Chart Advisor: Restaurants Break Out

By J.C. Parets & All Star Charts

Thursday, 27th April, 2023

1/ Bearish Calls for Small Caps

2/ Restaurants Break Out

3/ Muni Bond Base

4/ Crude Oil Fills the Gap

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1/ Bearish Calls for Small Caps

In yesterday’s note, we discussed the increasingly vulnerable position that small-cap stocks are in. With the Russell 2000 Index (IWM) threatening to fall below its prior-cycle highs from 2018 for the fifth time in less than a year, sellers may be ready to take control.

Relative trends are a valuable supplement for analyzing the absolute trend for a given asset. Here is what that looks like for small caps:

As shown above, the Russell 2000 vs. Russell 1000 ratio plunged to its lowest level in over two decades today. Broad-based indexes like these offer some of the best representations of stocks categorized by market cap, as they are the most comprehensive.

If these new relative lows in small caps versus their large-cap peers hold, it could support a downside resolution in the small-cap Russell 2000 Index on absolute terms. This would be a very bearish development. With the Russell 2000 testing a shelf of pivot lows now, we could have our answer soon.

2/ Restaurants Break Out

Although U.S. averages continue to chop sideways, some areas remain resilient. This is particularly true for the Dow Jones Restaurants & Bars Index as it reaches new all-time highs.

As you can see, the index is breaking out from a basing pattern after consolidating constructively for over a year:

Buyers were able to absorb all the overhead supply and make a decisive upside resolution. As long as this breakout remains intact, we could expect this group of stocks to outperform over the foreseeable future.

3/ Muni Bond Base

Investors recently sold off equities in large quantities and ran to the safety of U.S. Treasurys as the banking crisis unfolded.

It’s not just U.S. Treasurys, as all varieties of bonds have rallied. Here is the National Muni Bond ETF (MUB), a proxy for the performance of municipal bonds:

MUB is carving out a year-long base below a well-defined former resistance level. The buyer’s resolve becomes stronger with each additional test of overhead supply, increasing the likelihood of an upside resolution.

If and when MUB breaks out to fresh 52-week highs, bonds in general could catch higher along with other long-duration assets.

4/ Crude Oil Fills the Gap

Bears are in control of crude oil futures.

Notice the bulls failed to drive price above a key resistance level last week. And yesterday, price slid, closing a bullish gap higher from earlier in the month:

While the trend has been mostly sideways over the past six months, the bulls are now clearly on the back foot as the 14-day RSI hasn’t registered an overbought reading in over a year. That’s not a characteristic of an uptrend.

With bears in control, our attention now turns to potential near-term support levels.

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Originally posted 27th April 2023