sometimes get flipped as momentum fails to break in the expected direction
- Wait for the confirmation of the momentum move and you can often miss the big move

C'est la vie. This is where experience, patience and discipline come in. No one should ever blindly throw themselves into any trade. Rather, build your macro trade view up based on the conjunction of monthly, weekly, daily charts etc. and what momentum, market stretch, sentiment etc. are doing. Then, work on your timing of your trade entry to get the best possible price.

Remember that you should always patiently time your entry into a trade. But never be slow in getting out of a trade! Get out immediately if it has hit your stop loss and /or trailing take profit levels. Then never look back.

So this morning is giving much better entry levels to go long stocks. Thus, it's probably best to sit and watch market sentiment on the futures, news etc. to decide when to get in. Always wait for the afternoon session when the Dow is open to trade, and especially wait for after major market news events e.g. non-farm payrolls, crude oil releases, interest rate changes etc.

Although I'm less confident than I was yesterday that stocks are going to break up strongly now into August, I still think we will see a rally. It all depends on price action over the next two days....