Chart Advisor: Bullish Engulfing

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Thursday, 2nd March, 2023

1/ Bullish Engulfing for SPX

2/ The Next Generation Is Ready to Lead

3/ European Financials Gain Traction

4/ Rotation Points to Energy

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/ Bullish Engulfing for SPX

bullish engulfing pattern occurs when the trading range for a given session completely engulfs that of the prior session, with price closing higher.

It means price made new lows on the day, but recovered to make new highs, closing above both the prior day’s opening and closing price. Here’s what it looks like, using today’s daily candlestick chart in the S&P 500 as an example:

Source: All Star Charts, with data provided by Optuma

For a bullish engulfing candlestick pattern to fully complete, there needs to be upside follow-through in the subsequent session, or another green candlestick tomorrow.

If we get it, it could provide solid evidence that a tradeable low is in for stocks following the corrective action in February. It could make sense for the recent selloff to halt and for a new leg higher to kick off at the 200-day moving average (MA).

2/ The Next Generation Is Ready to Lead

When it comes to relative trends, one in particular caught our attention this week.

The Nasdaq Next Gen 100 ETF (QQQJ) found support at former resistance relative to the Nasdaq 100 ETF (QQQ).

The QQQJ is an index comprised by the 101st to the 200th largest companies by market cap on the Nasdaq, while QQQ comprises the largest 100 stocks. The two ETFs are proxies for the performance of mid-cap and large-cap technology stocks, respectively.

Source: All Star Charts, with data provided by Optuma

Notice that momentum (as measured by the 14-day RSI) has been diverging positively, suggesting a potential bounce in this relationship.

If and when that happens, we could expect to see the next generation of the Nasdaq outperform its large-cap peers.

3/ European Financials Gain Traction

The European Financials ETF (EUFN) is considered one of the most critical sectors in the world as it provides an excellent overview of the current market environment.

Not only has this group done well on an absolute basis, it has also gained traction on a relative basis.

The chart below shows EUFN breaking out from a multi-year reversal pattern relative to the MSCI EAFE ETF (EFA):

Source: All Star Charts, with data provided by Optuma

Seeing this ratio making a valid upside resolution suggests a healthy increase in risk-seeking behavior. Under this scenario, it’s difficult to see the stock market and the global economy breaking down.

4/ Rotation Points to Energy

Energy-related commodities have represented downside risk and opportunity cost since late last spring. It’s hard to argue that has changed, especially when looking at a chart of natural gas futures.

Nonetheless, these beaten-down contracts might be ready for some outperformance. Below is our ratio chart of the equal-weight energy vs. base and industrial metal indexes:

Source: All Star Charts, with data provided by Optuma

These two indexes cover the main pro-cyclical commodity groups—the areas most sensitive to economic conditions. After running into a logical resistance level and rolling over, energy contracts are digging in at former support levels relative to base metals.

While the absolute price charts of crude oil and its distillates remain rangebound, a relative bid could go a long way toward supporting higher prices for these contracts.

Either way, the above chart suggests it could be time for healthy rotation back into energy.

Originally posted 3rd March, 2023

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