Chart Advisor: Leveraging Breathtaking Reversals

Articles From: Investopedia
Website: Investopedia

By Gordon Scott, CMT

1/ Indexes on the Rise

2/ A Bullish Indicator

3/ Keeping a Cautious Mind

4/ The Stop-Go indicator

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1/ Indexes on the Rise

November charts gave investors a few reasons to breathe a sigh of relief after the troubling price trends that developed in the major indexes beginning last summer. The past month has seen breathtaking reversals in all major equity indexes including both the large-cap S&P 500 (SPX) and the small-cap Russell 2000 index. The chart below shows how iShares’ Russell 2000 ETF (IWM) outperformed State Street’s S&P 500 (SPY) and Dow Jones Industrials ETF (DIA) as well as Invesco’s Nasdaq 100 ETF (QQQ). The fact that small-cap stocks outperformed the other equity indexes means one important thing: investors are ready to take risks again. That is a largely bullish indicator of future performance.

2/ A Bullish Indicator

A few years ago I wrote and Investopedia article mentioning how low volatility in the markets could be a bullish indicator. That indication lasted for about a month before the rising volatility coinciding with rising prices signaled a huge warning flag in front of the COVID panic. But that brief blip aside, the following year turned out to be quite bullish after all.

The following chart gives three indications that 2024 could be a strongly bullish year in its own right. First, SPY rose more than 10% during the month of November. This is, historically speaking, a very bullish prognosticator. Second, the average true range indicator is approaching its lowest level since before 2022, and this corresponds with what could be a continuation of the upward trend. Third, the Cboe Volatility Index (VIX) has hit its lowest since before the pandemic, displaying that option sellers expect less volatility than any time in the last three years. All three signals are strongly bullish indicators.

3/ Keeping a Cautious Mind

About the only thing that could generate worry in the minds of investors would be the sign of an imminent recession. The inverted yield curve returning back to its zero line would be just such an indication. While this could happen in 2024, that could be several months away and a bullish market behavior could result all along the way up until that time comes. Meanwhile there is no guarantee that the inverted yield curve means a bear market is inevitable, even if the country does face a recession.

4/ The Stop-Go indicator

In 2013 I co-authored a book titled “Invest to Win.” Within those pages I articulated something I called a Stop-Go indicator. The rules behind this indicator have a pretty strong record over the past century for indicating bear market setups. Right now, this indicator is showing exactly the opposite. With large cap stocks in general outperforming the utility sector coinciding with a marked decrease in historical volatility (as measured by the ATR on a monthly chart), this is the perfect signal that forecasts a “GO” market, meaning a bullish outlook for the months ahead. Investors who have been too timid to rejoin stock market investing over the past few months may want to re-evaluate that position.

Originally posted 4th December 2023

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