foxex: Natural Bull

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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Friday, August 14, 2020 Headlines

1. Natural Gas surges while other markets stall

2. A quick comparison between Alibaba and Amazon

3. One explanation for Amazon's extra gains

Market Moves

Traders are fond of saying that there is always a bull market somewhere. Today it appears that one could be starting in the price of natural gas futures (NG), which is all the more noticeable because most other assets stalled into lackluster trading action for the day. The S&P 500 index (SPX) and the Nasdaq 100 (NDX) both closed essentially flat compared to yesterday's close. Oil, gold and bond prices all traded slightly lower. Meanwhile, NG futures closed 7.5 percent higher.

The chart below shows an interesting analysis of how the trend has changed from downward to upward over the past two weeks. The chart uses a Bollinger Band study with a pitch fan drawing overlaid. The pitch fan is simply five different lines defined by a downward trend and the width of its most prominent counter-trend price action (green line).

Notice that the price action seems to find support on the downward sloping lines made by this drawing tool as marked by the three red circles. The green circle highlights an area where the price action fails to touch the lower side of the Bollinger Band, suggesting that the trend may be ready to reverse. Shortly after that point, the price travels higher and breaks through the most shallow of the five sloping lines. A rapid breakout follows. This trend on NG futures will be worthwhile to watch, but unless oil futures begin to move higher as well, NG is likely to have a limited upside.

[NEW READER SURVEY: We are running another two-week survey of our U.S.-based readers to gauge your sentiment and see what moves, if any, you have been making with your money given the market recovery, and current economic conditions. We'll share the results, as always, and we thank you for your time and participation.]

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A Quick Comparison Between Alibaba and Amazon

With Alibaba (BABA) nearing its quarterly earnings report, the following comparison might be worth analyzing. Notice that Amazon (AMZN) shares are highly correlated in their price movement with BABA shares. Since AMZN shares got a favorable treatment from the good news they had last quarter, it seems as though it might be a worthwhile question to consider whether BABA shares will fare similarly.

The chart below yields an interesting observation: the value of the U.S. Dollar (DXY) falling seems to contribute to the profitability of these companies. However, the chart also suggests an important question: "Why are AMZN shares surging significantly higher?" After all, if the price action on these businesses is so highly correlated, and their business models are similar, why are AMZN shares increasing in 2020 by almost double the rate of BABA shares?

Slow Airline Industry Recovery Pushes Global Oil Demand Forecast Lower

Alibaba Earnings: What to Look For

One Explanation for Amazon's Extra Gains

To answer the question posed previously, it might be helpful to analyze the following chart. Over the past few years an interesting pattern can be observed where the U.S. Dollar index (DXY) falls, and shortly thereafter Amazon's net margins seem to increase. If customers have to spend more dollars to buy goods, then it benefits Amazon as it takes a portion of those dollars spent and received by its suppliers. This is admittedly only one of many factors, but one many investors would likely overlook.

The Bottom Line

Most assets traded in a tight range today while Natural Gas continued its recent breakout. Charts comparing two stocks with similar business models (Amazon and Alibaba) seem to differ in one important respect. As the dollar declines, Amazon does a better job of increasing its net profit margins.