Chart Advisor:  Using Momentum for Confirmation

By J.C. Parets & All Star Charts

Thursday, 8th June, 2023

1/ Using Momentum for Confirmation

2/ Rotating Toward Little Tech

3/ Retail Holds the Line

4/ Argentina Reaches New All-time Highs

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1/ Using Momentum for Confirmation

The S&P 500 has gone more than 200 days without an overbought momentum reading, marking one of the longest bearish streaks in history. To measure momentum, we’re using the traditional daily 14-day relative strength index (RSI) indicator, shown in the lower pane below.

We’ve marked up a price chart of the S&P 500, highlighting the current base with resistance at the all-important August highs:

With breadth expanding since last week, the market seems to be gaining the internal strength needed to force this base breakout. However, we’ll also be looking for an overbought momentum reading to confirm a resolution above the August highs.

We have color-coded the RSI-14 indicator based on the momentum regime. The way we measure this is simple: If the most recent extreme reading was overbought (above 70), we’re in a bullish regime; and if it was oversold (below 30), we’re in a bearish regime. The last extreme reading was an oversold reading just before the cycle lows last fall. 

If and when the S&P 500 resolves higher from the current reversal pattern, we’ll be looking to the RSI-14 to flip back into a bullish regime to confirm the move. Without it, we will have little conviction that the resolution is a valid one.

2/ Rotating Toward Little Tech

The rotation into small caps has received some well-deserved attention this week. However, when we look beneath the surface, it’s the same sectors leading the way.

Tech stocks have ruled the market this year, particularly in the large- and mega-cap arena. Now that smaller stocks are catching a bid, it shouldn’t be any surprise that small-cap tech stocks are experiencing the best returns.

Here’s the Invesco Small-Cap Technology ETF (PSCT) emerging from a base that resembles what we’ve already seen from its large-cap counterparts:

This base has all the bullish characteristics indicative of a reversal pattern. The 200-day moving average has flattened and is now curling higher beneath price. Momentum is hitting its highest level in years, confirming the bullish resolution with overbought readings.

Price has reclaimed critical resistance at the August highs and more recently the year-to-date highs. This gives bulls a clear level to define their risk for long positions.

And last but not least, the relative trends are confirming all this action, as PSCT is making new highs against small-cap indexes as well as broader large-cap indexes. The bottom line is that the evidence suggests this group could continue to outperform for the foreseeable future.

3/ Retail Holds the Line

When it comes to market laggards, the S&P Retail ETF (XRT) comes to mind, as it has been a consistent underperformer since peaking way back in 2021.

However, after threatening to violate the lower bounds of a short-term consolidation last week, buyers stepped in and sparked a tactical rally. Here’s a daily chart showing price rebounding off the pivot lows:

As you can see in the lower pane, there’s also a bullish momentum divergence in place, as the 14-day RSI made a higher low and stayed out of oversold territory despite the lower lows in price.

The takeaway here is that the markets’ weakest stocks refuse to break down. If the trend will not break lower—and we can only go sideways for so long—odds eventually begin to favor a new uptrend. This may be what’s in order for many of the markets’ weakest areas right now.

4/ Argentina Reaches New All-time Highs

We’ve been vocal about the strength in international equities as participation among diversified indexes expands. The same is true for individual country indexes, as more and more seem to make new highs every week.

When we look at Latin America, one country that stands out is Argentina. Here is a look at a weekly chart of the iShares MSCI Argentina ETF (ARGT):

After five years of absolutely no progress, buyers finally absorbed all the overhead supply at the upper ends of the base and pushed prices to record highs.

The fact that one of the most economically vulnerable regions and countries is participating higher speaks to a bullish risk appetite for stocks around the world. This is one more piece of evidence suggesting that global equities are in good shape.

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Originally posted 8th June 2023