Chart Advisor: A New High for New Highs

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Friday, 3rd February, 2023

1/ A New High for New Highs

2/ Reclaiming a Valuable Line

3/ Small Stocks Go Big

4/ Precious Metals Digest Gains

Investopedia is partnering with All Star Charts on this newsletter, which both sells its research to investors, and may trade or hold positions in securities mentioned herein. The contents of this newsletter are for informational and educational purposes only, however, and do not constitute investing advice.

1/ A New High for New Highs

In a typical bull market, the number of stocks making new highs expands. This is particularly true during the early stages of a bull cycle.

Yesterday, the Russell 3000 Index saw more components reaching new 52-week highs than at any time over the trailing year.

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Source: All Star Charts, with data provided by Optuma

The Russell 3000 Index comprises about 98% of tradable U.S. equities, providing one of the broadest measures of the U.S. stock market. More stocks are making new 52-week highs this week than in early January 2022, when the equity market hit all-time highs.

Bulls need to see a growing number of stocks make new highs to support the recent rally, and that’s exactly what has taken place this week.

2/ Reclaiming a Valuable Line

Another great representation of the broader U.S. equity market is the Value Line Geometric Index. With over 1,700 components, the index is equally-weighted and uses a geometric average, resulting in a value that represents the price of the median stock.

Below is a chart of the Value Line Index reclaiming a critical level of interest at its prior-cycle highs from 2018.

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Source: All Star Charts, with data provided by Optuma

Notice how this level also coincides with the pivot highs from last August and the upper bounds of a bearish-to-bullish reversal pattern. In other words, the median stock is resolving to the upside and making higher highs.

The index is also hitting overbought territory, as momentum provides solid confirmation for the recent price action. Seeing this critical index reclaim this key level is a major milestone for the broader equity market, and indicates that the path of least resistance could now be higher for the average stock.

3/ Small Stocks Go Big

With markets enjoying a solid rally to start the year, small-cap stocks are catching our attention as they work to reassert old leadership.

As you can see, the Russell 2000 ETF (IWM), Russell 2000 Value ETF (IWN), and Russell 2000 Growth ETF (IWO) have all built a bearish-to-bullish reversal pattern relative to the S&P 500 (SPY) for most of 2022. Now, they are threatening to break out and complete bullish reversals in the relative trends.

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Source: All Star Charts, with data provided by Optuma

If smaller stocks can outperform their large-cap peers over longer timeframes, it could be a major development for the bulls. It also speaks to an environment where risk appetite is expanding.

4/ Precious Metals Digest Gains

Gold bulls continue to contend with an overwhelming amount of overhead supply at the former 2011 highs. Based on silver’s breakdown today, downside pressure could persist over the coming days.

Below is a daily price chart of silver futures:

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Source: All Star Charts, with data provided by Optuma

A few weeks ago, the consolidation appeared to be a bull flag or pennant.

In their classic book Technical Analysis of Stock Trends, Edwards and Magee issue a clear and present warning: “A pattern of this type that extends beyond three weeks should be watched with suspicion.”

As time wore on, the bull flag interpretation lost credibility. Fast forward to today, and it’s not surprising we’re witnessing a swift breakdown from the six-week consolidation.

Originally posted on 3rd February, 2023

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