As the month of August comes to a close, U.S. markets continue to make new highs. Overall, many major corporations reported excellent earnings for the second quarter. The U.S. dollar continues to weaken which pushes markets higher. The U.S. stock market is denominated in dollars; as the dollar weakens the price of securities must go higher. Inflation continues to creep higher but the rate of inflation has slowed which is being taken as a good sign. Inflation may be transitory as the Central Bank and Treasury Department has insisted it would be.
The Relative Strength Index (RSI): A key indicator to watch when things get extended
The RSI, developed by J. Welles Wilder, is a momentum oscillator that measures the speed and change of price movements. The RSI oscillates between zero and 100. Traditionally the RSI is considered overbought when above 70 and oversold when below 30. Signals can be generated by looking for divergences and failure swings. RSI can also be used to identify the general trend. (Fidelity, 2021).
$SPY: On the chart below, the S&P 100 is well into the overbought territory on the weekly RSI. Additionally, price is far away from the rising moving averages with very few pullbacks since the passing of the first stimulus bill after the post pandemic sell off.
$QQQ: Below, notice the RSI on the QQQ being set up for a possible double top. It is even more extended from a price perspective. The Nasdaq 100 is inflation sensitive.
$DIA: This might be where capital will move to safety in the event of a tech correction, as it is not nearly as overbought on the RSI.
Upcoming News Catalysts to Consider
September and October are two months that are statistically more bearish than bullish. Let us consider some upcoming news catalysts for these two months.
1.) The recent Supreme Court decision that has blocked the extension of the eviction moratorium. This will probably take time to affect the market as the court cases to evict tenants will have to move forward and could take weeks to months.
2.) The most recent legislation passed in Congress did not include an extension of the debt ceiling limit. Congress voted in July 2019 to suspend the debt limit until July 31, 2021. That debt ceiling limit has quietly expired and the Treasury is now using temporary “emergency measures” to conserve cash so the government can keep paying its obligations. Last month, Treasury Secretary Janet Yellen warned that the Treasury may not be able to sustain those emergency payments for long given how much COVID-19 stimulus Congress approved. Everyone needs to be prepared for the U.S. Federal Government to shut down at some point this fall. It is unknown when the money will run out but it will certainly affect markets.
3.) The dramatic withdrawal from Afghanistan and the recent ISIS-K terrorist attack on U.S. forces assisting in the evacuation has yet to affect markets. However, if further attacks transpire, markets will start to take notice. Markets usually dislike uncertainty and repeated attacks at uncertain times will start to impact the markets.
4.) The European Union has added the U.S. back onto its high risk list; limiting travel from the United States. Further travel restrictions and lockdown restrictions will start to drag on markets if they persist.
5.) If oil prices continue to rise and stay above $75 a barrel, oil as the prime commodity will start to impact financial markets by driving up prices and reigniting inflation. Recent hurricane Ida has shut down a large portion of U.S. refining capacity and will most likely increase oil prices.
$USL: Representing the 12 month futures contract for oil, $USL is on the upswing from an oversold region on the RSI. This indicates that oil might be moving much higher if this move up continues.
Crypto
Cryptocurrencies, such as $BTC ($GBTC is the tracking stock for Bitcoin) continue to gain strength, largely due to the weakness in the U.S. dollar. Bitcoin is a digital asset that has no debt. As the U.S. continues to print money for infrastructure and other budgetary concerns, it makes Bitcoin an attractive alternative as a hedge against the U.S. dollar. Paypal ($PYPL) recently allowed users in the U.K. to purchase Bitcoin directly using their app. As more people gain access to purchasing Bitcoin worldwide, it may be setting up to make a run-up to its previous high.
Technical analysis states that often the biggest moves happen near the end of a mature uptrend. We believe it’s wise to be cautious at this time. Keep your stops or trailing stops in place as there are many good reasons to protect your profits.
Market Research and Analysis provided by Michael DiGioia, Director of Educational Services
Trade well.
Works Cited
What is rsi? – relative strength index. Fidelity. (n.d.). https://www.fidelity.com/learning-center/trading-investing/technical-analysis/technical-indicator-guide/RSI#:~:text=The%20Relative%20Strength%20Index%20(RSI,oscillates%20between%20zero%20and%20100.
What’s New from DAS
While we didn’t release any production updates during the month of August, we do plan on releasing some significant updates during September. We are currently beta testing version 5.6.4.14 which is available for all to test. If you wish to become a beta tester, you will need to fill out the contact form on our website and include the firm/broker you’re trading with as well as your login ID.
Please be sure to install the latest version of the DAS Trader Pro platform. You can do this very easily from DAS by clicking Tools > Auto Upgrade. You can learn more about the Auto Upgrade feature in our Knowledge Base.
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