Chart Advisor: Big Tech Is Back

By J.C. Parets & All Star Charts

Wednesday, 26th April, 2023

1/ Microsoft Makes the Grade

2/ ARKK Gets Tight

3/ Russell Wrestles with Support

4/ Emerging Markets Make New Lows

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1/ Microsoft Makes the Grade

Microsoft (MSFT) gapped higher today by more than 7% as investors cheered the company’s first-quarter earnings report, released after yesterday’s close.

The world’s second-largest stock just got a lot bigger, adding roughly $200 billion in market capitalization on today’s move. To put the magnitude of today’s gain into perspective, blue chip stocks such as McDonald’s (MCD) and Nike (NKE) have market caps of about $200 billion.

Here is a daily bar chart showing the stock breaking out to fresh 52-week highs:

But this wasn’t just any breakout to new highs. How and where the breakout occurred is what really stands out.

The stock just registered a breakaway gap, which is as bullish as a formation can get. And it took place at a major confluence of resistance at last summer’s highs and the 61.8% Fibonacci retracement.

Microsoft has all the classic characteristics of a bearish-to-bullish trend reversal, including a 200-day moving average (MA) that is now sloping higher. As long as price holds above its August highs, the path of least resistance could now be higher for this tech behemoth.

2/ ARKK Gets Tight

When it comes to U.S. equities, the ARK Innovation ETF (ARKK) provides an excellent gauge of how the most speculative growth stocks are performing.

The chart below shows ARKK’s volatility (as measured by the Bollinger Bandwidth indicator in the lower pane) at its lowest level since September 2021, as prices have been coiling in a tight range for the past two months:

These periods of volatility contraction are often followed by big moves in either direction that tend to set the tone for the coming weeks and months.

As such, a strong move in ARKK could be on the horizon. We’ll be watching closely over the next few days for clues about the future direction of these speculative growth stocks.

3/ Russell Wrestles with Support

The iShares Russell 2000 ETF (IWM) is testing the all-important support level around $170 yet again. This level represents the prior-cycle highs from 2018 and 2020. 

This former resistance-tuned-support has now been successfully tested five times over the past year. The question now is whether or not it can hold.

The more times a level is tested, the more likely it is to break, as each successive test soaks up demand. Following this key principle of technical analysis, the Russell 2000 could be on the verge of breaking.

This is one of the most important charts and levels to watch right now as small caps generally tend to set the trend for the broader market.

4/ Emerging Markets Make New Lows

It’s no secret that international developed market indexes such as the MSCI EAFE Index have been in a leadership role since last year, currently trading near their highest levels since 2021 relative to the S&P 500 (SPY).

However, not all international markets are created equal. It’s a very different picture when we look at emerging market stocks (EEM) relative to the S&P 500:

EEM just hit fresh five-month lows relative to SPY. This ratio has been in a structural downtrend for over 12 years now, and unlike developed markets, there is no evidence of this trend reversing anytime soon.

For now, the playbook could remain overweight developed markets—particularly European ones—and underweight emerging markets.

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Originally posted 26th April 2023