Today we saw broadening of participation by comparing the percentage change of the cap-weighted version of the S&P 500, SPY (+1.50%), versus the equal-weighted, RSP (+2.25%), which shows that today RSP advanced 52% more than SPY.

Our biggest beef with the SPY rally was that it wasn’t broad. It was narrowed to big mega-cap stocks and the rest were not participating. Just look at our bias chart below. Notice where the Silver Cross and Golden Cross Indexes were at similar price levels. They read in the 70’s and 80’s. We’re setting a new high and these indicators show broad participation has been almost nonexistent as they read in the 30’s and 40’s.

Today saw a big shift as participation of stocks above their 20/50/200-day EMAs skyrocketed to and past our 50% bullish threshold.

The rally in the SPY has confounded us and if you look at the comparison between the SPY and RSP you’ll understand why. RSP’s price chart is what the SPY should’ve looked like, but it didn’t. Why? The difference is capitalization. It worked in the SPY’s favor, but not in RSP’s.

RSP’s breakout from the declining trend looks good and bolsters the new participation numbers we see on the chart above.

Conclusion: This is only one day’s action, but we think it shows a turning point. We’ve often been asked what it would take for us to move to the bull camp and we always reply “bias”, we need to see the broader market participating. We are seeing that now.

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In this episode of StockCharts TV‘s The MEM Edge, Mary Ellen reviews what’s pushing the markets above resistance and how you can capitalize. She also highlights this week’s rally in Bank stocks and whether the group is in an uptrend.

This video was originally broadcast on June 2, 2023. Click on the above image to watch on our dedicated MEM Edge page on StockCharts TV, or click this link to watch on YouTube. You can also watch on our on-demand website, StockChartsTV.com, using this link.

New episodes of The MEM Edge air Fridays at 5:30pm PT on StockCharts TV. You can view all previously recorded episodes at this link. You can also receive a 4-week free trial of her MEM Edge Report by clicking the image below.

What compels me to write a bold headline claiming one sector is obviously poised to break out to the upside?

As a trend follower, I have three goals every day: identify trends, follow those trends, and anticipate when those trends may reverse. Simple, right?

Energy has been the worst-performing sector in 2023, so the trend has been confirmed negative. Especially on a relative basis, energy has been a pretty tough place to be.

Here, we see how three growth sectors–Consumer Discretionary, Communication Services, and Technology–have absolutely dominated the US equity markets in 2023. Everything else has underperformed, with Energy coming in with a -21% relative return in the first five months of this year.

So what tells us this confirmed downtrend may be at an end?

Weekly Chart Shows Key Support

Let’s start with the weekly chart of the Oil Services ETF (OIH). Although the trend for these energy stocks in 2023 has been down, as evidenced by the daily chart below, the weekly chart actually shows a fairly consistent stepwise uptrend over the last two years.

Note the similarities between the recent of support at $250 with previous pullbacks in mid-2022 and late 2021. In all three cases, the price has pulled back and formed a double bottom. The weekly RSI has come down to around 40, but not much lower. This is classic behavior for a market in a primary uptrend experiencing short-term pullbacks.

And while this time certainly could be different, I’m inclined to assume that a price trend with certain characteristics will continue in its current form until proven otherwise.

Daily Chart Features Bullish Divergence

Now that we’ve established the long-term uptrend and how the recent pullback fits into that larger trend, let’s check the daily chart to see what the short-term picture has involved.

Now we see the multiple tests of resistance around $330 in the first quarter, followed by a significant drop in March. You may notice the dashed pink line which represents a 61.8% retracement of the September 2022 to January 2023 rally.

So that first big pullback of 2023 came right down to a Fibonacci support level. In May, we saw the OIH make frequent retests of support around $250, demonstrating that willing buyers have been willing to step in and buy OIH at that price point.

If you check the RSI in the panel below the price, you’ll see a clear bullish momentum divergence. This is where the price is making lower lows while the indicator is making higher lows. This tends to suggest a lessening of bearish momentum, and lack of downside pressure on price.

Now We Need Follow-Through

So it’s all bullish from here, right? Perhaps. But as they say, “the proof is in the price.”

Energy stocks ended this week in a position of short-term strength, handily outperforming growth sectors like Technology and Communication Services on Friday. Long-term gains always start as short-term gains, so now we need to confirm when a new uptrend is in place.

First, I’m watching the 50-day moving average. The OIH pushed above this key trend barometer this week, and I’d like to see if there is further upside momentum next week as well.

Second, I’d be looking for the RSI to push above 60. In bearish phases, the RSI tends to reach up to around 60 on upswings. In bullish periods, the RSI tends to become overbought. Can the RSI show that more willing buyers are entering the fray?

Finally, it’s all about relative strength. For energy stocks to be a compelling option for equity investors, the sector needs to start outperforming the benchmarks. Look for the relative strength to (finally!) turn higher.

We’ve spoken often of the dominance of a relatively small number of mega-cap growth stocks. How will we know when there is new leadership emerging for stocks? Just watch the price!

Interested in consuming this content in a convenient video format? Just head over to my YouTube channel!

RR#6,

Dave

P.S. Ready to upgrade your investment process? Check out my free behavioral investing course!

David Keller, CMT

Chief Market Strategist

StockCharts.com

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.

On this week’s edition of StockCharts TV‘s StockCharts in Focus, Grayson tours you through the chart annotation tools in both SharpCharts and ACP, our Advanced Charting Platform. Along the way, you’ll see some helpful tips and tricks that will enhance your drawings and streamline your annotating experience. With shortcuts and hotkeys, you’ll be drawing trendlines, support and resistance lines, Fibonnaci levels, and more faster than ever before.

This video was originally broadcast on June 2, 2023. Click on the above image to watch on our dedicated StockCharts in Focus page on StockCharts TV, or click this link to watch on YouTube. You can also watch on our on-demand website, StockChartsTV.com, using this link.

New episodes of StockCharts in Focus air Fridays at 3pm ET on StockCharts TV. You can view all previously recorded episodes at this link.

It’s no surprise that the Technology sector was the most talked-about sector of the past several weeks. AI FOMO was everywhere on Wall Street as Nvidia (NVDA) and other AI stocks pulled ahead of their non-AI counterparts. In the end, Tech stocks, in general, kept the Nasdaq well ahead of the broader S&P 500 index ($SPX) and the large-cap Dow Jones Industrial Average ($INDU). The strong Tech momentum had investors wondering whether the move had real substance behind it or if it was driven by AI exuberance.

A Technical Look at the Tech Sector

Below, the daily chart of the Technology Select Sector SPDR Fund (XLK) shows an uptrend in play. Is it ripe for a pullback?

CHART 1: DAILY CHART OF SELECT SECTOR SPDR TECHNOLOGY ETF XLK. The ETF has been in a strong bull rally fueled mostly by AI stocks. But is the rally sustainable? It helps to look at technical indicators, such as the Ichimoku cloud, stochastic oscillator, Chaikin Money Flow, and market breadth.Chart source: StockCharts.com (click chart for live version). For educational purposes only.

XLK is at the $166 price level, having pulled back slightly from its 12-month high of $168. Still, it’s well above its 50-day and 200-day simple moving average reading, while XLK appears to be on the verge of a parabolic curve.

Let’s look at the Ichimoku cloud to see what kind of forward-looking trend scenario and support and resistance it might project. The Ichimoku cloud bullishly plots resistance 26 days ahead between $154 and $158. This could be an indication that XLK may be over-extended. In other words, it has plenty of room to fall.

The Stochastic Oscillator displayed in the top panel above the price chart suggests that XLK is in overbought territory, which supports the possibility of XLK falling to the $154–$158 level in the next few weeks.

It helps to see if the price momentum is driven by strong buying pressure. The Chaikin Money Flow (CMF) indicator helps identify whether buying pressure is strengthening or weakening. The CMF is showing divergence, which suggests that although price is rising, buying pressure is dwindling.

The XLK High-Low Percent ($XLKHLP) indicator helps to see whether stocks within the sector have reached new highs or lows and the frequency and recency of these new highs and lows. It’s a lagging breadth indicator, yet it can support a thesis that might find the sector in a bullish, bearish, strengthening, or weakening condition.

The $XLKHLP is displayed in the lowest panel below the price chart. It’s been moving up and down by a wide range since the start of the AI boom, but, overall, it gave some bullish indication that stocks in the sector (probably AI-related names) were reaching new highs. But the indicator has fallen since reaching a high of $168, which further confirms the price action in XLK.

On an industry-group level and on a monthly scale, Semiconductors appear to lead the pack (again, most likely AI-driven), as you can see below.

CHART 2: MONTHLY SECTOR SUMMARY. Semiconductors in the lead.Chart source: StockCharts.com. For educational purposes only.

But if you look at the industry groups over a quarterly timespan, you’ll see that “chips,” lagging in third place, only came to dominate within the last week, likely spurred on by NVDA’s recent earnings and the ensuing AI FOMO frenzy.

CHART 3: STOCKCHARTS PERFCHART OF TECH SECTOR COMPONENTS.Chart source: StockCharts.com. For educational purposes only.

If you look at the stock that served as a catalyst to all this—NVDA, the chip stock that also happened to reach the elite $1 trillion market cap level last week—you see a similar reading to that of the overall sector. 

CHART 4: DAILY CHART OF NVIDIA STOCK.Chart source: StockCharts.com (click on chart for live version). For educational purposes only.

While the overbought Stochastic readings and CMF divergences are apparent, note that NVDA appears to be exhibiting an exhaustion gap pattern on high volume. This would typically hint of a pullback. But the Ichimoku cloud level and the Volume by Price bar levels seem to converge between the $290 and $300 range, which should serve as ample support (based on the volume of trading and representation of buying pressure, in addition to the cloud itself). A break below that would see support at $260, slightly below the March and April lows.

The Bottom Line

The Tech sector has seen impressive performances this week, with AI companies, particularly Nvidia, leading the charge. However, indicators suggest a possible overextension in the sector, and while AI-related names have reached new highs, there’s a looming possibility of a pullback. 

It’s crucial for investors to remain vigilant, as the apparent “AI FOMO” could be followed by a period of market correction, especially in overvalued stocks. Despite this, a strong support level exists, reducing the potential for extreme losses. The situation underscores the need for balanced investment strategies that factor in both the potential rewards and inherent risks of investing in high-growth sectors like AI.

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

Gold is valuable, not just because you can sell it for a lot of money, but also because it gives us answers that we cannot get anywhere else. Gold serves as a great leading indicator for lots of things, leading the changes in grain prices by about 15 months and foretelling the movements of oil prices by just under 20 months.

That is the trick revealed in this week’s chart. The plot of gold prices is shifted forward by 19.8 months to reveal how gold’s price movements get echoed later by similar movements in oil prices. It does not always work perfectly, but we should not expect perfection from something making its predictions that far in advance.

And the relationship can sometimes get disrupted when non-market forces put a thumb on the scale. The Russia-Ukraine War spiked oil prices up a lot, as the supply of Russian oil suddenly got cut off by countries who objected to Russia’s invasion. That sent oil prices up to an initial peak, which was a little bit early vs. gold’s prediction. But oil prices balanced that out by making a double top, with the twin tops centered on the ideal top date gold had suggested. That is an imperfect way to model oil prices, but a nice bit of symmetry after initially getting thrown off.

19-20 months ago, gold prices were making a rounding bottom before starting a slow advance toward an eventual blowoff top in March 2022. That top in gold prices equates to a November 2023 top for oil prices, assuming that the 19.8-month lag time continues working right. It has been functioning for several years, so it would be weird to see it suddenly stop working now. Afterwards, oil prices should see a meaningful decline in early 2024. Gold prices bottomed in September through November 2022, which equates to a bottom for oil prices due in May to August 2024.

Investor interest seemed to be restricted to semiconductors and software. This week, it appears to be widening out into new areas for a move higher. It’s been a long time since anyone loved the ARK series of funds, but the ARKK has an SCTR above 75, suggesting a strong move has started and is behaving better than most of the ETF’s out there.

Joe Terranova is a pretty smart investor. He has traded with one of the brightest minds in the commodities business, Mark Fisher. JOET is the ticker of the Terranova momentum fund. He has struggled to grasp the gains in the narrow advance as well, but this week the chart is starting to turn up. Looks great. SCTR moving back above 50, the price is breaking a big downtrend and the PPO looks to be headed into positive territory.

Another ticker I like to keep an eye on is the IBD 50 ETF (FFTY). It has struggled as it is a growth and momentum fund. The daily chart is perking up and you can see the SCTR moving higher as well.

The weekly chart shows how it can be a solid performer, or a solid under-performer. I like the SCTR turning up after making an 18-month base. Price is trying to break out from a sideways consolidation since the beginning of the year. The weekly Full sto was stuck in the lower half, and has now flipped back to the upper half. Price will close above the 40 WMA for the first time in a long time.

I’ve been waiting for some broadening out. Nice to see a meaningful change in these charts.

I covered some of this on the Monthly conference call on June 1, and members are listening to the recording today. I’ll have a lot more in the weekend newsletter. If you would like to try a subscription to Osprey Strategic, it is only $7 for the first month and let’s you catch all of the recent postings.