Chart Advisor: May the Force Be with You

Articles From: Investopedia
Website: Investopedia

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

1/ Uranium Stocks

2/ Offense vs. Defense

3/ Oil & Energy Stocks

4/ Consumer Discretionary – One Check

5/ Technology – Two Checks

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1/ Uranium Stocks

Uranium stocks have been in a strong uptrend for most of the past year and just pulled back, against the uptrend on the daily chart (green circle).  I like to keep an eye on the “force”, which is Elder’s Force Index (middle panel) as it allows us to combine price and volume to gauge who is stronger: the buyers, or the sellers.  An uptrend is an uptrend, until it’s not.

2/ Offense vs. Defense

We can learn a lot about market character by analyzing and using relative strength to our advantage.  Here, by creating a composite that defines “offense” as the combined technology and consumer discretionary sectors, and “defense” as utilities and consumer staples and then plotting offense divided by defense, we end up with this ratio that demonstrates risk on, if you will.  The relationship made new highs yesterday and we’re in breakout territory above those 2021 highs, which simply offer further evidence of the bull market that we are in.

3/ Oil & Energy Stocks

A simpleton would like to be able to say that if oil prices are rising, then energy stocks should be too, but it’s not always the case.  That said, we can see the relationship here.  In the top panel, we have crude oil, which continues to consolidate and in the lower two panels, we have two varieties of energy stocks: SPDR Oil & Gas Explorers ($XOP:US) and iShares S&P/TSX Energy ($XEG:TSX).  The stocks can be considered to be the higher risk cousin of the underlying and I like to use them as proxies for what the market thinks or is expecting about the underlying, in this case crude oil.  Either way, $XOP and $XEG both turned 20EMA/50SMA bearish (moving average crossover) in the fall and led oil downwards.  There has been no change since.  We label a 20-day exponential moving average (EMA) below a 50-day simple moving average (SMA) has intermediate-term bearish.

4/ Consumer Discretionary – One Check

There are two trends that I like to be aware of when contemplating investment and considering opportunities for risk taking.  One is the absolute trend: is the stock, ETF or index trending upwards or downwards?  It’s easier to make money in your portfolio by buying stocks that are rising.  The bottom panel below shows the SPDR Consumer Discretionary ETF ($XLY) in a rising uptrend, with higher highs and higher lows.  But in the top panel, we see a downtrend, in fact, we see “lows for the move” having just been made, and this chart is the $XLY vs. the S&P 500.  So while the sector is in an uptrend, the relative trend is down.  Generally speaking, knowing that stocks are more risky than diverse sector ETFs, which are more risky than more diverse index ETFs, we can more easily assess where and how much risk to take on.  Ideally, we’d invest in securities that are trending upwards, both absolutely and relatively.

5/ Technology – Two Checks

Contrast the last example with the SPDR Technology ($XLK) ETF below, and you can see very clearly that technology is in an absolute uptrend (lower panel) and it’s in a relative to the S&P 500 uptrend (top panel).  That’s what I like to see.  The same analysis can be conducted on each stock in your portfolio.  Give it a try!

Originally posted 25th January 2024

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