Carl Capolingua is the most precious Australian technical analyst you will meet in this story.

He works by candlelight at ThinkMarkets and in this highly exclusive series, The Candlestick, Capo flexes a few mathematical muscles into the unknowable iterations of markets – global, local, individual.

Here he is:

bearish bitcoin
Carl ‘Drogo’ Capolingua, Via Capolingua


The Candlestick – Eleventh iteration – Big picture thinking starts here

Morning all.

To work!

I’m going to show you a few “macro” charts in today’s Candlestick to help you identify some of the key risk indicators for the global economic growth story going forward. Wise Candlestick says – Macro is an abbreviation for “macroeconomic”. It’s a little more of the analyst jargon for anything considered – as big picture stuff. These are the factors affecting the entire global economy.

As no individual economy is immune from what’s going in in the broader global economy, your typical analyst usually starts with the macro and then drills down to the “micro”, that is, the key economic factors impacting an individual economy.

So, if macro is world, then micro could be Australia.

Finally, the analyst turns their attention to individual stocks. Based upon those macro and micro trends, which stocks are most likely to benefit, and which are most likely to struggle?

This approach is known as a “top-down” approach.

The opposite, obviously, is called “bottom up”. Bottom up is where you look at one stock at a time and try to figure out how it’s travelling with respect to the macro and micro.

Horses for courses, but my preferred approach is top down. It saves a great deal of time and spotlights key blind spots which might impact earnings growth for stocks in general. Spotting big picture economic red flags is a must for long term investor survival.

An understanding of the macro helps us figure out what’s on the radar, whether it’s getting closer or further away, and if it’s a friend or a foe. Now, to the radar we go!

Macro Chart 1 & 2: Keeping warm and doing tik toks is non-negotiable

Natural Gas Futures NYMEX:

Via ThinkMarkets

Important stuff which requires electricity (in no particular order): Keeping warm, keeping the lights on, streaming Stranger Things, watching tik toks.

There’s no mucking around on any of these things… they’re non-negotiable, essential requirements for human life.

Remove a bunch of Russian gas from what was already a tight supply-side due to the pandemic, and you’ve got chaos in energy markets. Toss in the widespread wind-down of fossil fuel powered electricity generation because of its terrible ESG credentials, plus significant underinvestment in new fossil fuel-based capacity, and you’ve got a tinderbox for energy commodity prices hot to explode! (pun, mic drop)

Case in point, natural gas. As we head towards a European winter, it’s clear from the chart above both power companies and investors are piling in.

Bottom left-top right and trading at 14-year highs. Short- and long-term trends are well-established, and both appear to be gaining strength.

US$10/MMBtu is a natural psychological supply barrier, but on the other side of this, there’s very little holding Natural Gas futures back. I can see solid demand in the high-US$8/MMBtu region where several peaks and troughs have formed and at the short-term trend ribbon (light-green zone) which is not far behind.

Woodside Energy (ASX:WDS) is an obvious potential beneficiary of rising Natural Gas prices, but you can also go straight to the source and trade a Contract for Difference (CFD) on the NYMEX futures contract on the ThinkMarkets platform.

View: Bullish, prepared to buy pullbacks to the short-term trend ribbon until a close below the 15 August low of US$8.40MMBtu.

Newcastle Coal Futures NYMEX:

Via ThinkMarkets

I flagged this in a previous Candlestick back in May. Natural gas is the preferred alternative to coal, but despite its filthy reputation, coal remains vitally important in the energy supply chain.

The chart of the black gold looks rock solid with strong short- and long-term trends in place. We are seeing some compression beneath the 7 March peak set at US$385 per tonne which was logged just after Russia’s invasion of Ukraine. After an initial pullback, it has been a steady build, albeit a volatile one. If US$488 per tonne goes, well, my charts don’t go back far enough to find a higher price.

Not all coal producers are created the same. On the ASX you’ve typically got your coking coal producers and your thermal coal producers. The chart above represents the thermal coal variety (the chart of coking coal is nowhere near as bullish as thermal coal). New Hope Corporation (ASX:NHC), Terracom (ASX:TER), and Whitehaven Coal (ASX:WHC) are the three go-to thermal coal plays on the ASX.

View: Bullish until a close below US$325 per tonne.

Macro Chart 3: China, the elephant in the room

Shanghai Composite Index (SSEC):

Via ThinkMarkets

There’s been plenty of talk about the slowdown in Chinese economic growth.

COVID shutdowns and an ailing property market packed full of zombie companies and zombie projects are the main culprits. Countering this, Beijing has promised to right the ship with a number of stimulus measures such as cutting key lending rates and investing in infrastructure projects (another bridge to nowhere anyone?).

Either way, the chart of the SSEC shows how demand and supply have responded to the delicate balance between slow-down and stimulus in the Chinese economy.

My tip looking at the trends here, and it does require a little more confirmation, is the bearish China economy case is winning the battle.

The long-term trend ribbon (dark-pink zone) appears to have repelled a valiant demand-side push since late April which was sparked by those promises of action from Beijing. Further, the clear supply-side candle on 24 August I feel has commenced the dreaded “next leg down” for Chinese shares.

Watch for a final and crucial potential demand point at the 2 August low of 3155 to potentially halt the decline. Failing this, I suspect it’s lights out for Chinese shares – the 27 April low of 2863 beckons.

View: Bearish until a close above 3309.

Macro Chart 4 & 5: Bull market mettle vs metal

Iron Ore Singapore SGX:

Via ThinkMarkets

If the big Chinese infrastructure push is going to materialise, and if the Chinese property market is going to get back on its feet, then this chart should be bottom left-top right or pretty close to it.

Infrastructure and apartment buildings need steel, and plenty of it. China is the world’s largest consumer of iron ore, and most of that consumption goes into producing steel for construction purposes. So, clearly there’s a dislocation between the rhetoric from Beijing, the bounce in Chinese shares (and perhaps our own!?), and the ailing price of iron ore.

The chart here shows well-established short- and long-term downtrends.

The recent bounce from US$95.50 has fizzled and the price action is grinding towards the major swing low of US$84.60 per tonne set on 9 November 2021. Below that it could get very ugly for the likes of BHP (ASX:BHP), Rio Tinto (ASX:RIO) and Fortescue Metals Group (ASX:FMG).

View: Bearish until a close above US$114 per tonne.

High Grade Copper COMEX:

Via ThinkMarkets

Copper is often referred to as “Dr Copper” because of its ubiquitous use across so many industries.

Basically, investors have long used the price trend of copper to diagnose the health or lack thereof of the global economy. Unfortunately, the Doc is looking a little peaky at the moment.

To be fair, the trends in copper are not as bad as they are for iron ore, but they’re not exactly great either. The short-term trend ribbon is back to neutral and does appear to be supporting prices in the short-term, which is encouraging, but the long-term trend is well entrenched to the downside.

The recent rally from the 15 July low of US$3.13 per pound appears to be losing steam as the peaks appear to be getting closer together on a vertical basis.

My tip is a close below the 18 August low of US$3.54 per pound is going to seal the deal for another leg down which could retest that July low.

View: Neutral, bearish below US$3.54 per pound.


Macro Chart 6: US Housing Market…Timber….!

Lumber Futures CME:

Via ThinkMarkets

Lumber is another commodity heavily used in the construction industry – a major employer globally, and high employment is a key factor in sustaining economic growth. High economic growth generally equals strong company profits, and therefore rising stock prices. Clearly then, it’s not usually a great sign for the global economy, nor for stock markets, if the price of lumber is trending lower.

The CME Lumber contract shown above is a particularly good indicator of the health of the US housing market – a major contributor to US GDP. The combination of higher mortgage rates and spiralling construction costs have put the brakes on US home building, and industry metrics and home builder confidence have fallen off a cliff.

Talking about falling off a cliff, the price of lumber appears to be about to… ahem, timberrrrrrr!

Both the short- and long-term trends are well-entrenched to the downside and only the 17 August 2021 low of US$452 per-thousand-board-feet offers any potential support above the next major swing low of US$251 per-thousand-board-feet.

View: Bearish until a close above US$636 per-thousand-board-feet.

Macro Chart 7: Nasdaq Composite (COMP): Bear, bull, back to bear?

Via ThinkMarkets

The COMP is the world’s key risk-on market.

It’s a proxy for risk seeking activity among stock investors, and therefore it’s worth checking how it’s faring against the macro backdrop we’ve discussed above.

In our last update, we noted the COMP had flipped its bear into a bull by closing at least 20% above its 10565 low. It’s touch and go, however, given the pesky long-term downtrend ribbon (orange zone) appears to still be impeding upside momentum.

The price action is certainly tested the mettle of the bulls. The consecutive 19 & 20 Aug “gap and run” down days are particularly bearish.

A gap and run occurs when the price opens below the previous day’s low and continues lower. A close at or very near the low of a gap and run day is even more bearish again. Two gap and run-down days in a row, well, you get the picture!

Sessions like this tell me the supply-side of the market has kicked back into gear; this is especially important given how little supply we’ve seen for the last four weeks. Also, it signals the demand-side has lost a great deal of power. They simply don’t want to get in the way of all that supply.

If they are waiting for a better price to get back in, we need to watch for demand-side candles (i.e., white candles and or lower shadows) at key static and dynamic support zones. If the price slices through these zones, it demonstrates the demand-side isn’t waiting to get back in… rather, they’re not looking to get back in at all. Da, da, daaahm!

Okay, so where are these key static and dynamic zones?

Well, I see the area between the 2 June high of 12320 and the 22 July high of 12093 as the key static demand zone which will need to be held to stave off further declines. The dynamic zone is the short-term trend ribbon with which the price action is interacting with now.

The candles so far in the ribbon are less than inspiring, I’d say they’re more likely confirming the control of the supply-side rather than indicating the demand-side is coming back in with any great force.

In summation ladies and gentlemen of the jury: I fear my concession to switch back to a bullish bias last week was premature. The view’s been informative from here, but I’m going to climb back onto the fence and revert to neutral. Given the uncertainty in this demand-supply picture, and the opportunity to do so still open, it’s the most sensible thing to do.

I rest my candles.

View: Neutral until a close back above 13181 (bullish), or a close below 12093 (bearish).