Carl Capolingua is one of Australia’s leading technical analysts. He works by candlelight way out West at ThinkMarkets, where he is admired for his unique brand of price action-based trend tracking.
Capo has been honing his art over some 30 years of investing, advising, and managing funds.
Every week in The Candlestick, Carl plots via a data-trove of unleavened technical analysis the unknowable iterations of markets global, local and the very stocks within them.
Here is Carl.
The Candlestick – Seventh iteration – Know your pain threshold
I know that sometimes it’s painful being a trend follower.
By definition, you’re wrong at least two times in any trend. At the top (you don’t know it’s a top at the time!), you’re typically fully invested, enjoying everything the bull market provides. At the bottom (again, there’s no way to know this!) you’re either short or sitting on a pile of cash, so, either rejoicing the bear or waiting for it to pass.
It takes a great deal of faith in one’s methodology and a bunch of guts to stick to the trend – especially after it has extended a long way.
Still, this is how the big wins are made in the long run. In a bull market, it’s how you give yourself the greatest chance of holding on to that 10, 20, or even bigger bagger.
In a bear market, staying the course is equally important because it can keep you from buying any of those tantalising dips which soon give way to yet another round of falls.
It all depends on your definition of pain.
In a bull market, some investors weigh the pain of a loss greater than the pain of a missed win. They’d rather get out with a small profit and have the certainty it won’t evaporate, rather than risk that small profit to attain an even greater one.
Not me. I hate missing out on a bigger winner, especially if it’s occurred because I chickened out of a perfectly good uptrend.
I would rather lose my small win knowing I still followed my plan, and that I gave myself the greatest chance of snagging a much bigger win. I know if I stick at it long enough, yes, I will lose a few small profits along the way, but the big wins I do eventually score will more than make up for them.
In a bear market, some investors weigh the pain of a missed win greater than the pain of a loss.
They’d rather get in after a big fall hoping they’ve picked the bottom. If there is a rally, they are certain to be in profit straight away. They’re comfortable risking a loss if the price continues to fall just so they don’t miss the bottom.
Not me. I don’t want to risk breaking my rules by buying in a downtrend too early.
I’m happy to wait for a bounce first, for a new uptrend to establish itself. This uptrend will tell me excess demand has returned to the market. I am happy to forgo the profits the bottom pickers are already enjoying for the extra confidence I derive from making a trade with the trend; that is, from gaining a greater probability of success.
Trend followers view investing as a trade-off: Profitability vs Probability.
Sure, if you can pick the exact bottom to buy, and the exact top to sell, you’re going to make a pile of profit (i.e. High Profitability). But what are your chances of doing this consistently over a long period of time? (No, actually stop and think about your own track record!) This is a Low Probability strategy.
I prefer to buy and hold when it may seem like the top to others – this is because I’m backed by excess demand. I may get it wrong, maybe I do buy at the top sometimes, but more likely, the trend just keeps going.
Similarly, I don’t try and buy too early, that is, I don’t fight the excess supply in the market in the hope of picking the bottom. In doing so, I aim for High Probability scenarios.
You see, I figure if I get the probability part of it right, the profitability part will take care of itself.
Let’s look at some charts!
Nasdaq Composite (COMP): 5 white candles amidst the chaos
Candlesticks give the technical analyst tiny fragments of information about the underlying demand-supply environment. White candles demonstrate excess demand over the course of a particular trading session. Last week, we observed 5 out of 5 white candles on the COMP. A nice turnout for the bulls.
So, is that the low of the bear market I hear you ask? Maybe! What I can say for sure, is that it’s a very good start.
Friday’s candle in particular was a monster! Not only did it close at the session’s high, but it also closed smack bang in the short-term downtrend ribbon (light pink zone). It also closed above the peak from 15 Jun at 11,244. This ensures wherever the next peak forms, it will signal a return to higher peaks in the price action. Should we subsequently make a higher trough to 10,565, the price action will have returned to higher peaks and higher troughs.
This is a fantastic indicator market psychology has returned to “buy the dip” – a first sign the bull is returning.
A few weeks ago, we noted just how important price action within the short-and long-term trend ribbons is. Just look at how consistent the short-term trend ribbon has been at terminating promising COMP rallies. Tick them off, 13,711, 12,986, and 12,320.
If we see a bunch of supply-side candles (black bodies and or upper shadows) in this zone, it signals more of the same. Look out below! However, if we see further demand-side candles (white bodies and or lower shadows) and a close above the zone, the chance of a sustainable rally increases significantly. So, it’s going to be a massively important week ahead for the COMP.
I can’t get really bullish on the COMP until I see a close above the short-term trend ribbon, and preferably even above the static supply point at 12,320.
Also, I’d prefer higher peaks and higher troughs in place.
The bear case? Another failure in the short-term trend ribbon, or a close below 10,565. In either case, my nagging suspicion remains the bear market isn’t over until we test the 19 Feb 2020 high of 9,383.
View: Bearish, sell rallies until a close above 12,320.
S&P ASX200 (XJO): Resources stocks hold key to bounce
We didn’t enjoy 5 out of 5 white candles, but a monster Tuesday and a solid Friday facilitated a commendable weekly performance for the local benchmark.
It would have been better, however, if not for the Energy (XEJ) and Materials (XMJ) sectors which sagged 4.5% and 4.9% respectively for the week. Energy prices were modestly lower, and metals prices were hammered, with iron ore down over 4%, copper down 7%, and nickel plunging 14%.
We’ll check a couple of those charts in a second.
What’s important to note for this week, is the XEJ and XMJ may continue to undermine a further rally in the XJO.
I’m watching for supply-side candles in the mini-supply zone between 6566 and 6671. Should they appear, we’re likely to plumb the lows again with demand kicking in at 6,407. Should we clear this supply zone, then 6758 beckons.
That’s the big daddy of supply points, especially when one considers the pesky short-term trend ribbon is going to be meeting up with it very soon. My tip is not to get too excited about any rally until we sufficiently deal with each of these barriers.
View: Bearish, sell rallies until a close above 6,758.
LME Copper: Who do you call when the Doctor is sick?
Copper is often referred to in financial circles as “Dr Copper”. Its pervasive use in industry ensures it’s a reliable barometer for world economic growth. So, when the price of copper is on a healthy upward trend, the global economy is also likely to be healthy. However, when copper prices snap lower, as they did last week, it’s often a warning sign not all is right with the global economy.
The copper price was in a solid long-term uptrend until April, as evidenced by the steadily rising long-term trend ribbon (dark green zone). Investors should always pay close attention to when the price of any security breaks below its long-term trend ribbon. It’s the first step to changing the long-term uptrend.
Worse still, is when after dipping below this zone, the price moves back into it and fails to reclaim it. The zone is now offering dynamic resistance. Should the price repel lower out of the zone, and subsequently break the previous trough formed by the rally, the new long-term downtrend has begun.
In the copper chart above, this scenario is as clear as day.
It’s an excellent case study for how bull markets transition into bear markets. We can see after the break of the long-term trend ribbon on 3 May, the trough for the rally of the retest was set at 9,018 on 12 May. The retest peaked smack-bang in the long-term trend ribbon at 9,712 on 6 Jun.
Aggressive traders may look for shorts after this peak is confirmed, and those caught on the long-side should be well clear of their positions by the break of the trough low at 9,018 on 21 Jun.
View: Bearish, sell rallies until a close above 9,712.
Iron Ore CFR China 62% Fe Spot: BHP, RIO, FMG et al. on alert!
The price of iron ore hasn’t fared as poorly as that of copper, but we can see the tell-tale signs the long-term trend is re-establishing to the downside.
The recent peak at 146 did pip the long-term trend ribbon by a few bucks, but it appears clear, now, excess supply has caused a decisive rejection of prices above that point. Like copper, the iron ore price has now breached the key trough at 130, and therefore it’s once again in a long-term downtrend.
Judging by the lack of a decisive bounce from 127, I’d expect this level will only offer minor excess demand if tested again. 113 is the next key major demand point to the downside from there. Reclaiming 146 (and the short -and long-term ribbons which occur on the way) is crucial to re-establishing a long-term uptrend in iron ore.
View: Bearish, sell rallies until a close above 146.
Sifting through the rubble for my favourite ASX charts from last week
On Friday afternoon I was surprised and encouraged to see so many double-digit percentage gains across my watchlist.
Most of the charts, including crowd obsessions Lake Resources (ASX:LKE), Liontown Resources (ASX:LTR), and Zip Co (ASX:ZIP), remain too well entrenched in their respective long-term downtrends to even contemplate them for a buy.
However, one fan fave, Audinate (ASX: AD8), has done what so many beaten down ASX stocks must do to drag itself back into contention. Tempest Minerals (ASX:TEM) is also an interesting turnaround play, and Austral Resources (ASX:AR1) and Anteris Technologies (ASX:AVR) are classic bottom-left-top-right.
Find them below for your sheer charting pleasure!
Audinate (AD8)
Audinate is popular among analysts because of its industry standard audio-visual products.
I’ll let you nag them about the fundamentals.
This is called The Candlestick for a reason! And what a fantastic string of candles from the 10 May swing low at 4.99 to the 8 Jun swing high of 7.65 (seriously, this is the stuff that gets me excited!).
You can’t ignore a set of candles like that – they clearly demonstrate the commitment of the demand-side for AD8.
I feel the dip from the 8 Jun peak is more to do with the rest of the market melting down rather than anything too sinister, and AD8 steadied well on 17 and 23 Jun with two solid demand-side shows. Friday’s long, white-bodied candle is a clear sign of two key facts:
1. The demand-side is losing patience and they want back in; and
2. The supply-side is reluctant to stand in their way.
The short-term trend ribbon (light-green zone) has re-established to the upside and is now confirmed as offering dynamic support. Along with those textbook-perfect demand-side candles, this is another key step in turning the long-term downtrend. I will call a new long-term uptrend on a close above the long-term trend ribbon (dark-pink zone) and the 8 Jun swing high. But, based upon the strength of what I have seen so far, I am going to pre-empt these final checks (famous last words), and go a buy on AD8 right now.
View: (Aggressive) Bullish, buy pullbacks until a close below the 17 Jun low of $6.28.
Tempest Minerals (TEM)
Total speccy here (I know you love them!).
Gold, copper, and lithium play kicking rocks over in the desert in Western Australia. The boom in March was sparked by some impressive first results at their flagship Meleya copper project. Since then, it’s been a steady drop back to earth as the chat rooms lost patience and moved onto the next shiny new things!
But, catching my eye, I think TEM did some great work last week at re-establishing its long-term trend. Quite often, to do so, the demand-side needs to dislodge a bunch of pesky supply which has been sitting on the price action. Judging by the pick-up in volume during the burst Wednesday-Friday, sufficient supply was dislodged to get TEM going again. Friday’s candle is particularly impressive.
Moves like last week on volume are certainly worth keeping an eye on, so put this one on your radar. I don’t think you need to rush out to buy it, perhaps target a pullback into the high-6s and early-7s which I expect will be well supported.
Company announcements suggest further results on the way over the next few weeks, so that’s your timeframe.
View: Bullish, buy pullbacks until a close below 0.053.
Austral Resources (AR1)
Okay, you got me, I can see the irony in putting up a lousy copper chart and then talking about two copper hopefuls as potential buys in the same article. But remember, I believe the demand-side and the supply-side know everything going on in the world, and as a result, they make their decisions in the price action. I’d trust the price action over the news any day – and the price action on AR1 is convincing.
AR1 is a relatively new addition to the ASX, and as such, it doesn’t yet have a long-term trend ribbon. The short-term trend ribbon is pointing up, and more importantly, it is supporting prices. The candles are a clear picture of demand-side domination. We may see an influx of supply at the 3 Jun high of 0.65, but if it can be cleared, it’s blue skies ahead. Another I’d be happy to accumulate.
View: bullish, buy pullbacks until a close below the 20 Jun low of 0.39.
Anteris Technologies (AVR)
AVR has been a regular feature in my daily Twitter shortlists since 14 Jan, it’s not hard to see why, this chart is another picture of demand-side domination.
What an excellent case study in sticking with momentum despite the maelstrom in the broader market!
For those of my followers who own it, I can’t see any reason in the price action to sell it. If you don’t own it, unfortunately last week’s explosion has taken it too far away from the support of my short-term trend ribbon to call it a buy at current levels.
However, I would entertain buying a pullback with the right demand-side candles into the last break out level around the 7 Jun high of 24.10.
View: Bullish, buy pullbacks until a close below the 17 Jun low of 20.15.
Until next week,
Candle-out.
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