Chart Advisor: Erasing Gains – Stocks reverse lower, erasing most of yesterday’s gains.

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Friday, 14th October, 2022

1/ Consolidations Resolve Lower

2/ Health Care Holds Up

3/ Relative Strength From Regional Banks

4/ The Juice Is Loose

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1/ Consolidations Resolve Lower

Many of the market’s weakest areas and cycle laggards bottomed early in the summer and have been stuck in prolonged sideways formations ever since. The big question on the minds of technical analysts is whether these consolidations could turn out to be continuation patterns or reversals.

A handful of ARK ETFs appear to be giving us some insights this week.

Source: All Star Charts, with data provided by Optuma

The above chart shows the ARK Innovation (ARKK), ARK Internet (ARKW), and ARK Fintech (ARKF) ETFs all pressing to new lows and violating the lower bounds of their ranges.

These multi-month consolidations displayed in the chart could be continuation patterns, breaking lower in the direction of the underlying trend. If these new lows hold, we could expect these groups to experience a fresh leg to the downside in the coming weeks.

2/ Health Care Holds Up

Health care stocks have held up better than most throughout the volatility this week. This type of relative strength is nothing new, as large-cap health care stocks are trading at fresh multi-year highs against the broader market.

While the sector is outperforming on a relative basis, it still isn’t experiencing any uptrend. Here is the Large Cap Health Care Sector SPDR (XLV) trading in a sideways range amid a potential topping pattern:

Source: All Star Charts, with data provided by Optuma

The choppy price action continued this week, as evidenced by a wide-ranging, small-bodied candle on the weekly chart. While it may not meet the textbook definition of a doji candle, given that the opening and closing prices are not equal, it is similar in essence. This type of price action signals indecision between buyers and sellers, as neither highs nor lows can hold and price ends up back to where it started. 

In a market where all sectors are experiencing downward pressure, simply trading sideways can be considered leadership.

3/ Relative Strength From Regional Banks

Earlier this week, we mentioned the impressive relative strength from homebuilders. Regional banks represent another economically-sensitive group showing leadership right now.

The chart below shows the SPDR Regional Banking ETF (KRE) reaching its highest level since March of 2021 relative to the S&P 500 (SPY).

Source: All Star Charts, with data provided by Optuma

Like homebuilders, outperformance from regional banks and other risk-on sectors is not the type of behavior we would expect to see if the market was about to break down.

Continued outperformance from KRE could be a positive for the bulls moving forward. If this base breakout in KRE/SPY is a valid one, we could expect more leadership from these stocks in the future.

4/ The Juice Is Loose

There’s always a bull market somewhere. All we have to do is look for uptrend lines and base breakouts, such as the one currently in orange juice futures.

The above chart provides a classic example of a breakout to fresh highs, followed by a retest of former resistance. In this case, the principle of polarity kicked in as former resistance turned into support.

As long as newfound support holds, the path of least resistance could be higher for OJ.

It’s hard to find a data point more bullish than a multi-month base breakout to fresh multi-year highs.

Originally posted 14th October, 2022

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