The trend is your friend

It’s the first time since starting to write this blog that I feel a post has a clear target audience and I didn’t need to think about it or weigh my words. In this case, namely, people that don’t usually look at price charts. For anyone else reading this, I hope you find it entertaining.

When I look at charts of assets, I do so through a lens of Technical Analysis (TA).

The purposes of using TA are the following for me:

• to identify trends - up, down or sideways - on different timeframes

• using the above identification to help manage risk when taking a position (When is the trade idea wrong or finished? When is the trend over? Are there other investments with a better risk/reward or less opportunity cost?)

To be clear, its purpose is not to predict the future - that is impossible.

The dogma that I subscribe to is that price is the final arbiter of success in investing, and therefore the main thing that should be studied.

Another take I have is that sophisticated, rich, cunning and very well-informed hedge funds with many billions of dollars at their disposal, have an army of employees on their payroll, paid to read and study everything about everything, which makes the likelihood that I would have an edge in finding out information that they don’t have quite small.

And because these people that are richer, smarter and more connected than I am take their positions in the financial markets based on what they know, their opinion on what they know will ultimately be visible to the retail public by watching either the price itself, the volume traded, or both.

This is fine for me as my goal is not to outsmart the market, but to align with it.

There are of course exceptions to this dogma:

• reading about new, largely undiscovered technologies

• smaller up&coming companies that don’t get the attention of large funds yet

• times where the big players are making a mistake in not taking a position in a certain trend early or simply can’t do so yet due to compliance restrictions

• paying attention to indicators that aren’t of the financial kind

I think that fundamental research and sentiment analysis have tremendous value. But ultimately, only price pays. In the markets, there is no such thing as being right and also losing money. Price keeps score. It’s the final arbiter of truth. The market is the sum of all of its participants and price is the overall opinion they expressed.

Charts

With that out of the way, let’s look at some basic line charts. No indicators, just price.

Let’s start with the S&P500, the largest index in the world.

As you can see, the S&P is in a strong uptrend since the Covid-Crash but has been in a correction since December. It made a low in January, followed by a bounce, and then a lower low on the day of the invasion of Ukraine. Since the invasion, it has rallied significantly, but found resistance at a level that appears to have been relevant multiple times. If the S&P keeps pulling back here, will it set a higher low than the day of the invasion? And when will it get back above the ‘Red Hammer’?:)

This is some very bland analysis. I don’t know where the edge lies. Prices aren’t low enough to speak of 'a great deal’ and the trend isn’t clear enough to align oneself with.

The Nasdaq has known a fierce uptrend over the last decade, also losing some steam recently, but a very strongly performing index. With that said, this chart doesn’t look like it’s going to be making new highs in the short term. Does owning dominant and disruptive (Big) Technology companies remain the safest trade out there? And what about more ‘up&coming’ technologies within the technology basket? (AR/VR, drones, blockchain, AI, IoT, 5G, Cyber Security, you name it….). Perhaps some interesting opportunities could develop in the coming months/years, about which doing lots of fundamental research can perhaps indeed provide an edge over the rest of the market.

Perhaps other assets are more interesting at the moment?

For good measure, let’s give a shout-out to the ‘Gold is an inflation hedge’ borderline meme:

Almost everything went up since the 2008 crisis, but not Gold. Maybe this is the beginning of a new uptrend? This chart looks reasonably strong if price finds acceptance above the 2011 highs and appears to ready itself for the next move up. The narrative is there, both from an inflation point-of-view as from a ‘unconfiscatable nation-state’s store-of-value’ point of view. Yes, I do believe that Gold may, for the first time in a decade, become relevant again as an asset. As an anecdotal addition, a person I know who could reasonable be categorized as a ‘goldbug’ told me that ‘Gold was too expensive now’. It is indeed priced higher than a few months ago, but perhaps it is still cheap compared to many other assets. Ultimately, it is for the market to decide what is ‘too’ expensive and what isn’t. I personally like the confluence of a solid technical setup (sustained trading above 2011 highs), a fundamental tailwind (increased demand as more transactions on global markets get settled in Gold) and skeptical retail sentiment. If it stays above $1800, it could very well be setting up for a new secular uptrend. But, it’s still Gold, and it moves slow and disappoints more often than not.

One thing is for sure though, for the last 10-15 years, technology companies were the real inflation hedge. Not gold.

And in comparison to the Nasdaq, the Bel20 hardly made new highs post-Covid and never even made new highs since the 2008 crisis (!), while many other European Indexes did. If only for the basic activity of filtering out which Indexes (whether it be Regional or per Sector) performed the strongest post-Covid, I would say Technical Analysis is a handy tool. The Bel20:

Some pretty simple but helpful stuff about which Indexes to avoid and which ones to focus on. Moving on to Oil:

Is Oil going up due to the war? It definitely had a large knee-jerk reaction to the upside, but it had already been going up almost exclusively since the legendary ‘below zero’ moment in 2020. Is the War the beginning of the next move up, or is the top already in for Oil? What impact does the release of strategic reserves have? And what about potentially reduced demand in case of a potential economic slowdown? These questions aside, lots of companies in the Oil&Gas space look like they’re on the brink of a breakout, which makes for an easy invalidation of the new trend below the former highs:

SilverBow Resources is an independent exploration and production company with assets in the Eagle Ford Shale located in South Texas. This is a semi-random choice, many other charts in the same sector look similar and have also been trending up.

What about agriculture & fertilizer stocks?

CF Industries Holdings, Inc. is a North American manufacturer and distributor of agricultural fertilizers, including ammonia, based in Deerfield, Illinois, a suburb of Chicago. It was founded in 1946 as the Central Farmers Fertilizer Company.

Very strong trend at the moment, perhaps even bubble-territory (although these are of course the most interesting to trade for a variety of reasons). Notable is first and foremost that this currently appears to be the most booming sector of the ones discussed and that, while the Russian invasion of Ukraine obviously created an extra supply issue pushing prices up, the trend was already in motion before this happened. Many other stocks look like the CF chart.

What about…Uranium? Deserving of its own blog post given the political significance (which I’ll make in the weeks to come), it is notable that it recently reached price levels that haven’t been seen since Fukushima, and that are still way lower than the end of its bubble-style price action in the years before that:

Put simply, if this developing trend is real, price shouldn’t revisit the area below the line for all too long. This isn’t witch craft or predicting the future, simply using Technical Analysis to describe current state of things (‘hey look, price is higher than it was when Fukushima happened’) and finding logical price areas to manage risk around if one were to wager some funds on a sustained trend (‘price shouldn’t go back below that Fukushima point’)

In Summary:

Scrolling around price charts can truly objectively show which countries/regions/technologies/sectors are currently doing well and how they compare to each other, in a way that watching the news can’t do for you. Because in the markets, it is not really the news that matters, but how markets react to the news and how that becomes reflected in price.

More practically, questions for this week:

• Does last week’s relative weakness in mostly Technology stocks follow through, dragging the S&P down? If so, does it spill over into the sectors that had been trending up?

• Does Crypto stay weak overall, largely following the Nasdaq recently?

• Healthcare was very strong last week - does it continue? And if so, what is the best way to get exposure?

• Does the agriculture/fertilizer sector continue to lead the pack?

• Does Uranium continue to go up, and if so, do the share prices of the producers, miners and explorers start to play catch-up?

• Some Gold & Silver miners look poised for a move higher, will they do it?

• …..there are always a million trades in both directions and in thousands of stocks and on every timeframe. That’s what makes it great and daunting at the same time:)

Next post is about…Money.