Chart Advisor: Bullish Momentum Eases – Stocks give back some of their recent gains as yields and the dollar rebound.

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Wednesday, 5th October, 2022

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/ From Failed Moves Come Fast Moves

The past few months have been characterized by failed moves and messy price action for stocks. This is standard behavior in a sideways, or trendless market like the one equities have experienced in recent months.

With markets rallying aggressively to start the week, we’re seeing an abundance of failed breakdowns materialize. Here’s an example of it in the Amplify Online Retail ETF (IBUY).

Source: All Star Charts, with data provided by Optuma

This chart stands out for a handful of reasons. First, the support level that IBUY is hooking higher from represents a clear and well-tested level of interest. Prices found a floor here on five separate occasions during the spring and summer months, before undercutting these pivot lows late last month. 

As for momentum, markets barely became oversold on the failed move and are now seeing a multi-month bullish divergence confirm itself as IBUY reclaims its support. If these moves hold up over the coming days, the squeeze could be on for IBUY and related indexes. As the saying goes, “from failed moves come fast moves in the opposite direction.”

2/ A Big Thrust for Small Caps

Stocks and risk assets kicked off the new week, month, and quarter on very strong footing. The chart below shows the two-day rate of change in the iShares Russell 2000 ETF (IWM). 

With the exception of the pandemic lows of early 2020, we’d have to go all the way back to 2011 to find a two-day stretch as favorable as Monday and Tuesday.

Source: All Star Charts, with data provided by Optuma

Short-term breadth thrusts like these mean little without confirmation. Not only do we need price to confirm the action, we need additional longer-term breadth thrusts to follow and validate the current one. 

Back in June and July, markets experienced some tactical thrusts, but no decisive follow-through. Now that stocks have fallen back down to their June lows, it looks as if bulls are giving it another go. This week’s price action is a good start.

3/ Capital Markets Catch Support

From a structural standpoint, few things are more important than the prior-cycle highs.

When we go through our charts, there are plenty of long-term levels coming into play. The S&P Capital Markets ETF (KCE) provides a good example of former resistance now acting as support.

Source: All Star Charts, with data provided by Optuma

KCE bounced off a shelf of former resistance at the current level earlier this summer. With prices now back at this critical polarity zone, buyers are digging in and defending the 2007 highs once again.

Bulls would like to see this group catch higher, as it contains some of the strongest stocks in the financial sector. If KCE fails to hold this level and violates its pre-financial crisis highs, the structural trend will be broken. Under this scenario, we could expect other economically-sensitive groups to lose key support levels as well.

4/ Momentum Remains Bullish for DXY

There are plenty of momentum indicators available to market technicians, and just as many ways to use them. 

One of our favorites is the Relative Strength Index (RSI), developed by J. Welles Wilder Jr. In our models, we use the original 14-period calculation method. RSI is best applied through the study of bullish and bearish momentum regimes, or ranges.

The chart of the U.S. Dollar Index (DXY) below confirms a strong uptrend for the dollar, with no signs of abating.

Source: All Star Charts, with data provided by Optuma

The strong uptrend in the dollar this year has been accompanied by a bullish momentum regime, indicated by momentum readings above 70, as seen in the lower pane.

If and when the U.S. dollar rally begins to lose steam and roll over, the first clear indication could be a 14-day RSI print below 40. Any throwback action in the dollar without a breakdown in momentum could be viewed as corrective action within an ongoing uptrend.

Originally posted 5th October, 2022

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