Chart Advisor: Stocks Slip as the Dollar Slides

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Wednesday, 4th April, 2023

1/ Tech Stocks Cut a Path for the S&P 500

2/ Strength Runs Deep for the Dow

3/ Will GDX Follow Gold Higher?

4/ Tracking CEW for Insight into the USD

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1/ Tech Stocks Cut a Path for the S&P 500

Not only are technology stocks back in the driver’s seat as they continue to lead the way higher, but they are the largest sector within the S&P 500, representing 26% of the index.

The chart below shows the Technology Sector (XLK) reaching its highest level in seven months, overlaid with the S&P 500 contending with overhead supply.

Source: All Star Charts, with data provided by Optuma

These two charts look incredibly similar due to the S&P 500 composition. So will the S&P 500 follow the XLK higher, violating a downtrend line and completing a multi-month reversal? As long as XLK cuts a path higher, the weight of the evidence—or index—suggests that the S&P 500 could follow. 

2/ Strength Runs Deep for the Dow

You can’t have a bull market without bulls, or new highs, for that matter. That’s why we look beneath the surface for signs of market health.

The advance-decline line is a classic breadth indicator, measuring the number of advancing issues against the number of stocks that declined on the day. 

Check out the Dow Jones Industrial Average’s advance-decline making new record highs:

Source: All Star Charts, with data provided by Optuma

This is a significant improvement in internals and speaks to the strength and broadening participation at the individual stock level for the Dow components. More stocks are going up, not down.

This kind of internal strength is a bullish development and bodes well for the index, suggesting new highs at the index could follow.

3/ Will GDX Follow Gold Higher?

While March is seasonally gold’s weakest month of the year, instead of rolling over, gold almost posted double-digit returns last month. The higher beta plays (silver futures and mining stocks) soared.

Unsurprisingly, the Gold Miners ETF (GDX) has reclaimed a key level of interest marked by its former 2016 high.

Source: All Star Charts, with data provided by Optuma

Strength among gold mining stocks is another feather in the hat for gold bugs as it indicates risk-seeking behavior reentering the market. 

For now, the path of least resistance would point higher for gold and silver mining names. As long as that remains the case, it could only be a matter of time before gold futures print new all-time highs.

4/ Tracking CEW for Insight into the USD

The U.S. dollar’s decline is back on track, dropping toward the 100 level.

As you might expect, major developed market (DM) currencies are breaking out. But we would want to see DM currency strength spill over into emerging market (EM) currencies, confirming the broadening U.S. dollar weakness. 

Here’s the WisdomTree Emerging Currency Fund ETF (CEW):

Source: All Star Charts, with data provided by Optuma

CEW is carving out a possible reversal pattern below a polarity zone, coinciding with a series of key pivot highs and lows from 2021 and 2022. 

Notice momentum has improved as price churns below resistance at approximately 18, supporting a potential upside resolution. A breakout above that level implies a significant tailwind for global risk assets, and confirms the bullish price action from DM currencies.

We’re watching CEW for insight into the next significant dollar move, as it would be difficult to imagine a sustained USD decline if CEW holds below 18.

Originally posted 4th April 2023, 2023

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