How RRG Helps Us Find Pair Trading Opportunities

November 24, 2023

How RRG Helps Us Find Pair Trading Opportunities

Post By zittrexstore Stock cat, charts, dj industrials, dow jones, etfs, financial charts, indu, investing, mrk, MSFT, nke, relative rotation graph, rrg, rrg charts, seasonality, sharpcharts, stocks, support vs. resistance, technical analysis, yield curve No Comments

KEY

TAKEAWAYS

DJ Industrials closing in on overhead resistance
Weekly RRG showing some strong opposite rotations
Identifying two potential pair trading setups (MSFT-MRK & NKE-CAT)

The Dow Jones Industrial Index ($INDU) is reaching overhead resistance between 35.5k and 35.7k, which means that upside potential is now limited. Even if the market manages to break that area, the next resistance level is already around just 37k.

However, the relative rotation graph featuring the rotation for all 30 members of the DJ Industrials Index is showing some potentially very interesting pair trade setups.

DJ Industrials

On the weekly chart above, that overhead resistance area is clearly visible. The previous highs, which define the resistance zone, date back to late 2021 and early 2022, almost two years ago. This makes it a very important resistance zone.

An upward break of that resistance will obviously be a very bullish signal. But the recent rally, coming out of the late October low, has been very steep, and it would not be strange to see some form of consolidation against the aforementioned resistance zone.

With overhead resistance nearby, the near-term risk is now to the downside. Looking at the chart, a setback after a peak against resistance could take the Dow as low as 32.3k. This would still keep $INDU within the boundaries of this year’s trading range.

Opposite Tails on Weekly RRG

The weekly relative rotation graph above shows the rotations for all thirty stocks inside the Dow Jones Industrial Index. With the benchmark index still inside a trading range, some of the opposite rotations that are visible on the graph suggest that a few interesting pair trading opportunities are present.

In order to clean up the RRG and put emphasis on the more interesting rotations, I have taken out the tails with less favorable characteristics.

In order to see if I could get confirmation, I have run the same RRG on the daily time frame.

Given the current rotational patterns, many different pair trading opportunities can be found. I encourage you to do your own research and find out whether you have a particularly strong view of specific stocks or combinations of stocks, positive or negative. Here, I will pick two examples of potential pair trades from the RRGs above and look at the individual charts.

NKE vs. CAT

On the weekly RRG, Nike and Caterpillar’s tails are rotating in opposite directions. NKE is inside the improving quadrant and rapidly heading toward leading. CAT is inside the weakening quadrant and rapidly heading toward lagging. Both tails are at the extremes of the RRG and far away from the benchmark. This indicates a big potential for alpha.

NKE

NKE is nearing resistance between 110 and 115, suggesting that there is limited upside potential left, unless NKE can clear this barrier in the coming weeks. However, as we are looking for pair trades, we need to focus more on the relative strength conditions. And these are clearly picking up for NKE.

The JdK RS-Momentum line is already well above 100 and is dragging the JdK RS-Ratio line higher. When both RRG-lines are moving up at the same time, this causes an RRG heading between 0-90 degrees, which we know is an indication of strength.

CAT

On the price chart, CAT has just bounced off its rising support line. The relative performance, however, is not looking that good. The JDK RS-momentum line already dropped below 100 a few weeks ago and is now rapidly dragging the RS-Ratio line lower. This rapid decline in relative strength suggests a further underperformance for CAT in the next few weeks.

Off-setting the relative strength of NKE against the relative weakness of CAT makes for a potentially interesting pair-trading opportunity.

MSFT vs. MRK

The weekly RRG details for Microsoft and Merck show opposite rotational patterns. MSFT has just completed a rotation from leading through weakening and is now back into leading, making it one of the strongest stocks, if not the strongest, in this universe. The opposite goes for MRK, which rotated from lagging into improving and is now crossing back into the lagging quadrant.

We know that rotations that complete on one side of the graph indicate a new up- or down-leg in an already established up or downtrend.

MSFT

The recent break to new all-time highs is holding up well. It has also caused the raw RS-line to push to new highs where it is also holding. This is a strong combination of facts.

After a brief dip below 100, the JdK RS-Momentum line has now crossed back above that level again, dragging the RS-ratio out of its low just above 100. This causes the tail on the RRG to push back into the leading quadrant at a strong RRG-heading.

The combination of strong relative strength and a break to new highs on the price chart makes Microsoft the best chart in this universe for the time being.

MRK

MRK reached its all-time high in May of this year, but has been in a steady downtrend since then. The price of Merck reached support just above 100 a few weeks ago and is still hovering slightly above that area at the moment. A break lower will very likely accelerate the decline, very likely, toward the next level of support, between 92.50 and 95.

The raw RS line is breaking an important horizontal support level, completing a toppish formation. The RRG lines already picked up on the new downtrend in July. The recent hiccup of the RS-Momentum line above 100 is the result of the sideways consolidation of relative strength above support.

With raw RS breaking support and the RS momentum line dropping below 100, both RRG-Lines are now once again moving lower while below 100. This is causing the tail on the RRG to move deeper into the lagging quadrant while traveling at a negative heading.

Both tails completing a rotation at the same side of the RRG suggests a continuation of the ongoing outperformance of MSFT over MRK.

Enjoy your Thanksgiving weekend, but #StayAlert, –Julius

Julius de Kempenaer
Senior Technical Analyst, StockCharts.com
Creator, Relative Rotation Graphs
Founder, RRG Research
Host of: Sector Spotlight

Please find my handles for social media channels under the Bio below.

Feedback, comments or questions are welcome at [email protected]. I cannot promise to respond to each and every message, but I will certainly read them and, where reasonably possible, use the feedback and comments or answer questions.

To discuss RRG with me on S.C.A.N., tag me using the handle Julius_RRG.

RRG, Relative Rotation Graphs, JdK RS-Ratio, and JdK RS-Momentum are registered trademarks of RRG Research.

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November 20, 2023

EB Weekly Market Report – Monday, November 20, 2023

Post By zittrexstore Stock charts, etfs, financial charts, investing, point and figure, relative rotation graph, rrg, seasonality, sharpcharts, stocks, technical analysis, yield curve No Comments

Sample Report

Below is our latest Weekly Market Report (WMR), which is published on Sunday/Monday of every trading week. It’s unlike our Daily Market Report (DMR) as the WMR focuses almost exclusively on the Big Picture and is more designed for those with longer-term investing/trading horizons. Our DMR looks much more closely at current action, designed more for active traders.

I thank all of you that have followed my work here at StockCharts.com over the past 16 years and this sample report is just a small Thank You for your support! If you like the report below and would like to subscribe to our full service, we do offer a 30-day FREE trial and signing up now makes a lot of sense. Our Fall Special, which offers the absolute best price for our service, begins tomorrow and will last roughly through the end of November. If you take us up on our Trial Offer and enjoy our service, you can then subscribe using our BEST DEAL of the year.

Either way, ENJOY and Happy Thanksgiving!

Weekly Market Recap

Major Indices

We finally saw some relative strength out of small caps (IWM) and mid caps (MDY) last week. All of our major indices gained ground, but the IWM nearly tripled the NASDAQ 100 and simply acted much more bullishly after the tame October CPI report was released on Tuesday morning before the opening bell. That triggered a tsunami of buying on Tuesday. After a brief pullback, the small cap bulls were back out on Friday. I would treat the IWM as an uptrending ETF – until proven otherwise. Check out the chart, with two key support levels identified:

There’s still much work to do, but the IWM is at least beginning to show significant improvement, especially on the absolute price chart. The huge gap up on Tuesday now provides us excellent gap support at 174.23 and the rising 20-day EMA is currently at 172.17. Those are the two support levels to watch closely.

Sectors

Two sectors that had really struggled in 2023 due to higher interest rates were real estate (XLRE) and utilities (XLU). It made sense for these two to perform well when investors poured into bonds last week, sending the 10-year treasury yield ($TNX) plummeting. Consumer discretionary (XLY) had an excellent week as well. You’ll see below that 4 of the top 6 industry groups last week were in the consumer discretionary sector.

I generally define a daily uptrend as “price above the 20-day EMA and the 20-day EMA above the 50-day SMA”. Of our 11 sectors, XLB is on the verge of meeting this definition as it prepares for a golden cross (20-day EMA crossing above 50-day SMA). The only other two sectors not meeting this definition and still showing more work left on their charts are energy (XLE) and health care (XLV). Here are the two charts:

XLE:

The XLE printed a tail beneath recent price support on Thursday, then recovered to test its nemesis, the 20-day EMA. Currently, the XLE is caught between those two – price support near 82.50 and the 20-day EMA at 85.26. Let’s see which one breaks first. In a bull market, I give the edge to the XLE breaking back above the 20-day EMA.

XLV:

The XLV seems to be a bit further along in its recovery attempt. It currently resides right at key price and trendline resistance. A breakout would be a solid piece of technical evidence that the “correction bottom” is in for the XLV.

Top 10 Industries Last Week

Renewable energy ($DWCREE) jumped about 13% on Tuesday alone after the October CPI report was released. The 290-300 area has proven to be difficult short-term resistance, so let’s see if the group can power through that area this week:

In that resistance zone is gap resistance and multiple price attempts at a breakout, so clearing it would definitely improve the technical picture here, perhaps even switching the overall trend from downtrend to uptrend. Before you get too excited, however, please keep in mind that renewables have been lagging badly vs. the benchmark S&P 500. We’ve seen some improvement, but there’s little leadership. In other words, much of the current rebound can be attributed to very oversold conditions and a bounce, plus a very strong overall market. It’s the old Wall Street adage, “a rising tide lifts all boats”. In that bottom panel, breaking the relative downtrend is truly what this group needs.

Bottom 10 Industries Last Week

I find about half of the above industry groups to be bullish on their charts. Apparel retail ($DJUSRA) has been very strong since its early-June low and the recent selling appears to be a handle off of a cup:

The huge spike in volume likely was the result of Gap’s (GPS) massive volume, which accompanied a much-stronger-than-expected quarterly earnings report. The DJUSIB, DJUSRD, DJUSMF, and DJUSHN all were among the 10 biggest losers last week, but still show technical promise, in my opinion. The DJUSIB, in particular, looks solid, having broken to a 52-week high earlier this month and still trading well above its rising 20-day EMA.

Top 10 Stocks – S&P 500/NASDAQ 100

Bottom 10 Stocks – S&P 500/NASDAQ 100

Big Picture

We cleared yet another hurdle on the S&P 500 as we cleared the 4500 level. After reaching a high of just over 4600 in July and pulling back to 4103.78 on October 27th, the bulls are back in charge. The S&P 500 is now nearing its 2023 high, just 2% away. The recent recovery is just one more reason why I like to take a step back and view the “Big Picture”, much more easily recognizing the current secular bull market:

The bottom panel highlights the 240-month (20 year) rate of change (ROC). I like to look at this for perspective. While many bearish analysts believe we’ve run too far to the upside and have lots of downside ahead, this 240-month ROC tells me a completely different story. This ROC has come nowhere close to the highs we saw in the previous two secular bull markets. If anything, this suggests we could have much more upside ahead than any of us can imagine right now. It’s one reason why I believe the S&P 500 could triple over the next 8-10 years, before we hit the next secular bear market.

Sentiment

I look at two key sentiment readings – the Volatility Index ($VIX) and the equity-only put-call ratio ($CPCE). Others use surveys, but I don’t trust those. After all, wouldn’t you rather see what traders are doing with their money rather than their lips? Yeah, me too.

Volatility Index ($VIX)

The first thing to understand is that the VIX is a calculation of “expected volatility” ahead. The calculation is based on the pricing of short-term S&P options. I like to view this as my “market maker sentiment reading”. Market makers set the premiums that they require option holders to pay. If market makers are looking to protect themselves against volatile market action, they’ll put higher premiums on options. If we’re in a boring market environment (nearly always occurs in bullish market environments), premiums are much lower and indicative of little volatility ahead. Market makers are giving us a GREAT BIG CLUE as to where they see the market heading.

Typically, a VIX over 20 suggests a fairly high expectation of trouble ahead as when the VIX rises above 20, you really want to avoid taking any unnecessary risks on the long side. Instead, you want to hunker down. The higher the VIX level goes, the more volatile and scary the action can get. VIX readings above 30 usually require market capitulation before we get a more tradable market on the long side.

If the VIX is in the 17-20 range, I’m usually on high alert. If it’s falling in this range, it can a very bullish signal. If it’s rising in this range, however, and approaching 20, caution would be suggested as selling could escalate quickly. At this point, if I was long and wanted to stay long, I might consider a covered call strategy, if you’re familiar with options. You’ll get a nice premium and it’s a way to at least hedge a little against your long positions.

The most bullish environment is when the VIX is below 17 and declining. We’ve seen that recently. Here’s where the VIX currently stands:

Check out that first big spike in the VIX back in March. That should be ingrained in your mind. That’s what can happen when the VIX moves through 20 resistance and accelerates. The stock market took a tumble of roughly 250 points in one week. The October scare saw the VIX jump 50% in a couple weeks, clearing 20 and reaching a high just above 23. That coincided with another significant selloff as the S&P 500 again lost about 250 points.

Look at those thick red/blue directional lines in November, though. As the VIX came tumbling down, we had a massive market rally as fear began to dwindle. All of this occurred during what we already knew was THE most bullish period historically of the entire year. This is how we can put puzzle pieces together in the short-term to increase our probability of making great market calls.

Equity-Only Put-Call Ratio ($CPCE)

While the VIX is a market-maker-related sentiment signal, the CPCE tells us what the retail trader is doing with their money. Just keep in mind that when retail option traders all start to pile in on the same side of the trade, it usually ends in very ugly fashion for them. We’re looking for the “rubber band to stretch” significantly in either bullish or bearish fashion and we position ourselves on the opposite side, waiting for the “snap back”. In my experience, any time the 5-day SMA of the CPCE hits .75, extreme fear is building and we should begin looking for a market bottom. Sometimes this 5-day SMA reading can reach as high as .85-.90 before a bottom is reached, so this isn’t an exact science. The main point I’m making is that, if you’re shorting or trading equity puts, you need to understand that your profits could swiftly disintegrate once the 5-day SMA of the CPCE moves past .75.

Here’s a historical chart of the CPCE (5-day SMA) to illustrate how this works:

The low 5-day SMA readings below .54-.56 have been solid signals in marking short-term tops, while high 5-day readings above .75 have been excellent in providing us clues of market bottoms. The last reading was circled in red, because it occurred while the market was accelerating to the upside. This tells me that we still have PLENTY of doubters as we rally. I believe that’s a very bullish signal.

Inflation

On Tuesday morning, the October CPI report was released, followed by the October PPI report on Wednesday morning. Both reports continue to stress that inflation is FALLING and it has been consistently for over a year. The stock market LOVES this news and is now rising to be priced accordingly. Do you believe inflation remains a big problem? Keep in mind that the Fed is most interested in Core CPI, so below you’ll find a chart of the absolute monthly Core CPI numbers with two panels below. The first shows the annual Core CPI (12-month rate of change) and the second panel shows the 1-month rate of change (ROC) of Core CPI:

The annual rate is dropping every single month and is now back to 4%. We’re not at the Fed’s target rate of 2%, but the last four monthly CPI increases have been in the “normal range” for the past 30-40 years, between 0.5% and 0.3%. If inflation remains in this area, we’ll be approaching the Fed’s target inflation level by June 2023, which is when many analysts believe the Fed will start lowering interest rates to spark a slowing economy. It’s interesting how this inflation data lines up almost perfectly with that narrative.

Intermarket Analysis

In addition to following technical price action on our major indices, just like most technical analysts, I believe it’s extremely important to monitor key intermarket relationships as well. The two primary relationships for me are (1) XLY:XLP to watch the rotation between the more aggressive discretionary sector (XLY) and the more defensive staples sector (XLP), and (2) QQQ:SPY to observe the rotation between the more growth-oriented NASDAQ 100 and the more value-oriented S&P 500. The former is extremely important, because our GDP is comprised roughly of two-thirds consumer spending. Watching to see where these consumer dollars are going helps us determine whether investors are in a “risk on” or “risk off” mode. The former is bullish, while the latter is bearish.

So where do these two relationships stand today?

XLY:XLP

My analysis features this relationship “ignoring gaps” and “including gaps”. I believe the stock market is highly manipulated, especially at the opening bell. A gap down is a great way to “encourage” unsuspecting traders to sell and a gap up is a great way to “encourage” those same unsuspecting traders to buy. The top panel ignores that opening bell activity and focuses ONLY on the rotation during the trading day. You can’t plot this on a chart with regular data. In order get this intraday rotation, you must keep a User-Defined Index at StockCharts, which is exactly what I do. What we saw during much of the correction was a weak S&P 500, but a strengthening XLY:XLP. It was a rather important signal that the S&P 500 selling would not last. Now we see the result as our major indices scream higher once again.

QQQ:SPY

While the S&P 500 has yet to break above its July high near 4600, this ratio has broken out whether we include or ignore gaps. Again, it’s a bullish signal as the big Wall Street firms buy into the more aggressive growth index, while simultaneously appearing on CNBC to spread indecision, fear, and sometimes, outright doom and gloom. Follow the charts, not the lips on CNBC.

Trade Setup

I discuss potential trade setups here from a LONG-TERM perspective. These are not trades where you’re hoping to jump in, make 10-15%, then sell and move on to something else. Instead, I focus here on stocks that generally have solid long-term track records. Entering at the current level might make sense due to various factors.

Today, I want to highlight Seagate Technology Holdings (STX) as it has performed better than the S&P 500 over time and it also has performed much better than one of its primary competitors, Western Digital Corp (WDC). I also like the recent technical breakout on STX after languishing mostly during the 2022 cyclical bear market and the recent market correction from July to October:

Another positive with STX is that it pays a healthy $2.80 dividend ($.70 per quarter), which results in a 3.69% dividend yield, not a bad addition to the solid long-term capital appreciation.

Looking Ahead

Upcoming Earnings:

Earnings season is slowing down now and most big companies with calendar quarter ends (March, June, September, and December) have already reported their quarterly results. There are a few, however, that do report in other months and you’ll see below that NVIDIA Corp (NVDA) is one of those. The following earnings reports (market cap in parenthesis) are, in my opinion, at least relatively significant and worth watching. This is NOT a list of ALL companies reporting this week, so please be sure to check for earnings of any companies that you own or add:

Monday: A ($33 billion), KEYS ($24 billion), ZM ($19 billion)
Tuesday: NVDA ($1.2 trillion), LOW ($117 million), ADI ($90 billion)
Wednesday: DE ($109 billion)
Thursday: None – Market Closed for Thanksgiving Day Holiday
Friday: None – Market Closes Early at 1pm ET

Key Economic Reports:

Monday: Leading indicators
Tuesday: Existing home sales, FOMC minutes
Wednesday: Initial jobless claims, durable goods, consumer sentiment
Thursday: None – Market Closed for Thanksgiving Day Holiday
Friday: None – Market Closes Early at 1pm ET

Historical Data

I’m a true stock market historian. I am absolutely PASSIONATE about studying stock market history to provide us more clues about likely stock market direction. While I don’t use history as a primary indicator, I’m always very aware of it as a secondary indicator. I love it when history lines up with all my other signals, providing me much more confidence to make particular trades.

Each week, I’ll provide you the average annualized returns for each calendar day and by index. Here are the historical numbers for this week:

S&P 500

November 20: -32.39%
November 21: +55.64%
November 22: -1.21%
November 23: +49.61%
November 24: +127.98%

NASDAQ

November 20: -90.10%
November 21: +74.67%
November 22: -17.21%
November 23: +34.13%
November 24: +230.95%

Russell 2000

November 20: -72.94%
November 21: +71.46%
November 22: -9.82%
November 23: +63.10%
November 24: +255.15%

The S&P 500 data dates back to 1950, while the NASDAQ and Russell 2000 information date back to 1971 and 1987, respectively.

We are now in the most bullish period of the calendar year. The close on October 27th through the close on January 18th is THE ABSOLUTE BEST TIME OF THE YEAR FOR U.S. EQUITIES – HISTORICALLY SPEAKING. Last week was an “ok” period for equities, but the upcoming week typically sees much more historically-bullish action and this bullishness extends through the first week of December.

Final Thoughts

As we move into the Thanksgiving holiday season, let’s keep a few things in mind:

Historical bullishness should not be ignored. 73 years of data on the S&P 500 tell us that NOW is the best time of the calendar year to be bullish and to be long. Fight this historical bullishness at your own risk.
The 10-year treasury yield ($TNX) has lost neckline support in a topping head & shoulders pattern, with its initial measurement pegged near the 4.10% level
Key intermarket relationships point to the sustainability of the current S&P 500 rally; 4600 is the next significant test, with a breakout likely sending us higher to test the all-time high near 4820
NVIDIA Corp (NVDA) reports its earnings on Tuesday after the bell; this will be significant not only for NVDA, but also for the entire semiconductor group ($DJUSSC). I expect big numbers from NVDA, but it has run a lot in November, now testing critical price resistance at 500.
Small caps (IWM) have shown improvement, but continue to watch the KRE (regional banking ETF) and XBI (widely-diversified biotech ETF) for clues about future relative strength; these are the two industry groups that most heavily influence IWM performance.
As I pointed out last week, TG Therapeutics (TGTX) is a strong short squeeze candidate, with over 27% of its float short. The closing breakout level of 11.88 provided was cleared on Friday’s close and we now see the result as TGTX is up more than 5.5% at my last look. Volume is picking up and there’s little overhead price resistance. Shorts could be covering big time later today. Wildly accelerating volume will be the major clue that a significant short squeeze is, in fact, underway. Short squeeze trades are ALWAYS extremely risky, but this one has the potential to fly this week.
I want to wish everyone a very happy Thanksgiving holiday weekend. If you’re traveling to be with friends and family, please be safe!

Feedback

If you’d like to share your thoughts on our Weekly Market Report, positive or negative, you can reach us at “[email protected]”.

Happy trading!

Tom

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November 13, 2023

In Bullish Trends, Seek Value and Momentum; Three Sectors to Watch as Year-End Rally Progresses

Post By zittrexstore Stock Bonds, charts, cpi, etfs, Fed, financial charts, igpt, Inflation, investing, market breadth, ndx, nyad, ppi, qqq, seasonality, sector rotation, sharpcharts, SPX, stocks, technical analysis, tnx, ura, vix, xhb, yield curve No Comments

The combination of a pause in the Fed’s rate hikes and strong year-end seasonal tendencies have created an opportunity for investors to end the year on a positive note. The fly in the ointment, in the short term, could be a bad set of readings on the upcoming Consumer (CPI) and Producer (PPI) price gauges. Aside from that, the negative sentiment on Wall Street is still thick enough to push prices higher.

As I noted last week, “The stock market seems to have bottomed, as short sellers panicked and recently frightened buyers rushed back into the markets. It’s about time, as the signs of a pending reversal have been in place for the past two months, namely a slowing economy and fears about the Fed’s rate hike cycle, which have been mounting as investor’s pessimism rose to a fever pitch.”

On the other hand, Fed Chairman Powell proved once again that a few words can kill any rally, when he noted the central bank was “not confident” that inflation was fully vanquished on 11/9/23 and stocks sank. Whether that was just tough talk or a sign that he knows what the CPI and PPI numbers will show is anyone’s guess. Thankfully, the market recovered, although, as I discuss below, breadth remains weaker than one would hope for.

That said, there is no substitute for being prepared for any eventuality. For now, the trend is bullish, so here are three groups that should move higher, barring any unpleasant surprises.

It’s What’s Inside That Matters; Three Sectors Worth Watching as the Year End Rally Develops

Most investors focus on areas of the market which are exhibiting strength. That’s because, in bull markets, strength usually leads to further strength. This, of course, is the essence of momentum investing.

At the same time, it’s also useful to review the action in weak sectors, as underperformers are often future areas of value. Moreover, it’s important to know what you’re buying. Here is what I mean.

The software sector encompasses a wide swath of companies ranging from security companies to app developers, along with those in the increasingly popular AI sector. With so many companies, it’s often more practical to buy into a diversified portfolio, such as an ETF.

One such ETF is the Invesco Dynamic Software ETF (IGPT), recently renamed Invesco AI and Next Gen Software ETF, which is closing in on what could be a major breakout. But don’t let the title fool you; this ETF holds the usual large-cap tech stocks that typically rally when the tech sector moves into a rising trend, such as what is currently developing and is evident in the price chart for the Invesco QQQ Trust ETF (QQQ). QQQ holds many of the same companies, but currently trades at ten times the price of IGPT.

So, you can pay ten times more for QQQ, or get the same general market exposure via IGPT for a fraction of the price. Consider that IGPT is currently trading below $40 per share, which means you can own shares in Meta (META), Alphabet (GOOGL), Adobe (ADBE), and even NVDIA (NVDA) for a fraction of the price of each of these blue chips.

And here’s what the price chart is telling us regarding IGPT:

The ETF is back in bullish territory, as it just crossed above its 200-day moving average;
Accumulation/Distribution (ADI) is moving higher after a recent consolidation as short sellers leave the scene;
On Balance Volume (OBV) is in an established uptrend, as buyers come in; and
A move above $36 will likely take this ETF higher, as long as the bullish trend in the technology sector remains in place.

Another bullish sector which remains undervalued is the uranium mining sector, as in the Global X Uranium ETF (URA), in which I own shares and which is a core holding at Joe Duarte in the Money Options.com. Nuclear power is slowly becoming an option for areas of the world which are trying to find a compromise between clean fuels and reliable power generation.

URA’s appeal has been boosted by the demise of the renewable power sector over the last few months, due to the expense burden and supply chain challenges required to build wind turbines. Note the difference in the performance of URA versus the First Trust ISE Global Wind Energy ETF (FAN).

For one, URA is in a bullish consolidation pattern after its recent breakout. Note the excellent support at $26, where the 50-day moving average and a large Volume-by-Price (VBP) bar continue to attract buyers. Moreover, note the bullish uptrend in OBV as buyers sneak into the shares.

Certainly, FAN is in a consolidation pattern of its own after its recent collapse. Note, however, that neither ADI or OBV have turned up yet, which means that there is currently little interest in these shares from bullish investors. On the other hand, from a contrarian standpoint, it’s not a bad idea to keep an eye on this ETF as the cycle works itself out. All it would take for this sector to bottom out would be something like a large infusion of government cash, such as what may be materializing in Europe, according to reports.

I recently recommended an ETF which is now breaking out in a big way. Join the smart money at Joe Duarte in the Money Options.com, where you can have access to this ETF and a wide variety of bullish stock picks FREE with a two-week trial subscription.

Bonds Retain Bullish Tone Ahead of Inflation Numbers

As I noted last week, bond yields have made at least a short-term top. In fact, just three weeks ago, the U.S. Ten Year note yield (TNX) hit the 5% point, an event that unhinged both stock and bond traders.

Since then, things have quieted down and TNX has settled into a trading range, with 4.5% and the 50-day moving average as the floor.

If the inflation numbers are bullish, and TNX breaks below 4.5%, expect a big move up in stocks.

Keep an eye on the SPDR S&P Homebuilders ETF (XHB), specially the $78-$80 area. If CPI and PPI are bullish and bond yields fall, XHB should rise as short sellers get squeezed. Note the improvement in ADI, as the shorts cover their bets, while OBV is still holding steady, as buyers remain patient.

I’ve recently posted several detailed articles on mortgage rates, bonds, and homebuilders at my Buy Me a Coffee page. You can access them here. For the perfect price chart set up, check out my latest Your Daily Five video here.

Market Breadth Lags Rally as Indexes Outperform

The NYSE Advance Decline line (NYAD) has bottomed out, but has yet to cross above its 50- or 200-day moving averages. So, for now, NYAD is neutral to slightly positive. If it doesn’t show a bit more pop in the next few weeks, it may signal that the rally will have short legs.

In contrast, the Nasdaq 100 Index (NDX) is nearing a breakout after rallying above its 50-day moving average. Both ADI and OBV turned higher as short sellers cover (ADI) and buyers move in (OBV). A move above 15,800-16,000 would likely extend the rally further.

The S&P 500 (SPX) is also lagging NDX, but has delivered a minor breakout above 4400. SPX is well above its 200-day moving average, returning to bullish territory after its recent dip below 4150. Moreover, it has now survived a test of the 4350 support area.

VIX is Back Below 20

The CBOE Volatility Index (VIX) is well below 20. This is bullish.

A rising VIX means traders are buying large volumes of put options. Rising put option volume from leads market makers to sell stock index futures, hedging their risk. A fall in VIX is bullish, as it means less put option buying, and it eventually leads to call buying. This causes market makers to hedge by buying stock index futures, raising the odds of higher stock prices.

To get the latest information on options trading, check out Options Trading for Dummies, now in its 4th Edition—Get Your Copy Now! Now also available in Audible audiobook format!

#1 New Release on Options Trading!

Good news! I’ve made my NYAD-Complexity – Chaos chart (featured on my YD5 videos) and a few other favorites public. You can find them here.

Joe Duarte

In The Money Options

Joe Duarte is a former money manager, an active trader, and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best-selling Trading Options for Dummies, rated a TOP Options Book for 2018 by Benzinga.com and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.

The Everything Investing in Your 20s and 30s Book is available at Amazon and Barnes and Noble. It has also been recommended as a Washington Post Color of Money Book of the Month.

To receive Joe’s exclusive stock, option and ETF recommendations, in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.

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#Bullish #Trends #Seek #Momentum #Sectors #Watch #YearEnd #Rally #Progresses

November 6, 2023

Santa May Be Warming Up His Sled; What’s Next? Watch the Fed and the Bond Market

Post By zittrexstore Stock charts, cpi, etfs, Fed, financial charts, investing, mdlz, mortgage, MSFT, ndx, nyad, ppi, qqq, seasonality, sharpcharts, SPX, stocks, technical analysis, tnx, treasury bonds, vix, xhb, yield curve No Comments

The traditional year-end rally may have started with last week’s liftoff on Wall Street, as the Fed’s rate hikes start to bite and the economy shows signs of slowing. Investors hope the economy slows just enough to reduce inflation.

The stock market seems to have bottomed, as short sellers panicked and recently frightened buyers rushed back into the markets. It’s about time, as the signs of a pending reversal have been in place for the past two months, namely a slowing economy and fears about the Fed’s rate hike cycle, which have been mounting as investor’s pessimism rose to a fever pitch. Moreover, the self-perpetuating talk of doom loops led to a bout of panic selling, which reversed as the Fed held rates steady and Friday’s employment report showed a cooling in the labor market.

Of course, there are no certainties in any market. And this rally could easily fizzle. But the longer stocks hold up and bond yields remain subdued, the higher the odds of the rally intensifying.

Buckle up! Santa may be warming up his sled.

The Signs Were There

I’ve been expecting a major reversal in both bonds and stocks since September when the selling in the U.S. Treasury market, and the subsequent rise in yields entered an absurd trading pattern. I chronicled the entire process, including the likelihood of a pending reversal in bond yields on October 15, 2023, when I wrote:

“The slightly-hotter-than-predicted PPI and CPI numbers certainly put a temporary damper on the recent short-covering rally in stocks and bonds, raising investor fears about further interest rate increases. But, as I’ve noted recently, fear is often the prelude to a buying opportunity. Such an opportunity may be developing in the U.S. Treasury Bond market and related interest-sensitive sectors of the stock market, such as homebuilders, real estate investment trusts, and select technology stocks.”

Prior to that, I had suggested that a historic buying opportunity in homebuilder stocks was approaching, while providing an actionable trading plan for such a development here.

Last week, in this space, I wrote: “The stock market is increasingly oversold, so investors should prepare for a potential bounce before the end of the year, especially given the usual bullish seasonality which begins in November and can run through January.”

Bond Yields Crash and Burn and Stocks Respond with Bullish Reversal and Broad Rally

What a difference a week makes, especially in the strange world of the U.S. Treasury bond market. Just two weeks ago, the U.S. Ten Year note yield (TNX) tagged 5%, a chart point which triggered heavy selling in stocks from the mechanical trading crowd, also known as commodity trading advisors (CTAs) and their hedge fund brethren. The selling was further enhanced by headlines about mortgage rates moving above 8%.

But as I noted here, the selling spree had the smell of panic, especially given the lack of a new low in the RSI indicator, when the New York Stock Exchange Advance Decline line (NYAD), as I describe below, made a lower low. The key was whether NYAD broke below its March lows, which it didn’t. This provided the perfect setup for a massive short squeeze, which is currently unfolding.

Here are some details. The U.S. Ten Year Note yield has rolled over, with two significant technical developments occurring:

TNX is now trading inside the upper Bollinger Band, which is two standard deviations above its 200-day moving average. This marks a return to a “normal” trading pattern;
It is also testing its 50-day moving average and the 4.5% yield area. Normal trading action suggests that a consolidation in this area should occur before TNX makes a move toward 4.3%; and
Bullishly for the homebuilder and housing-related real estate stocks, as well as the rest of the market, mortgage rates seem to have topped out as well.

Moreover, as I discuss below, the rally seems be quite broad, as measured by the New York Stock Exchange Advance Decline line. In addition, money is moving back into large-cap technology stocks, as in the Invesco QQQ Trust (QQQ), which also rebounded above its 50-day moving average. Especially encouraging on this price chart is the rally in On Balance Volume (OBV), which signals that the rally is being fueled by real buying along with short-covering, as evidenced by a rising ADI line.

Big tech certainly got a boost, as Microsoft (MSFT) continued its recent climb and is approaching a potential breakout which, if left unhindered, could well take the stock to the $400 area in the next few weeks.

But it’s not just big tech that’s rising. A less obvious member of the QQQ stable, food producer and packager Mondelez (MDLZ), has been quietly moving higher and is now approaching its 200-day moving average. MDLZ’s On Balance Volume (OBV) line is rising nicely as money piles into the shares.

Huge Potential Gains Lurk in Homebuilders

Even better is the unfolding rebound above the 200-day moving average in the SPDR S&P Homebuilders ETF (XHB), where OBV is exhibiting an equally bullish trading pattern. As I noted above, I issued a Buy alert on the homebuilders a few weeks ago, and thus subscribers to my service have been well-positioned for this move in the sector.

Consequently, the rally in the homebuilders may just be starting, especially if interest rates don’t rise dramatically from current levels. As the price chart above shows, mortgage rates may have topped out, along with bond yields. This reversal is already being reflected in the bullish action visible in the homebuilder stocks. Note the following:

Rates are still trading above normal long term trends.
The upper purple line on the chart is two standard deviations above the 200-day moving average.
Since mortgage rates follow the trend in TNX (above), the odds favor a further decline in mortgage rates, with the first downside target being 6.5%.

Note the nearly perfect correlation between falling bond yields (TNX), falling mortgage rates, and rising homebuilder stocks (SPHB).

Join the smart money at Joe Duarte in the Money Options.com. You can have a look at my latest recommendations FREE with a two-week trial subscription. And for frequent updates on real estate and housing, click here.

Incidentally, if you’re looking for the perfect price chart set up, check out my latest YD5 video, where I detail one of my favorite bullish setups. This video will prepare you for the next phase in the market.

Market Breadth Reverses Bearish Trend

The NYSE Advance Decline line (NYAD) did not remain below is March lows for long, and has now nearly fully reversed its bearish trend as it approaches its 200-day moving average. The price chart below shows the similarity between the unfolding market bottom and that which occurred in October 2022. The circled areas highlight this super cool technical phenomenon where the lack of a new low in the RSI, when NYAD made a new low, marked the bottom. Also note the double top in VIX, which is also repeated.

The Nasdaq 100 Index (NDX) rallied above its 50-day moving average, with both ADI and OBV turning higher as short sellers cover (ADI) and buyers move in (OBV).

The S&P 500 (SPX) also rebounded above its 200-day moving average, returning to bullish territory after its recent dip below 4150.

VIX is Back Below 20

The CBOE Volatility Index (VIX) didn’t stay above the 20 level for long, which is a bullish development.

When the VIX rises, stocks tend to fall, as rising put volume is a sign that market makers are selling stock index futures to hedge their put sales to the public. A fall in VIX is bullish, as it means less put option buying, and it eventually leads to call buying, which causes market makers to hedge by buying stock index futures. This raises the odds of higher stock prices.

To get the latest information on options trading, check out Options Trading for Dummies, now in its 4th Edition—Get Your Copy Now! Now also available in Audible audiobook format!

#1 New Release on Options Trading!

Good news! I’ve made my NYAD-Complexity – Chaos chart (featured on my YD5 videos) and a few other favorites public. You can find them here.

Joe Duarte

In The Money Options

The Everything Investing in Your 20s and 30s Book is available at Amazon and Barnes and Noble. It has also been recommended as a Washington Post Color of Money Book of the Month.

To receive Joe’s exclusive stock, option and ETF recommendations, in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.

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#Santa #Warming #Sled #Whats #Watch #Fed #Bond #Market

November 2, 2023

Holiday Shopping Bonanza: Retail Stocks You Need to Watch

Post By zittrexstore Stock charts, etfs, financial charts, investing, point and figure, relative rotation graph, rrg, seasonality, sharpcharts, stocks, technical analysis, yield curve No Comments

KEY

TAKEAWAYS

Since holiday shopping season is here it could be a good time to add some retail stocks to your portfolio
AMZN, WMT, COST, and TGT could be potential stocks to add to your portfolio as holiday shopping begins
Set alerts for these stocks so you can enter at opportune levels

The holiday season and discretionary spending can be synonymous, ringing in a boom in retail profits. And with Halloween in the rearview mirror, it’s time to strategize a few killer plays in the retail arena.

Perhaps it’s no coincidence that, upon running a StockCharts Technical Rankings (SCTR) report using the US Industries menu, the Dow Jones US Broadline Retail Index ($DJUSRB) emerged among the top outperformers with an impressive score of 98.9 (see below). The holiday shopping season has started, so it’s worth looking more closely at this industry. Retailers in this industry have diverse products and services that work across several sectors.

CHART 1: US INDUSTRIES SCTR RANKING. $DJUSRB ranked second in the US Industries category.Chart source: StockCharts.com. For educational purposes.

CHART 2: DAILY CHART OF $DJUSRB. The index is currently pulling back, but shows several support levels should the bounce fail to break above the most recent swing.Chart source: StockCharts.com. For educational purposes.

The index bounced off the 38.2% Fibonacci retracement level from the December 2022 low to the September 2023 high. It’s outperforming the S&P 500 index ($SPX) by over 6% and looks like it’s on the verge of moving even higher.

So, How Might Inflation Affect Holiday Spending?

According to recent consumer spending reports, cash is flowing out of pockets and into the hands of retailers despite inflation and mounting household debt. “Borrow and spend freely” seems to be the main theme as we head toward the end of 2023.

Still, you must consider the toll that inflation may eventually have on consumers’ spending pockets, especially when it comes time to play Santa Claus. And that makes the Dow Jones US Broadline Retailers Index particularly sturdy this holiday season.

In 2022, AMZN took the largest share of holiday shopping (around 41%). It’s also a large component of the $DJUSRB. Looking at the daily chart of AMZN below, you can see that the stock is outperforming the S&P 500 index ($SPX) by about 29%. It also has a strong SCTR score.

CHART 3: DAILY CHART OF AMZN. The recent slide in AMZN’s stock price suggests that buying momentum may be slowing.Chart source: StockCharts.com. For educational purposes.

Though AMZN has pulled back, it appears to be clawing to challenge its September high. However, there’s a deceleration in buying pressure, and you can view this more clearly if you look at the Chaikin Money Flow (CMF) in the lower chart panel. AMZN bounced strongly off the 200-day SMA line and broke above its most recent swing high of 134.50. It will have to challenge its 2023 high of 145.85 if its uptrend is to remain valid.

Let’s look at some of the other US large retailers, starting with Walmart (WMT).

CHART 4: DAILY CHART OF WMT. The stock price is about to challenge its all-time high, and the CMF shows that buying pressure is still strong.Chart source: StockCharts.com. For educational purposes.

WMT, too, is outperforming the S&P 500, and the buying pressure, as exhibited by the CMF, concurs with this reading in momentum. Though WMT’s price appears to be pulling back, it has several levels of support, including its 100-day and 200-day SMAs before its 50% Fib retracement. If WMT breaks above 165.75, it will have reached record highs, and right now, it looks poised to break above that level.

Like WMT, Costco (COST) benefits from a diverse suite of private-label products and economies of scale, allowing it to control costs better and maximize profits.

CHART 5: DAILY CHART OF COST. Investors seem indecisive about accumulating CSCO stock.Chart source: StockCharts.com. For educational purposes.

Technically, COST is experiencing higher levels of volatility as it approaches its all-time high above 600. It also outperformed the S&P 500, though its relative performance exhibits slight indecision. Its CMF reading is positive, but shows divergence over the last month (see the flat blue line on the CMF and compare it to Costco’s rising trajectory, leading to its pullback and the following fluctuations).

Although COST appears to have bounced off its 100-day SMA, if it falls further, it has plenty of technical support between 510 and 530, where the 38.2% and 50% Fib retracements are clustered along with the 200-day SMA.

The stock price for Target (TGT) presents a different scenario. Amid a high-interest rate environment, mounting theft, and, particularly, a strong consumer backlash against certain products, TGT shows the most epic falling knife scenario (see chart below) among the largest retail giants. Still, it’s an arguably solid company with a diverse portfolio of cost-competitive offerings.

CHART 6: DAILY CHART OF TGT. Ouch! However, the selling pressure looks like it’s drying up. If it breaks out to the upside, its reversal faces many headwinds.Chart source: StockCharts.com. For educational purposes.

It’s difficult to predict if the stock price has bottomed, but certain levels can help you gauge its advance and momentum once it begins to show signs of recovery. And the holiday season may provide the catalyst for TGT’s upside reversal.

TGT is caught within tight consolidation between roughly 106 and 113.50 after a 42% plunge from its 2023 high of 177.50. Its SCTR score of 13 and -38% underperformance against the S&P 500 underscore the severity of TGT’s drop. Any early signs of a recovery would begin with a close above resistance at 113.50. The CMF indicator paints a slightly optimistic picture of this likely upside break as selling pressure recedes, and buying activity sends the indicator above the zero line for the first time in four months.

But even if TGT bulls attempt to rally the stock, it has multiple resistance levels. Drawing a Fibonacci retracement from its 2023 peak to its lowest point, you can expect resistance between 132.50 (38.2%) and 140 (50%), a range in which the 200-day SMA will likely be met. Also, 125 and 137.50, the bottom and top of a previous rectangle formation, will likely provide additional resistance, adding to TGT’s technical headwinds (not to mention the consumer-driven headwinds that played a significant part in its near-term demise).

Actionable Levels

AMZN, WMT, and COST are all prone to pullbacks, while TGT awaits signs of a potential reversal. Each stock presents different technical scenarios, momentum profiles, and potential support levels. Where you choose to buy (if you’re bullish) depends on your level of aggressiveness and means of (bullish) confirmation. Fibonacci and SMA levels (as well as swing points) also present different stop-loss scenarios that can be trailed should you find yourself on the right side of the market.

The Bottom Line

As we enter the holiday season, retail stocks will likely take center stage. The Dow Jones US Broadline Retail Index ($DJUSRB) shines with a robust SCTR score. Its biggest component, Amazon (AMZN) faces challenges. Other large retailers show different scenarios—Walmart’s gaining ground, Costco is wavering, and Target is eyeing a comeback.

Add these four retail stocks to your StockCharts ChartLists and set alerts at the possible support and resistance levels shown in the above charts.

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

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#Holiday #Shopping #Bonanza #Retail #Stocks #Watch

October 26, 2023

Many Reasons to Love and Hate AMZN Stock

Post By zittrexstore Stock amazon stock price, amzn stock, charts, consumer discretionary sector, etfs, financial charts, investing, sharpcharts, stocks, technical analysis No Comments

KEY

TAKEAWAYS

Amazon stock has been falling ahead of earnings and is close to hitting the support of its 200-day moving average
When AMZN announce its Q3 earnings, investors will be interested in the company’s e-commerce and cloud services
Keep an eye on AMZN’s price action especially at critical support levels

If you’re feeling a little conflicted on Amazon’s (AMZN) near-term prospects and whether to take a bullish or bearish stance, it’s probably because of the many reasons—technical and fundamental—to consider either perspective.

Technical Reasons to Hate AMZN Stock: The Bearish Case

Despite AMZN’s strong YTD performance, the big picture shows it underperforming the S&P 500 ($SPX) by -29% and the Consumer Discretionary sector (using XLY as a proxy) by -18% (see weekly chart of AMZN below).

CHART 1: WEEKLY CHART OF AMZN. The current price action may be nothing more than a bear rally.Chart source: StockCharts.com. For educational purposes.

The upside trend break (see blue trendline) marks the stock’s reversal after bottoming at the beginning of 2023. But is this a mere correction? Once the rally hit the 61.8% Fibonacci retracement level, drawn from the 2021 peak to 2023 trough, the bears were jumping (and bulls lost heart).

What fundamentals support this bearish technical outlook? There are many…

Fundamental Reasons to Hate AMZN Stock: The Bearish Case

AMZN may have a diverse startup portfolio, but startups are going extinct, at least for now. With over 543 startup shutdowns recorded this year, the drop in cloud service demand will sting.

Also, AMZN’s stock price is down 25% from where it was in early January 2021. Macroeconomic challenges, such as high oil prices and interest rates, could hurt the company’s performance.

Lastly, Amazon is in an antitrust battle with the FTC over price manipulation and merchant lock-in. This could hurt the company and lead investors to sell.

Technical Reasons to Love AMZN Stock: The Bullish Case

CHART 2: DAILY CHART OF AMZN. The year-to-date picture shows a different situation, with price declining into potential critical support. Plus, buying pressure, as shown by the Chaikin Money Flow (CMF), appears to reveal a sharp surge.Chart source: StockCharts.com. For educational purposes.

Here’s a question: Are the bulls failing to see the big picture (long-term), or are they right in taking a more “current view of AMZN’s performance?

AMZN may be declining against the S&P 500, but it’s still outperforming it in the near term by 21%. As for XLY, AMZN’s year-to-date outperformance is quite pronounced and rising, up 22%. AMZN’s price action shows a sharp decline that began in September; however, by drawing a Fib retracement from the March bottom to the September top, representing the stock’s YTD surge, we can see that the stock’s price touched the 50% Fib level, which happens to coincide with the 200-day simple moving average (SMA).

Adding to the technical bull case, look at the Chaikin Money Flow (CMF) in the lowest panel. The CMF shows a sharp divergence between AMZN’s decline and the rise in buying pressure, indicating that more investors are buying than selling the stock (possibly). This bullish technical perspective is not without fundamental merit either.

Fundamental Reasons to Love AMZN Stock: The Bullish Case

Amazon has a diverse portfolio of startups. AWS has supported around 250,000 startups, including 83% of the world’s unicorns. Startups are slowing right now, but there’s the generative AI boom, which can increase demand for AI cloud services.

AMZN stock has had a strong year-to-date performance, up 50%, with the company’s revenue having grown across all of its business segments. Its diverse revenue streams also show signs of strength.

Overall, its dominance in e-commerce and cloud services, plus its strengthening digital ad revenue, all provide a strong case for its growth prospects.

Earnings Will Be a Critical Driver for AMZN’s Stock Directionality

Today’s earnings drop has everyone on edge. If today’s numbers show a hint of weakness or Amazon’s grip slipping, the bears will be ready to pounce, potentially sending the stock deeper into negative territory.

A couple of things to consider:

Bulls might find AMZN in “buy” territory down to $110, its 61.8% Fib level. Granted, there’s a reason to bet on a reversal in momentum and price (versus taking a riskier pre-emptive approach). A stop loss at around $107 would be reasonable, as it would invalidate the near-term technical bull case.
Bears are likely in position already, with many shorting the stock since September. Hopefully, they placed a stop loss right above $135, the most recent swing high point, to prevent from getting “squeezed” just in case AMZN reveals a blockbuster beat.

The Bottom Line

The conflicting forces of boom and doom are clashing fiercely as AMZN’s earnings report looms. The outcome dictates the stock’s immediate trajectory—surge or plunge. With a long-term technical landscape that paints a grim picture of potential bear rallies and a 25% nosedive since January 2021, the bears seem to be standing their ground. However, the bulls have a robust case, too, with a 50% spike in YTD performance, dominance in e-commerce, and a potential AI cloud services boom. Either way, today’s earnings are poised to tip the scales, a financial showdown and make-or-break moment for AMZN’s near-term fate.

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About the author:
Karl Montevirgen is a professional freelance writer who specializes in finance, crypto markets, content strategy, and the arts. Karl works with several organizations in the equities, futures, physical metals, and blockchain industries. He holds FINRA Series 3 and Series 34 licenses in addition to a dual MFA in critical studies/writing and music composition from the California Institute of the Arts.
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