Chart Advisor: Detecting Conspicuous Price

Articles From: Investopedia
Website: Investopedia

By David Cox, CMT, CFA, FCSI, FMA and Conor White CMT, CIM

1/ What’s Happening in China?

2/ Bitcoin is Falling(!)

3/ Energy & Technology

4/ No, It’s Not All Technology

5/ What’s the Trend?

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1/ What’s Happening in China?

Stocks in Shanghai are heading down and that is not my opinion, it’s price.  The weekly chart has lower highs and lower lows and appears to be heading en route to levels seen during #COVID selloff lows as a possible level of support on the chart.  Why argue with price?

2/ Bitcoin is Falling(!)

Amidst great enthusiasm and headlines that dominated the market about recent Exchange Traded Fund (ETF) approvals, the newest investors, who waited for the new ETFs to be launched entered right before a correction in the price.  Bitcoin #BTC is down about -20% since the launch, but what does the daily chart show?  After the most recent mid-’23 consolidation (that occurred after a strong early ’23 run-up), Bitcoin broke through $30,000 USD with fervour and ran all the way up to touch $49,000 after the approvals.  The daily chart smooths out the swings and the headlines and looks like an uptrend to me.  I’m a big fan of using the Relative Strength Index (RSI) and we’re quite oversold on an RSI(5) basis (green circles).  Oversold is not some green light, or infallible tool that justifies decision-making or action.  Oscillators are useful, but an understanding of trend must be first be known.  I’m a fan of buying oversold pullbacks in uptrends.  But buying oversold pullbacks in downtrends isn’t the same strategy.  Not at all.

3/ Energy & Technology

Technology has without question been beastly in performance since the ’22 stock market bottom and if we compare returns even in recent months since the fall ’23 correction lows, one will find technology continues to impress investors, who appear willing to pay higher and higher prices for the stocks within.  On the left side, we can see the SPDR Energy ($XLE) stocks in the past several months in a lower highs and lower lows downtrend and technology of course, looks like the polar opposite.  I always say, I really don’t care what the narrative says, but I do care about price.  If we stand in the way of strong downtrends, we can get hurt both financially and mentally.  Trend following really does work, but it’s not always easy.  Emotions make it difficult to want to buy something that has risen in price to establish a strong price trend without you.  The feeling that you’ve missed the boat is easy to experience.  But trends can continue for longer than we’d might otherwise think likely.  So seek to get better at identifying them, both uptrends and downtrends.

4/ No, It’s Not All Technology

There are some investors intent on calling out technology as the only game in town, even using it as a rationale to explain that the stock market makes no sense, that it’s a bubble and it can’t go on.  Another strong trend, is the U.S. homebuilder stocks ($ITB) which touched new highs again this week.  This industry group is in the consumer discretionary sector and the group is a strong one.  It also happens to be one of the few areas that bottomed ahead of the market in 2022 (hint: these are good characteristics to watch for in markets).  Early leading groups (and stocks) can give investors a leg up in setting expectations in markets. Either way, the builders have been very strong and are in long-term uptrends.  So it’s certainly one other area that trend followers know is out there, and outside of the dominating technology force.

5/ What’s the Trend?

Those of you that follow me on “X”, or watch my Friday #WhereDoWeStand webinar (email [email protected] to subscribe) have seen my regular tables, like this one, that shows us the trend on a variety of time frames.  Here’s our “all asset” list, sorted by YTD returns (in ’24) and the short, intermediate and long-term trends of each asset.  But how do we define trends?  One way is to use the condition of two moving averages, on a given time frame.  If the shorter-term average is above the longer-term average, it’s an uptrend and vice versa.  We define the short-term trend using the 8/20-day exponential moving averages (EMA).  If the 8EMA > 20EMA, it says “True”, and suggests an uptrend.  The intermediate-term is based on the 20-day EMA and the 50-day SMA, and the longer-term average uses the 13 and 34-week EMAs.  You may disagree with my time frames, but the technique can be applied to whatever time, or chart frequency that fits with your objectives and your beliefs.  Take the time to study the information.

Originally posted 24th January 2024

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