Chart Advisor: Laggards Hit Oversold

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Tuesday, 6th September, 2022

1/ Laggards Hit Oversold

2/ Structural Trends Shift in Favor of Value

3/ USD/JPY Hit Fresh Highs

4/ Will Steel Hold Support?

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/ Laggards Hit Oversold

Robotics has been one of the worst-performing groups in our thematic universe since last year. Considering all the long-duration growth stocks in this index, this is just another proxy for the weakest equities, or sector culprits, of the current cycle. The Global X Robotics & Artificial Intelligence ETF (BOTZ) peaked in November of 2021 and has been heading lower ever since.

As you can see below, BOTZ has fallen by roughly half from its highs last year, and is showing no signs of stopping as price just closed at its lowest level since May 2020.

Source: All Star Charts, with data provided by Optuma

Notice that momentum is still in a bearish regime as the daily RSI-14 hasn’t been able to reach overbought conditions in over a year. With sellers becoming increasingly aggressive, the oscillator has hit oversold several times since January. This is classic bear market behavior.

Seeing these laggards make new lows and print their latest oversold reading today could indicate further downside for the rest of the market. The most vulnerable stocks could lead the way lower, and right now, that’s exactly what’s happening.

We just received fresh monthly candlestick charts for August last week. When we look at a monthly line chart of the growth-versus-value relationship, we can see a recently completed double top formation and successful retest from below.

The fact that this bearish reversal pattern is occurring at a critical level of interest at the Dotcom bubble highs from 2000 makes this price action even more significant. 

Source: All Star Charts, with data provided by Optuma

As long as this distribution pattern remains valid, we could see a structural reversal in this relative trend that favors value stocks. And, as shown in the upper pane, this could favor the value-heavy Dow Industrials, to the detriment of tech-heavy indexes such as the Nasdaq 100.

3/ USD/JPY Hit Fresh Highs

The USD/JPY pair is a combination of two of the most significant currency market trends of 2022: the dollar and the yen. It’s hard to find a stronger uptrend in the forex (FX) market than the current dollar rally. Meanwhile, the yen is crumbling against nearly every asset on the market, including gold.

It’s no wonder USD/JPY continues to rip in a seemingly straight line higher, making fresh 24-year highs today.

Source: All Star Charts, with data provided by Optuma

While the steady ascent in USD/JPY makes sense given the overwhelming strength of the dollar and the broad weakness in the yen, the trend could continue due to the structural base breakout, shown above.

Demand has absorbed supply at a level that had previously suppressed price for multiple decades. Now, the path of least resistance could be to the upside.

4/ Will Steel Hold Support?

As selling pressure accelerates, we’re seeing commodity-related equities test critical support levels.

An excellent example is the monthly chart of the VanEck Steel ETF (SLX). Steel stocks are pulling back to a critical level of former resistance marked by the 2018 highs and a key retracement level.

Source: All Star Charts, with data provided by Optuma

A break below 53 would complete this large topping pattern, signaling elevated downside risk for an industry that is already under pressure.

While commodities have experienced a steep correction in recent months, the selloff in industrial and base metals has been the most severe by far.

To see their associated stocks break down could only add to the bearish evidence mounting against one of the most economically-sensitive markets.

Originally posted 6th September, 2022

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