By J.C. Parets & All Star Charts
Tuesday, 25th October, 2022
1/ Big Week for Big Tech
2/ Stocks Still Outperform Bonds
3/ The US Dollar Wavers
4/ Bitcoin Continues to Coil
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1/ Big Week for Big Tech
All eyes are on mega-cap tech stocks this week, with key earnings reports coming from the FAAMG companies: Apple, Amazon, Google, Microsoft, and Meta Platforms.
Microsoft announced its earnings after market close today, with the software giant slightly beating estimates on both the top and bottom lines. Here’s a daily chart of MSFT with several years of price history:
Earlier in the month, MSFT was trading at its lowest level since January of 2021. Over the past few weeks, the stock has printed a bullish momentum divergence and made a swift rebound off a key Fibonacci extension and a shelf of former highs from 2020. Today’s close puts it back above an important level at the pivot lows from June.
However, as with most tech stocks, the primary trend is still lower, or sideways at best. Until this changes, we could anticipate more uncertain price action in the near future.
2/ Stocks Still Outperform Bonds
Comparing stocks to alternatives such as bonds not only tells us where the alpha lies, but also paints a picture of how market participants are currently positioned.
In the chart below, we’re looking at the relationship between the Value Line Geometric Index (VLG) and the 20+ Year U.S. Treasury Bond ETF (TLT) to give us an idea of how the average stock is performing relative to the bond market.
With the ratio breaking out from a multi-year base to new highs, stocks continue to outperform bonds. However, in the current bear market environment, this simply means that they are the better of two bad options.
Both stocks and bonds have experienced increasing selling pressure all year. Until we see some significant improvements in the absolute trends, this could remain the case.
3/ The US Dollar Wavers
Rallies don’t get much stronger than that in the U.S. dollar this year. But as we head into the end of the year, the dollar’s parabolic advance threatens to break down.
The U.S. Dollar Index (DXY) broke below a critical extension level today, undercutting 111.50.
This key level represents potential support. Now that DXY has broken down below this level, we’re watching for a Relative Strength Index (RSI) reading below 40 for confirmation.
If this occurs, the dollar rally could be in danger of collapse as the current advance exits a bullish momentum regime.
Risk assets, particularly stocks, could receive a much-needed boost in this scenario.
4/ Bitcoin Continues to Coil
While macro markets have housed some notable volatility in recent months, Bitcoin appears to be stuck in a trendless market. Bitcoin’s price volatility, as measured by the width of its monthly Bollinger bands, is at its lowest level since June 2020.
Regardless of which market we’re analyzing, when price action becomes more coiled, buyers or sellers are ultimately forced to react. This period of shrinking volatility is often met with violent unwinding in either direction.
With Bitcoin booking its largest single-day gain in over a month today, a new period of volatility expansion could be beginning. We’re on the lookout for upside follow-through tomorrow for confirmation that a fresh leg higher could be underway.
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Originally posted 25th October, 2022
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