Chart Advisor:Searching for Trustworthy Breakouts

Articles From: Investopedia
Website: Investopedia

By Frank Cappelleri, CMT, CFA

1/ What Uptrends Need

2/ The XLK Technology ETF

3/ Trading the Mid Cap Range

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1/ What Uptrends Need

The S&P 500 currently is +20% from the intra-day low on 10/13/22, now over 12 months ago.

But for the majority of the advance, it hasn’t been smooth sailing.  Yesterday, we talked about the plethora of large +/-1% moves that existed in 2022.  The elevated two-way volatility persisted all through the first quarter of 2023.

This created a treacherous trading environment for bearish traders, of course, since the trend finally turned higher. However, the trading landscape was just as unpredictable for buyers.

The reason is that breakouts just couldn’t be trusted.  Even the most promising bullish chart set ups didn’t work… until the start of the third quarter.

From April through July, the SPX broke out of four separate bullish formations. It achieved its upside target all four times.  This only can be replicated now if the number of sizable one-day moves lessens.

If the daily movement becomes quieter once again, whipsaws will be less prevalent and that would lead to trustworthy bullish patterns once more.

2/ The XLK Technology ETF

Technology represents 28% of the S&P 500, and Apple (AAPL) is 23% of the XLK Technology ETF.  With the influential stock reporting earnings on Thursday evening, the reaction on Friday will have an outsized effect on the XLK ETF and the market as a whole.

Bigger picture, XLK hasn’t made a new high since July, however, it hasn’t completely crumbled in the recent weeks, either. Up to this point, the ETF has oscillated within this clear downward sloping channel. 

While it hasn’t been able to break through the pattern’s upper trend line, the lower line has provided support every time it has been tested. That’s also helped XLK stay above the 31.8% retracement level of the entire rally.

Thus, at this stage, the pullback appears like a mean-reverting down move within a larger uptrend.  A solid response to AAPL’s third quarter earning’s result would keep this scenario in play.

3/ Trading the Mid Cap Range

Has there been a more frustrating chart pattern than the one MDY has been in over the last two years?  MDY last made a new high in November’21 and is net flat since May’22.

But that doesn’t make it useless from a trading opportunity standpoint.  Since December’21, the ETF’s 14-Day RSI has been oversold (or close to oversold) eight times, including just recently.  It’s bounced from that condition each time.

Indeed, some rallies have been short-lived and haven’t amounted to substantial percent moves.

However, the recent effort also has materialized from a key support zone near 430, which has helped produce two of the strongest up-moves in the last year – from mid-December’22 and late-March’23. 

MDY will be trying to replicate that kind of price action yet again now.

Originally posted 2d November 2023

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