Chart Advisor: Chipmakers Charge Higher

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Friday, 19th May, 2023

1/ Chipmakers Charge Higher

2/ Micro-Caps Fight Back

3/ Berkshire Breaks Out

4/ Cotton Revisits the Scene of the Crime

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/ Chipmakers Charge Higher

Semiconductors led all industry groups this week, gaining 8.5% and registering their best week since November. This helped buoy the large-cap Technology Sector SPDR (XLK) to fresh 52-week highs.

The VanEck Semiconductor ETF (SMH) was also able to close out the week at its highest level since last April, acting as bullish confirmation for the price action in XLK, the Nasdaq 100, and other stock indexes.

Here’s a weekly candlestick chart with about two years of price history:

Source: All Star Charts, with data provided by Optuma

Notice how this week’s monster candle occurred at a key polarity zone dating all the way back to 2021. After this former support level was violated early last year, bulls failed at two attempts to reclaim it in June and August. It was tested again in Q1 of this year, but bears won again.

Now that the long-term moving average has had time to flatten out and curl higher, indicating that the primary trend is now up, this base breakout could be the real deal. This week’s momentum surge has resulted in a decisive resolution from this classic reversal formation. As long as SMH is above $125, the path of least resistance is likely higher.

2/ Micro-Caps Fight Back

The chart below illustrates just how important of a polarity zone this $100 level is. It acted as resistance prior to the COVID crash in 2020 and has now come into play as support several times since last summer.

Earlier this month, we wrote about the new lows and potential breakdown in the Russell Microcap Index (IWC). Fast forward a few weeks, and it looks like this could be a major failed breakdown—or bear trap—in the making.

Here’s the daily chart of IWC with the 14-day relative strength index (RSI) in the lower pane as our momentum indicator:

Source: All Star Charts, with data provided by Optuma

Not only have the bulls made another save, sending prices back above the pivot lows, but there is a notable momentum divergence in place with higher lows in the 14-day RSI despite lower lows in price.

We consider it a bullish signal to see bull hook formations supported by momentum in this way. The longer it takes the bears to gain control and force a violation of this support zone, the less likely it is to happen.

And if even the weakest indexes refuse to break lower, this could also be a bullish indicator for the overall market.

3/ Berkshire Breaks Out

When we talk about bellwethers, we are referring to large-cap equities that provide an indication of the broader market’s future direction. These stocks often have a heavy weighting in various sectors and indexes, as well as a solid read-through to the economy due to their size and/or importance.

Berkshire Hathaway (BRK.B) meets all the requirements, giving us an excellent representation of the current market environment and health of the overall economy.

Source: All Star Charts, with data provided by Optuma

As you can see in the above chart, BRK.B recently broke out of a multi-month base. After a standard retest, price is following through and making new 52-week highs this week.

If Berkshire Hathaway is trending toward the upper right of the chart, how bad could things be?

Seeing this leader make new highs reinforces a potential upside bias for the stock market and risk assets.

4/ Cotton Revisits the Scene of the Crime

Watch out for cotton!

Back in February, buyers were hammering a key retracement level from below. The way we learned it, the more times a level is tested, the higher the likelihood that it breaks.

Three months later … the July contract is knocking on the door—again!

Source: All Star Charts, with data provided by Optuma

How polite!

The July contract is on the verge of completing a bearish-to-bullish reversal. We’re watching for a 14-day relative strength index (RSI) reading greater than 70 for bullish confirmation of a breakout.

However, not all contracts are approaching buy zones this week. Copper and crude have come under increased selling pressure. Gold undercut a former support level. In fact, most of the commodity space lacks any sign of constructive rotation.

Originally posted 19th May 2023

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