One of the first things that we’re taught as we enter the field of technical analysis is the polarity principle. From a pure supply and demand perspective, this is one of the most important concepts to understand as a market participant. Simply put, this is the general tendency for former resistance (supply) to turn into support (demand) and former support levels to turn into resistance.
On March 3rd, Russia broke down below several years of support (see here). The demand that was there since 2011 dried up on this 4th go around. Our polarity principles teach us that the level where we had demand for years should now turn into over head supply. This is precisely what we’ve seen develop over the last couple of weeks.
The first chart is the same one that I shared 6 weeks ago, just updated with the recent price action. Notice how where there was once support, we are now watching it turn into resistance:
The headlines coming out of this space have slowed down some. I think this is an interesting development. A funny thing happens when prices start to roll over hard again: we begin seeing a pickup in articles and tv segments discussing reasons to justify the action. But we can clearly see in this chart that this is simply a supply and demand dynamic.
The next chart helps to give us some longer-term perspective. First of all, notice how well defined this support level has been since 2011. Not only did we have a horizontal support break, but we can also include the rising trendline from 2012 into this dilemma:
From a momentum standpoint, Russia is stuck in this bearish cycle. Notice in the plot below price how every time we get a sell-off, momentum falls down into oversold conditions. When prices rally, momentum continuously fails to give us any overbought readings. These are extremely bearish characteristics that we don’t find in uptrends. Sometimes, we’ll see a bullish momentum divergence that might give us a heads up that the trend could be changing. But we’re not seeing this here at all, quite the opposite in fact.
I have no choice but to continue to give the bears the benefit of the doubt here. I do my best to keep a very open mind when I look at markets. But I don’t see a single reason to be bullish here.
What could change? I need to see prices convincingly hold above 25. In that case, I could potentially argue for a nice bullish squeeze. But from where we sit today, I think this is the lower probability outcome and lower prices are likely coming. I personally don’t care either way. In fact, I would prefer that it rallies because we can catch a nice move. I just don’t see it yet. I’m still a seller with a target under 18.
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Tags: $RSX $ERUS $EEM