Chart Advisor: The Squeeze Is On

By J.C. Parets & All Star Charts

Thursday, 2nd February, 2023

1/ Counting COIN

2/ Nasdaq Notches New High

3/ The Bid in Bonds

4/ Record Highs For Materials

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1/ Counting COIN

Short squeezes are the big news of the week as the most beaten-down and heavily-shorted names are leading the latest leg higher for stocks, while the list of stocks resolving from bases and making new highs continues to grow.

Coinbase (COIN), the $18 billion cryptocurrency exchange, provides an excellent example of the kind of moves we’re seeing from some of the most speculative stocks on the market.

Forty-four million shares of COIN, representing roughly 28.5% of the public float, are currently held short. The stock has rallied over 150% since bottoming less than a month ago, as short sellers rush to cover their positions and further fuel the buying frenzy.

With the stock hitting extreme overbought levels as price hits a logical shelf of resistance at the upper bounds of its range, the run higher in COIN and other heavily-shorted names could be due for a pause. With that said, the roaring rallies that have taken place in the weakest stocks over the past few weeks can be viewed as a positive development for risk appetite.

2/ Nasdaq Notches New High

The Nasdaq 100 (QQQ) bottomed in October and has soared over 20% since.

This week, QQQ reached five-month highs, and momentum (as measured by the 14-period RSI) achieved overbought conditions for the first time since November of 2021. However, price is reaching a logical zone for a breather.

This area of overhead supply coincides with the AVWAPs from the all-time high and the 2020 low. It also matches up with the 38.2% retracement from the 2020-2021 bull run, making it a potential confluence of resistance.

If the Nasdaq is to pause its rally, this could be a logical place for it to do so. However, if buyers take out this level with ease, it tells us bulls are in full control. In such a scenario, we could see further upside in the short term, particularly for growth stocks.

3/ The Bid in Bonds

It is no coincidence that the rally in growth stocks is occurring in an environment where fixed-income securities are also performing well. 

The bubble chart below shows every asset in our bond universe posting positive returns over the trailing week and month.

Similar to growth stocks, most bonds—depending on their duration—are also considered to be long-duration assets. As interest rates fall, they move higher in price. 

While the surge in growth stocks has certainly been more pronounced than the recent rally in bonds, this action could be a leading signal for what’s to come in the bond market, as yields could continue on their path lower.

4/ Record Highs For Materials

Yesterday, we mentioned that the SPDR S&P 400 Mid-Cap Value ETF (MDYV) was the first ETF from our portfolio to break out to new all-time highs.

That list has expanded today as the Small-Cap Materials Sector ETF (PSCM) emerged to fresh all-time highs after two years of sideways action.

Notice in the lower pane that momentum (as measured by the 14-period RSI) never reached oversold conditions during the recent correction. Not many sectors and industry groups can say the same. Now, we’re seeing momentum confirm the new highs with an overbought reading.

If this breakout sticks, more groups could follow suit. All-time highs are a leading characteristic of bull markets.

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Originally posted 2nd February 2023