Chart Advisor: Volatility Flirts With New Range

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

1/ Volatility Flirts With New Range

2/ Small Reversal for Small Caps

3/ Global Equities Hit New 52-Week Highs

4/ Silver Miners Reach an Inflection Point

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1/ Volatility Flirts With New Range

Unlike financial assets such as stocks, commodities, and bonds, which tend to trend over longer time frames, stock market volatility and the volatility index (VIX) tend to mean revert.

One of the big developments of the past few sessions is new multi-year lows in volatility as the VIX revisits levels it has not seen since the pre-COVID era on a weekly closing basis.

Here’s a look at a weekly chart of the S&P 500 Volatility Index (VIX):

Source: All Star Charts, with data provided by Optuma

Whether or not the VIX is about to snap back with a mean-reversion rally or simply settle into a new and lower range is the big question. If the former happens, it means that some much-needed corrective action is probably underway for equities. 

However, if we don’t get a bounce in volatility here, the price action could begin to look a lot more like other bull market periods such as 2017 or 2019.

2/ Small Reversal for Small Caps

Stock market bulls have been looking to small- and mid-cap stocks to pick up the pace and start participating in a more constructive way. Late last week, the Russell 2000 (IWM) answered those calls by registering its best single-day performance since November on Friday.

Here’s a zoomed-in view of the popular small-cap index, sporting what appears to be a head and shoulders reversal pattern over the past few months:

Source: All Star Charts, with data provided by Optuma

IWM resolved higher from this textbook basing formation last week when it eclipsed its pivot highs from April and May and reclaimed the anchored volume-weighted average price (AVWAP) from its year-to-date highs (shown in blue). 

Also notice how IWM took out the 200-day moving average on last week’s move. We’ve color-coded the long-term mean to reflect the direction of its slope. Seeing it flip from green to red several times already this year is a good reminder of the sideways range that small caps remain in over longer time frames. 

With that said, we could see some follow-through from the Russell 2000 in the coming days and weeks as long as it holds these new highs. After some give-back in today’s session, buyers showed up to defend this level as we headed into the close.

3/ Global Equities Hit New 52-Week Highs

When it comes to international equities, more and more countries are participating to the upside.

Whether you analyze the U.S., Europe, or Asia, the charts look more or less the same.

Below is the All Country World Index (ACWI) breaking out of a multi-month base to new 52-week highs:

Source: All Star Charts, with data provided by Optuma

As you can see, after carving out a bearish-to-bullish reversal pattern, price finally absorbed overhead supply at the top of the range.

Although momentum has been in a bullish regime for some time now, we are waiting to see an overbought reading as a potential confirmation of the recent breakout.

As long as we’re above a shelf of former highs in ACWI, the path of least resistance likely remains higher for global equities.

4/ Silver Miners Reach an Inflection Point

Gold and other precious metals have experienced increased selling pressure in recent weeks. As a result, risk-averse behavior along the fringes of the space is reaching an inflection point.

Check out the Silver Miners ETF (SIL) vs. the iShares Silver ETF (SLV):

Source: All Star Charts, with data provided by Optuma

The SIL/SLV ratio speaks to the risk appetite in the same vein as Gold Miners (GDX) vs. Gold (GLD). SIL/SLV is simply further out on the risk curve than GDX/GLD.

The last time this ratio traded down at these levels (early 2016), gold put in the low of its current decade-long base. And both snapped back, ripping higher along with other precious metals.

A similar reaction to the one we witnessed in Q1 2016 would go a long way for the bull case as gold churns just below its former all-time highs.

Originally posted 5th June 2023

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