Chart Advisor: Tactical Tops

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Monday, 15th May, 2023

1/ Financial Stocks Test Support

2/ Homebuilders Lead the Way

3/ Software on the Verge of Breaking Out

4/ Dollar Bulls Have Work to Do

Investopedia is partnering with All Star Charts on this newsletter, which both sells its research to investors, and may trade or hold positions in securities mentioned herein. The contents of this newsletter are for informational and educational purposes only, however, and do not constitute investing advice.

1/ Financial Stocks Test Support

Bank stocks staged a big rally today, with the S&P Bank ETF (KBE) up nearly 3%. This comes off the heels of KBE’s lowest weekly close since 2020 on Friday.

However, it wasn’t just the banks—the entire financial sector rallied today. And the bulls really needed it, as this group has been under significant selling pressure since March, with key levels of support currently being tested in a variety of indexes like the Financial Sector SPDR (XLF).

Here is another chart of a financial subsector that is testing a critical support zone. This is a daily candlestick chart of the SPDR S&P Capital Markets ETF (KCE):

Source: All Star Charts, with data provided by Optuma

While the bulls are holding their ground and defending the pivot lows for now, this is a classic bearish reversal pattern. Following a swift rally off the October lows, KCE has gone on to print a textbook head and shoulders formation. The December and March lows mark the neckline, or breakdown level, of this structure.

If the bears take control and force a downside resolution, we could see a retest of last year’s lows. If this happens, the entire financial sector will likely be experiencing heightened volatility.

2/ Homebuilders Lead the Way

Although major U.S. indexes remain stuck in their ranges, one group that has been trending higher is the Home Construction ETF (ITB).

These cyclical stocks are an excellent gauge of global growth and a leading indicator for the broader market.

Source: All Star Charts, with data provided by Optuma

As you can see in the above chart, when home construction is trending higher, it tends to happen in an environment conducive to risk-seeking behavior. The opposite is true when homebuilder stocks are under selling pressure. Notice how the S&P 500 (SPY) looks quite similar to homebuilders over time.

Seeing ITB press against 52-week highs suggests a risk-on tone for the market and risk assets in general. It is also supportive of the bullish price action we’re seeing at the index level.

3/ Software on the Verge of Breaking Out

Technology stocks have been in the driver’s seat, leading the way up on both absolute and relative terms for the past two quarters.

When we dive beneath the surface looking for strength, software stocks catch our attention.

The chart below shows the Dow Jones U.S. Software Index on the verge of breaking out from a bearish-to-bullish reversal pattern.

Source: All Star Charts, with data provided by Optuma

Not only is price pressing up against the upper bounds of the range, but the 200-day moving average is curling higher, indicating that a change in trend is likely underway.

4/ Dollar Bulls Have Work to Do

The U.S. Dollar Index (DXY) finished last Friday, posting its best week since peaking in late September 2022. 

Risk assets sold off across the board to no surprise. But before we get carried away on the next leg higher for King Dollar, let’s zoom out on the chart to get a read on where the USD truly stands—in the middle of a short-term range.

Source: All Star Charts, with data provided by Optuma

The DXY might have gained 1.5% last week, but it is still well below a key retracement level at approximately 105. As long as it remains below that level, it’s range bound like much of the market.

On the other hand, the path of least resistance would be higher if DXY reclaims the upper bounds of its multi-month range. This is something stock market bulls likely want to avoid.

Originally posted 15th May 2023

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