Chart Advisor: The Metaverse Has No Floor – Shares of Meta Platforms tumble 25% on lackluster earnings.

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Thursday, 27th October, 2022

1/ The Metaverse Has No Floor

2/ Energy Stocks Flex

3/ Caterpillar Inches Higher

4/ Lumber Hits the Deck

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1/ The Metaverse Has No Floor

As big tech earnings continue to roll out, Meta Platforms (META) was the big story of the day. Shares of the parent company of Facebook and Instagram fell by almost 25% as investors reacted negatively to the latest earnings report, released after the bell yesterday.

Yesterday, we discussed the Online Retail ETF (IBUY) and how prior-cycle lows from 2018 and 2020 are increasingly coming into lay. Here is another example of that theme with META, shown in the chart below:

Source: All Star Charts, with data provided by Optuma

Unlike IBUY, which recently found support at this level, META printed a massive gap below its 2018 lows today. It is not uncommon to see price gaps form at key levels of interest like this one. In the case of today’s breakaway gap in META, an overwhelming amount of supply hit the market as buyers capitulated, causing support to break.

2/ Energy Stocks Flex

Investors continue to favor the energy sector, particularly energy stocks. The strength from these stocks refuses to subside.

What really stands out is their relative strength compared to energy contracts such as crude oil. The Energy Sector ETF (XLE) is making fresh six-month highs, while crude oil futures find support at their October pivot highs from last year.

Source: All Star Charts, with data provided by Optuma

Despite its recent relative weakness, crude oil could be poised to catch higher as it carves out a tradable low. This would make sense in light of the strength from oil and gas equities. However, the market has revealed that the best way to express a bullish energy thesis is through stocks. As long as this remains the case, there could be opportunities in the strongest names in the energy space.

3/ Caterpillar Inches Higher

One stock that has caught our attention this week is the industrial conglomerate Caterpillar (CAT). We think of CAT as a bellwether for the global economy. When the stock is rising, it’s usually an indicator that the economy and market are healthy.

The stock also gives us excellent intermarket information, as it is highly correlated with other risk assets such as emerging market equities (EEM), shown in black.

Source: All Star Charts, with data provided by Optuma

Similar to EEM, CAT was trading at its lowest level since 2020 a month ago. However, the stock recently reclaimed a key level at its 2018 highs and has rallied roughly 30% over the past month. Today, CAT gapped higher by nearly 8% on the heels of an earnings beat, closing at fresh four-month highs.

Bulls would like to see EEM stop falling and catch higher, repairing the current divergence with Caterpillar.

4/ Lumber Hits the Deck

The final months of the year favor lumber futures from the perspective of seasonality. Yet, lumber futures remain in a choppy market, near a critical shelf of former highs. 

How it responds to this level in the coming weeks and months will carry valuable insight into the economy’s health and investors’ tolerance for risk.

Source: All Star Charts, with data provided by Optuma

If lumber trends below $500, it could be a strong recession signal. Risk assets could experience increased selling pressure under these circumstances.

On the other hand, if lumber futures can reclaim this key level and start trending higher, we could be in an environment that favors buying stocks.

Originally posted 27th October, 2022

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