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Analysis

US markets picking up strength | Relative Rotation Graphs

The Relative Rotation Graph (RRG) below shows the rotation of major world indices against the MSCI World Index over the past week. The high concentration of tails on the right-hand side of the graph indicates that the overall trend for major stock markets, versus the MSCI, is up at the moment.

As you may know, the MSCI World Index is made up of large and mid-cap stocks from across the world’s developed markets. What the below RRG tells us is that major markets are outperforming smaller ones.

Taking a closer look reveals that US markets – the Nasdaq [NDX], Russell 2000 [RTY], and S&P 500 [SPX] – are travelling upwards, which is a positive sign. They are still picking up.

Most other tails, while on the right-hand (i.e., strong) side of the graph, are heading in a negative direction. They are moving lower against both the horizontal JDK RS-ratio axis and the vertical JdK RS-momentum axis. 

To sum up, US markets are gaining relative strength vis-à-vis other major markets.

Daily chart highlights weakness in Asian markets

Moving on to the daily RRG below, the picture becomes a little fuzzier. Here we find more volatility, with some zig-zag moves in a few tails. Such moves suggest uncertainty. But what is very clearly visible on this daily RRG is the weakness in Asian markets, especially Hong Kong’s Hang Seng Index [HSI] and Japan’s Nikkei [NKY].

The Nikkei is moving rapidly into the lagging quadrant with a long tail, which means that there is strength behind the move. Meanwhile, the Hang Seng is detached from the main pack, way down to the left of the lagging quadrant.

On the weekly RRG both the Hang Seng and the Nikkei are coming out of a strong rotation. Both have recently started to roll over and lose relative strength and momentum. The weak tails for both these markets on the daily RRG underscore this change in relative trend.

Weakness in Asian markets can be offset against strength in US markets, offering potential pair-trading opportunities for those looking to make a play on this difference in relative strength.

Nikkei stuck in a range

The Nikkei price chart below shows that the index is caught in a trading range between 26,000 and 28,000. The market is currently testing the upper boundary of that range but seems to have trouble breaking above it. 

The RRG Lines at the bottom of the above image are both moving lower, with the green JdK RS-Momentum line about to cross below 100. This movement is dragging the NKY tail into the weakening quadrant of the weekly RRG at the top of the article. 

With heavy overhead resistance nearby and relative strength declining, it looks as though more weakness is on the way for Japanese stocks.

S&P 500 displaying relative strength 

The S&P 500 is also in a resistance zone, but managed to take out its previous peak, making it a little stronger than the Nikkei at the moment. Moreover, the relative strength of the US market against the MSCI world index is currently superior to that of the Nikkei.

On the above chart you can see that both RRG Lines have turned back up again, pushing the SPX tail strongly back into the leading quadrant of the RRG we looked at earlier.

All in all, it looks as if we are entering a period where US stocks should be preferred over Japanese stocks, or even over Asian equities in general.

Bitcoin completes top, enters recovery phase

While cryptocurrencies in general are going through a tough time at present, I am keeping an eye on what’s happening to bitcoin [BTC] as a proxy for the overall market.

The below BTC/USD chart is intriguing because it provides such a great illustration of how a freely traded market adheres to many of the rules of technical analysis.

When bitcoin broke below 30,000 back in June, a major top formation was completed. That put a hard stop to the massive rally that ran until the end of last year.

The rapid decline that followed the downward break found support at the level of the peak reached in late December 2017 and early January 2018. This is a great example of an old high (a resistance level) coming back as support.

Thus, we can now expect heavy overhead resistance to come in at around the 30,000 mark – the major support level that was formed between May and July 2021, then broken below in June 2022.

So, from a long-term perspective, the current rally in BTC out of the 18,000 support area should be seen as a recovery rally after the completion of an important top.

Can bitcoin get back to 30,000?

The big question now is whether this rally is strong enough to reach that 30,000 area? For the past month, the market has been trying to break previous peaks in the 24,000-24,500 area – with little success. As a result there are now a few marginally higher highs and a few higher lows. This creates, as the below BTC/USD chart illustrates, a rising wedge formation.

Breaking that pattern to the downside puts a price target for BTC at the bottom of the formation near 18,000. In case that support area gives way, the risk for BTC deepens to 12,500, where we find the first major support area coming off the highs that were set in 2018, 2019 and 2020.

Even if BTC succeeds in breaking short-term resistance around 24,500, its upside potential remains limited towards 30,000.

My take on bitcoin is that a very big top has been formed. The initial decline found support around 17,500-18,000. We’re currently seeing a bounce back towards the breakout level that will now act as resistance. A test of 30,000 is possible, but weakness is already showing up on the daily chart. There is negative divergence in the relative strength index (RSI) and resistance near 24,500 seems difficult to overcome while a rising wedge is in the making. 

In conclusion, the upside potential for BTC appears limited while the downside risk seems significant, especially if 17,500 gives way and opens up downside potential towards 12,500.

Pricing is indicative. Past performance is not a reliable indicator of future results. RRG’s views and findings are their own and should not be relied upon as the basis of a trading or investment decision.


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