ChartWatch Markets: Stocks have rebounded, so what? Plus: as gold and silver prices ebb, where's their tipping point?

In today's edition of ChartWatch Markets, we'll be covering the technicals for:

• Nasdaq Composite

• Gold Futures (Front month, back-adjusted) COMEX

• Silver Futures (Front month, back-adjusted) COMEX

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Nasdaq Composite Index

Analysis

I hope you caught my tweet on Friday regarding cutting my portfolio risk limit exposure to US stocks from 1/2RP to 1/3RP.

RP stands for Risk Position which is pretty self-explanatory. It’s just the terminology I’ve come to use to explain the maximum fill level of my “Risk Bucket”.

Imagine I have buckets into which I allocate risk – i.e., capital that is invested in assets whose price may adversely change. So, I might have a bucket for Aussie stocks and for US stocks. I can fill a bucket with risk up to a limit, and this is determined by the performance of a benchmark index. For Aussie stocks I use the ASX 200 and for US stocks I use the Nasdaq Composite (the “Comp”).

If the benchmark is going gangbusters, then it makes sense to increase the max-fill level of the bucket, allowing me to take more risk in that market. If I see the technicals for a benchmark change to reflect increasing supply-side control, then I’ll reduce the maximum fill level progressively (from FRP or “Full” to 2/3RP, 1/2RP, and 1/3RP).

If the technicals begin to demonstrate increasing demand-side control, I can increase the maximum fill level back up through those same levels.

The goal is to never be fully invested in a downtrend in the benchmark index, but also to allow for full investment when conditions are ideal.

The ASX Bucket operates independently from the US bucket. The model is purely technical / price action based. It has explicit rules for implementation – of which I regularly discuss here.

Thursday’s candle showed strong supply-side control (i.e., long black-bodied candle that closed very near it’s session low), it also closed below the last point of demand (i.e., 18-Nov low of 22231). Add in it resulted in another test and fail at the short term trend ribbon (i.e., Thursday’s high topped the ribbon, the price then fell sharply – indicating the short term trend ribbon is acting as a zone of dynamic supply), plus the prevailing environment of falling peaks and falling troughs and a predominance of supply-side candles – and one can only conclude: The supply-side has control of the Comp’s price.

As this is my conclusion, then I can only reach one conclusion with respect to my risk exposure to US stocks: I must operate at minimum risk exposure / maximum capital protection. As noted before, this equates to 1/3RP or 33% risk exposure vs 67% cash.

That’s they way I do it, and of course – you may do it any way you wish!

There’s no perfect risk management system – but at least I have one – and that’s a big step ahead of most!

If the market continues to plummet, no problems, I’m mostly in cash and I’ll invariably be using much of the 33% risk I can apply to short stocks showing strong signs of supply-side control.

If the market recovers, I simply increase my risk level again. I’ll do so based on the typical demand-side indicators I regularly discuss here such as:

1. Price closes above the short term trend ribbon / short term trend ribbon turns up (light green) / short term trend ribbon begins to act as a zone of dynamic demand.

2. Price action swings back to rising peaks and rising troughs (i.e., supply removal and demand reinforcement)

3. Candles swing to predominantly demand-side in nature (i.e., white-bodied and or downward pointing shadows).

Which brings me to Friday’s candle. Sure, it was up, and sure the media claimed a “bounce”. I even note the ASX 200 is rallying strongly today on the back of rising Comp futures (+0.7% at the time of writing).

But I note the candle’s long upward pointing shadow suggests the supply-side remains active in the system, ready and willing to sell into rallies. Also, Friday’s candle recouped very little of Thursday’s decline – and even at it’s high – barely nudged halfway back up Thursday’s range (i.e., Thursday’s candle’s demand-supply “balance point”).

= I remain unconvinced about the demand-side’s ability to impact price. I associate the prevailing technicals with the price of the Comp continuing to fall on a MOTN (More Often Than Not) basis.

View

I remain comfortable at 1/3RP in my Risk Bucket 🪣 for now. (i.e., my personal allowable capital allocation limit (i.e., Risk Position) for my investments in US stocks is 33%).

Key levels

The next critical zone of demand is 22058-185 – below it, the short term trend is unequivocally down and the long term uptrend is likely under significant pressure = ⚠️ The short term trend ribbon (presently 22860-22885) is the nearest critical zone of supply – the Comp must close above this zone with a strong demand-side candle to confirm the demand-side is moving back into control of the Comp's price.

Gold Futures (Front month, back-adjusted) COMEX

Analysis

The last time we covered silver was in ChartWatch Markets on 13-Nov.

In that update, gold was showing a likely resumption of demand-side control. The chart above suggests this has turned out to be the incorrect assumption!

We have a new point of supply at 4250, well below the major point of supply at 4398 – demonstrating 4398 is indeed going to be a tough nut for the demand-side to crack – if it ever does!

Indeed we have another point of supply below 4250 at 4134.3, and the short term trend ribbon has neutralised. The price action is now compressing / stuck in the ribbon, with it and a point of demand at 3997.4 the key points of demand for the short term uptrend.

A close below 3997.4 would confirm a new short term downtrend (as well as the price action slipping back to falling peaks and falling troughs).

Below 3997.4, 3901.3-3961.2 will likely serve as a critical go-no-go zone for gold's aspirations to claim a new all time high in the very near future.

A quick resolution – i.e., an emphatic showing by the demand-side to crush the growing participation of the supply-side – therefore convincing other holders of gold to Hold On for Further Upside "HOFU", and to draw even more capital from the sidelines for Fear Of Missing Out "FOMO" – is required here to spark the next gold price rally.

The longer such a resolution takes, the more likely long term trend change becomes. But! Gold has consolidated gains via long, drawn out equilibrium phases before – just look back to the period between April and August – and therefore, it deserves the benefit of the doubt for now.

View

Based on gold's trends, price action, and candles, my model allows for a maintain current risk stance only "=R".

Key levels

The short term uptrend ribbon (presently 4030-4065) is the closest zone of demand, the price should not close below here if the demand-side is in control of gold's price; below this, 3997.4 will likely serve as a critical go-no go zone for gold's short term uptrend (triggering my model to move to a reduce risk stance "-R"). 3901.3-3961.2 is the next-lower major zone of demand. 4134.3-4250 is the closest zone of supply. A strong demand-side candle with a close above 4250 is the minimum requirement for my model to move back to an add risk stance "+R".

Silver Futures (Front month, back-adjusted) COMEX

Analysis

The last time we covered silver was in ChartWatch Markets on 13-Nov.

In that update, just before silver retested the 53.77 point of supply, we noted it was moving strongly with credible demand-side candles and price action.

Points of supply aren’t fixed at a point, and it’s common to see the price action respond “around” these levels rather than smack-bang on them.

Often, it takes time for market participants to respond, and this can mean a slippage in price – as can be seen with the formation of the last major peak at 54.42 (i.e., versus the major point of supply at 53.77).

A lower peak at 52.25, and a breach of the last 18-Nov point of demand at 49.11, suggests the supply-side is credible and that 53.77-54.42 now serves as a zone of supply that must be consumed if silver is to continue its bull market.

The short term uptrend ribbon is holding for now, but a close below it at 49-49.23 would indicate that the demand-side is beginning to crumble under the weight of the current supply-side challenge.

The price action and recent candles since 54.42 suggest increased caution here, but with the short and long term trends still up – and with both still acting as zones of dynamic demand for now – it would be inconsistent to advocate for anything more than a neutral stance.

Friday’s candle low looks like an interesting go-no-go point for the short term uptrend. A close below it low (i.e., below 48.05) would signal supply-side control of at least the short term silver price.

On the other hand, a strong demand-side candle here (i.e., a long white body with close at or near the session high), would confirm the short term trend ribbon as a zone of dynamic demand, and it would likely stoke renewed optimism among both the demand-side (encouraging the demand-side to continue to apply cash for Fear Of Missing Out, and the supply-side to Hold On for Further Upside).

FOMO and HOFU are the two critical ingredients of any bull market!

View

Based on silver's trends, price action, and candles, my model allows for a maintain current risk stance only "=R".

Key levels

The short term uptrend ribbon (presently 48.95-49.80) is the closest zone of demand, the price should not close below here if the demand-side is in control of silver's price; below this, the 48.05 will likely serve as a critical go-no go zone for the silver bull market (triggering my model to move to a reduce risk stance "-R"). 53.77-54.42 is the next major zone of supply. A strong demand-side candle with a close above 52.25 is the minimum requirement for my model to move back to an add risk stance "+R".