Chart Advisor: Stocks Stage a Big Reversal – Stocks surge to end the day higher, rebounding from an early selloff.

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Thursday, 13th October, 2022

1/ Bullish Candles Are Everywhere

2/ Small Caps Take the Lead

3/ New Relative Highs for Energy

4/ From Failed Breakdown to Failed Top

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1/ Bullish Candles Are Everywhere

There has been notable relative strength coming from the financial sector lately. This is particularly true for bank stocks.

After undercutting a shelf of former lows from last month and earlier in the summer, financials led the intraday reversal and were some of the first stocks to trade in the green today.

Source: All Star Charts, with data provided by Optuma

Here is the Large Cap Financial Sector SPDR (XLF), which closed the day with over a 4% gain and a massive bullish engulfing pattern. While this type of candlestick formation usually catches the attention of a technical analyst, the one in XLF warrants a deeper look due to where it is taking place.

2/ Small Caps Take the Lead

While all of the major large-cap averages have violated their summer lows, the small and mid-cap indexes have remained above these key levels. 

The relative strength from stocks as we move down the market cap scale is nothing new. When we look at a ratio of the small-cap Russell 2000 ETF (IWM) versus the large-cap Russell 1000 ETF (IWB), we see that small caps have been basing on relative terms for the better part of this year.

Source: All Star Charts, with data provided by Optuma

After bottoming against large caps back in May, small caps just broke to their highest levels since December 2021 on a relative basis. 

If this rounding bottom pattern turns out to be a valid reversal, we could see an acceleration in outperformance from small-cap stocks in the near future. We’re on the lookout for an overbought momentum reading to confirm the new highs.

3/ New Relative Highs for Energy

When we evaluate some of the most critical relative trends in the stock market, another trend that stands out is the energy (XLE) versus tech (XLK) ratio.

Today, XLE/XLK broke out to fresh highs, confirming the leadership from energy stocks and suggesting more upside could be yet to come.

Source: All Star Charts, with data provided by Optuma

Investors are still favoring energy stocks over their technology peers. While this has already been the case for several quarters, the trend is becoming increasingly pronounced. Until we see signs of this changing, the energy sector could continue to provide investors with buying opportunities. For now, energy outperformance is only accelerating.

4/ From Failed Breakdown to Failed Top

What started out as reversal in heating oil is quickly becoming a continuation pattern.

Heating oil followed energy stocks as it recorded its highest level in three months, taking out its August pivot high and invalidating a potential topping formation.

This is an excellent example of a failed breakdown leading to a potential failed top.

Source: All Star Charts, with data provided by Optuma

While crude oil and gasoline completed multi-month reversal patterns, heating oil did not. Instead, the bulls stepped in and drove prices back above a shelf of former lows.

As long as the bulls remain in control and price holds above last summer’s pivot highs, the path of least resistance could be higher. The question now becomes whether crude oil and gasoline will catch up.

Originally posted 13th October, 2022

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