Chart Advisor: Gap Fill and Chill

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Wednesday, 19th April, 2023

1/ Gap Fill and Chill

2/ Banks: The Smaller the Weaker

3/ Will Bond Market Volatility Catch Lower?

4/ A Risk Reversal for PALL

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/ Gap Fill and Chill

Netflix (NFLX) kicked off earnings for the mega-cap growth companies last night, and experienced significant volatility in after-hours trading. After a big move lower, shares broke even and turned positive after last night’s earnings report.

However, shares opened lower today, gapping back into their old range. We’ve seen a handful of similar gaps occur at this level since last year. We’ve labeled three of the last four earnings reactions in the daily bar chart below:

Source: All Star Charts, with data provided by Optuma

NFLX collapsed after a big miss on its Q1 2022 earnings report this time last year. This created a memory gap, or volume pocket, between $250 and $330. 

After some downside follow-through early last year, it took two full quarters for NFLX to recover back to $250, forming resistance. Shares gapped higher on Q3 and Q4 earnings, resolving above $330. This marked the completion of the gap-fill move for NFLX. 

Ahead of the company’s most recent earnings report this week, price pulled back to test the $330 level from above. While price only fell roughly 3% today, price gapped back into its old range. As long as it stays below $330, the trend could remain uncertain for NFLX.

2/ Banks: The Smaller the Weaker

The chart below does an excellent job of illustrating the divergence between banks of different sizes. Below is a one-year chart of our custom Big 6 Bank Index, money center banks (KBE), regional banks (KRE), and community banks (QABA):

Source: All Star Charts, with data provided by Optuma

As you can see, while the largest and most important banks are still holding above their 2022 lows and resolving higher from a tight consolidation pattern, KBE, KRE, and QABA violated this level last month and remain trapped in a coil, or have headed lower in a tailspin since.

This tells us that the further down the capitalization scale you go, the worse it looks for banks. As such, bulls want to see these indexes dig in, catch higher, and follow the path of the biggest banks. Participation from bank stocks is a vital prerequisite for a healthy bull market.

3/ Will Bond Market Volatility Catch Lower?

The CBOE Volatility Index (VIX) measures the level of risk associated with the stock market, while the Move Index (MOVE) tracks volatility in the bond market.

When we overlay the VIX with the MOVE, we see that they have tracked each other very closely over the past decade, up until recently:

Source: All Star Charts, with data provided by Optuma

Last month, MOVE hit its highest level since 2008 while VIX remained in a sideways range.

Fast forward to today, and the VIX is reaching new 52-week lows, suggesting that volatility could subside for equities. The question now becomes whether MOVE will catch lower to the VIX.

4/ A Risk Reversal for PALL

We pointed out last week that the “smart money” has been buying palladium in large quantities. In fact, commercial hedgers recently held their largest net-long position in history.

This stretched positioning reveals the strongest hands are bullish on palladium, setting the stage for a potential rally—one that could already be underway.

The Aberdeen Standard Physical Palladium ETF (PALL) is charted below, as it’s shown reclaiming key former support:

Source: All Star Charts, with data provided by Optuma

This year’s breakdown in PALL has the hallmarks of a failed move. The path of least resistance could be higher now that bulls have forced prices back above their former 2020 lows. From failed moves often come fast moves in the opposite direction.

If this turns out to be a failed move in PALL and prices rebound higher, we could also see precious metals and other industrial metals catch a bid.

Originally posted 19th April 2023

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