Biden’s Oil Spill & How to Trade the S&P500
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Happy Friday everyone! This week’s Market Wrap focuses on major economic affairs such as the continuing Russia-Ukraine conflict, as well as some interesting quarter-end figures which have changed substantially since the beginning of the Covid-19 pandemic. As they say, all good things must come to an end. Enjoy!
Inflation inflation inflation
Eurozone HICP inflation has risen to a record 7.5% in March, putting increased pressure on the European Central Bank to tighten its extremely loose monetary policy by increasing interest rates. The record inflation witnessed has been driven in part by the war in Ukraine, which has had various implications for the supply of energy from Russia into Europe. Current lockdown measures in China are exacerbating both supply chain issues and inflation concerns. There is current unease amongst economists that the Russia – Ukraine war may send Europe into a recession because of the effects rising energy costs will have on household wealth. Here in the UK, energy bills rose 50% today! Ouch!
Deal or no deal?
Global dealmaking has fallen dramatically to its lowest level since the start of the pandemic. Private equity firms and asset managers had a record year in 2021 but are now more cautious due to the aforementioned issues. Microsoft’s takeover of gaming company Activation Blizzard has been the largest of the year so far, valued at $75bn. The number of special purpose acquisition company (SPAC) IPOs has fallen by nearly 80% this year compared with 2021 Q1, while only 38 mergers have been completed this year to date. Experts say that this trend is likely to continue in the months to come.
Biden’s oil spill
The US Government has announced that it will release 180 million barrels from its Special Petrol Reserve (SPR), a record amount. The steady rise in the price of oil over the last few months has had a significantly negative impact on household finances, and US President Biden hopes that this monumental release of oil will help mitigate the pains of inflation. Biden also plans to charge oil companies that are currently hoarding masses of oil-rich lands but not currently putting them to any use, in the hopes that this will encourage them to increase their output. The release of oil will occur at a rate of 1 million barrels a day for the next 6 months, reducing the reserve by a third to its lowest level since 1984. The US uses 20m barrels of oil per day, so this release will last a whopping… nine days. Desperate times…
Putin wants that beef
Following on from Putin’s initial demand for Russian oil exports to be paid for in Russian Roubles, the Russian President has now issued a Presidential decree, stating that gas supply will be cut off to any countries that do not adhere to this demand, effective immediately. “If such payments are not made, we will consider this a default on the part of the buyers — with all the ensuing consequences,” Putin said at a meeting in the Kremlin. The German chancellor Olaf Scholz has responded to Putin that it is not within their gas deliveries contract with Russia that they must pay in Roubles, so they will continue to pay in Euro.
See you next week,
Patrick
Why I am bullish on the S&P500 – Part 1
My first article with The Spark is going to look at the current technical setup for the S&P500 while next week I will be covering the fundamentals behind my thesis. I thought it would be a good idea to first analyse the S&P500 in order to gauge the direction in which I believe it will move in the near future.
My articles will generally be focused on short-term trade set-ups to gauge the most probable direction of price for various assets with a relatively short time horizon (a few weeks – a few months). Do be aware that these are just my own opinions, which may seem controversial at times, and always remember to do your own research. We hope to educate you to further help your own analysis! So, without further ado, let’s jump in.
Technical Analysis behind the bullish case
I am going to establish several technical analysis concepts I apply to the price chart of the S&P500 so that you can learn how to read price charts and understand my bullish bias toward this index. I will build upon these concepts in the coming weeks.
Trends
An uptrend is where the price moves through higher highs and higher lows and a downtrend is where the price moves through lower lows and lower highs. The S&P500 was in a downtrend since the start of the year but it has now made its first higher low and higher high, indicating a shift to an uptrend. This is our first indicator that a local bottom for the US stock market is in.
Candlesticks
For all the charts I will be writing about in terms of technical analysis, I will always use a candlestick chart, as each candles provide us with a lot of information: the high and the low, as well as the opening and closing price of the time frame it represents. The diagram below demonstrates how a candle with a green body indicates an upward price move and how a candle with a red body indicates a downward price move.
Engulfing Candles
An engulfing candle is one which engulfs the entirety of the previous candle, breaking its high and low and closing with a larger body (distance between opening and closing price). This is of the strongest candle types for determining the future price direction. When looking at the weekly chart for the S&P500, a bullish engulfing candle was printed just 2 weeks ago as well as occurring at the beginning of an uptrend. This is a very bullish development for the S&P.
Support and resistance levels
The final concept I will introduce will solidify my bullish case for the S&P500 from a technical analysis perspective. Any horizontal lines which I draw on my charts indicate levels where the price of the S&P500 is likely to react due to it having a history of doing so. These can indicate levels of supply called resistance levels (lines that are above the current price) and levels of demand called support levels (lines that are below the current price). Therefore resistance lines act as a price “ceiling” while support levels act as price “floors”. When the price breaks above a resistance line (or ceiling), it is an indication that buyers have taken over and price will continue upward. The opposite is true if the price falls below a support level (floor). You may also notice that all my levels are rounded whole numbers. These are called ‘psychological levels’, as investors are far more likely to place their bids or orders at whole numbers such as $4800 rather than $4793.
The same bullish engulfing candle also closed back above a very significant trend line which is the upper trend line of a price channel that stretches all the way back to 2010. Trend lines behave the same way as support and resistance levels except they are diagonal and therefore incorporate the direction of the overall trend. If price breaks above a trend line it indicates buyer strength and a break below indicates seller strength. The monthly chart below displayed the 12-year price channel with a break above the upper trend line and retrace to this line in the past couple of months. The bullish case is still intact.
Potential pullback
The S&P500’s current price is approaching quite a substantial area of resistance as it approaches the 4600-4800 region so a pullback to the upper trend line or even the 4250 support is certainly possible, especially after such an explosive move to the upside. However, I believe that the bottom could be complete, and a new uptrend has now begun due to the reasons outlined above. These indicators suggest that this could be the beginning of a run towards the all-time high and beyond in the coming months.
Signs of Invalidation
I am still of course very cautious of this set-up being invalidated given the high level of uncertainty in markets at present. Red flags to look out for would be if the price of the S&P500 were to retrace below the key 4250 support level or worst-case scenario, printing a lower low on the weekly chart, reinitiating a downtrend, and exposing more downside to lower support levels such as 3950. Also the bullish reversal occurred with disappointingly low volume which could signal weakness in this uptrend. Volume analysis will be something I will cover in more detail in later articles as it is incredibly important when trading.
See you next week,
Ronan
Disclaimer
This communication is for informational and educational purposes only and should not be taken nor used as investment advice, as a personal recommendation, or solicitation to buy or sell any financial instrument. This material has been prepared without considering any particular recipient’s investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or structured product are not, and should not be taken as, a reliable indicator of future performance. I assume no liability as to the accuracy or completeness of the content of this publication.