Chart Advisor: Tech Aims for the SKYY

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Tuesday, 23rd May, 2023

1/ Cloud Computing Could Head for the SKYY

2/ Defense Retreats

3/ International Opportunities

4/ Will Dollar and Rates Catch Higher With the USD/JPY?

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/ Cloud Computing Could Head for the SKYY

Over the past few months, we have seen more tech-related groups build out reversal patterns and resolve higher.

The Cloud Computing ETF (SKYY) is carving out such a base. As you can see, price is pressing against its pivot highs from February as buyers work on absorbing the overhead supply at this resistance zone.

Source: All Star Charts, with data provided by Optuma

These accumulation phases typically lack oversold readings on the 14-period relative strength index (RSI) and flat to upward-sloping 200-day moving averages.

If and when we get a valid breakout above $70, SKYY could complete this base and kick off a new leg to the upside. Seeing momentum register an overbought reading would confirm the resolution when we get it.

2/ Defense Retreats

Starting in February, staples stocks have been showing steady leadership relative to the overall market. Despite improvements from equities on absolute terms this year, this risk-off relative strength would eventually become a concern for bulls.

Staples stocks should underperform the broader market during true bull markets. That has finally been the case the past few weeks, as the relative trend has come crashing down.

Here’s the large-cap Staples Sector SPDR (XLP) charted relative to the S&P 500 (SPY):

Source: All Star Charts, with data provided by Optuma

After three months of staples leadership, we’re seeing an unwind in defensive positioning as investors reposition themselves into riskier stocks. Small caps and speculative growth indexes have caught a bid since last week, while staples have hit three-month relative lows.

This is all very bullish intermarket action, as investors favor more offensive groups. If this risk-on relative price action is going to continue, we should see a downside resolution from XLP/SPY and an oversold momentum reading to confirm it.

3/ International Opportunities

One of the main knocks on U.S. markets this year has been about thin leadership and big-cap tech stocks driving all the gains. While we don’t agree with this narrative, we know for sure that it doesn’t apply to indexes overseas.

In the chart below, we’re looking at the MSCI EAFE Index (EFA), which gives us a broad representation of developed stock markets outside of North America.

Source: All Star Charts, with data provided by Optuma

Japan, the U.K., and France are the largest country weightings, and financials and industrials make up more than a third of the sector exposure. This is a big departure from cap-weighted U.S. indexes, which are dominated by technology and growth stocks. EFA has less than an 8% allocation to technology!

This means that a variety of non-growth stocks and sectors must be driving the gains in this index. It can’t be just tech, because there barely is any tech.

With EFA coiling in a high and tight flag above the breakout level of a textbook base, there could be upside potential for this international index.

4/ Will Dollar and Rates Catch Higher With the USD/JPY?

Six months into 2023, key themes from last year’s markets are creeping back into the foreground.

Yes, it’s the U.S. Dollar Index (DXY) and interest rates again. 

Check out the triple-pane chart of the USD/JPY, DXY, and the U.S. 10-year yield:

Source: All Star Charts, with data provided by Optuma

These markets practically move tick for tick. 

Notice that the USD/JPY and the U.S. 10-year yield peaked on the same day last October, less than a month after the U.S. Dolla–r Index. Also, note that all three have carved out potential reversal formations over the past six months.

The lone exception: The USD/JPY is completing a bearish-to-bullish reversal.

While correlations come and go, we doubt that these markets will decouple in the coming weeks and months.

Instead, the higher-probability outcome points to these lines resolving in the same direction—a pattern all too familiar to last year’s stock market sell-off.

Originally posted 23rd May 2023

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