With the first quarter of 2023 drawing to a close, what impresses me most about the equity markets are the improving breadth conditions. While the markets can move higher on strength from the MANAMANA stocks, sustained bull market phases usually need additional support from other stocks.

One could argue that stocks like MSFT and AAPL represent enough market cap that they can single-handedly drive the benchmarks higher, and that is arguably what we saw earlier in March. But, by this Friday’s close, improving breadth conditions indicate that it’s not just the FAANG stocks anymore. This is a broad advance with an opportunity to push well above S&P 4100.

Why SPX 4100 Matters

The S&P 500 ended the quarter around 4110. That is right about the same level where the SPX was at six weeks ago. And the same level as four months ago. And also seven months ago. And eleven months ago. That’s right, our most followed benchmark is at the same place it was almost one full year ago, in the bear market phase of 2022.

So with all of the uncertainty, all the volatility, and plenty of upside and downside catalysts, the overall market trend has been sideways for almost a year!

When a market becomes rangebound, I find it helpful to use a “stoplight” approach, using support and resistance levels. At what level would the market look bullish if it reached above? And what level would need to be broken on the downside to confirm a bearish phase? Anything in between remains in the neutral category.

The 4100 level became extra significant in November, as it represented the first big up thrust off the October low. I see the February breakout as a failed breakout above that established resistance level.

Once again, we are testing resistance at 4100. Will the S&P 500 have enough upside momentum to power through this level to 4200 and beyond? It will need to be driven by not just the FAANG stocks, but by other names, represented by the ETFs listed below!

The Continued Strength of Technology

While semiconductors have been one of the strongest groups around, driven by solid charts like NVDA, I was impressed to see the Video Gaming and eSports ETF (ESPO) on my new swing highs list this week.

What’s really interesting about this ETF, besides the fact that it demonstrates a clear bullish bias with rising price and relative strength, is that two of its top five holdings are semiconductors! That’s right, NVDA and AMD are both top holdings in this ETF. Another great reminder of the value of due diligence on ETFs to be clear on what stocks are included!

But the strength in ESPO is not just due to the semiconductor holdings. Stocks like EA and ATVI have started to breakout to the upside, pushing above established bases and indicating a new bull phase in progress.

Non-US markets have benefitted from a weaker US Dollar, so I was not surprised to see a number of European equity ETFs in the top decile of our SCTR ETF rankings. Germany, France, Spain, Ireland, and Denmark are all toward the top of the entire iShares family of ETFs this week.

Here’s a pan-European ETF which is back to testing resistance around $50. Note the higher low in mid-March, the upward-sloping 200-day moving average, and the RSI, which bottomed out recently around 40. These are all signs of a bullish trend phase.

Participation From Lagging Sectors

Perhaps the most convincing bullish argument here comes from the improvement in charts of sectors like financials, which have been lagging behind the FAANG sectors. The XLF rallied into the weekend after bouncing off support in the $30-31 range.

I’ve added the PPO indicator on this chart to illustrate how the recent rally could be another rally phase similar to previous recoveries off the lows. Bottoms in June and October of last year were soon followed by PPO buy signals as buyers bought in on price weakness. Charts like the XLF moving higher in April could provide the additional upside momentum for our equity benchmarks, as some of the beaten-down sectors are seeing additional demand as well.

Given the inverted yield curve, the uncertainty of the 2023 financial crisis, and recessionary risks, significant upside for stocks seems unlikely. But for now, the charts are telling me that a broad advance is in place and S&P 4100 may be just the beginning.

What do you see coming next for the S&P 500? In my latest video, I break down four potential scenarios and the technical and macro implications for each. Which do you see as most likely, and why?

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.

There are times when technical merit alone can justify the case for a trade.

The reason for this is that many traders often stick with a familiar list or category of stocks, and for obvious reasons: to avoid trading a stock that you know very little about or to check the fundamental basis for each trade. But there are thousands of stocks, and sticking to familiar territory can sometimes limit your opportunities. You may want to trade stocks you’re familiar with, or you may prefer trading “patterns” that you’re familiar with.

If this matches your style, then technical analysis-based scans might be your thing.

Here’s one example: the bullish engulfing candlestick formation.

Scanning for Bullish Engulfing Patterns

Quick note here (based on Thomas Bulkowski’s candlestick analysis in his book Encyclopedia of Candlestick Charts). 

So, the bullish engulfing candlestick seems pretty good at first. After all, it has a 63% reversal rate, which means the price goes above the pattern’s top about 63% of the time. 

But there’s a catch: The results after a breakout can be a bit of a letdown depending on the context. So, you may need to take a closer look. A more thorough examination reveals that this pattern does better when the price goes down. In other words, it works best in a downtrend or a bear market, according to historical performance stats (based on Bulkowski’s studies).

Let’s consider a scan that looks for engulfing patterns in a downtrend.

1. Fire-Up the Scan Library

From Your Dashboard, under Member Tools, scroll down to Sample Scan Library. You can also access the scan library from the Charts & Tools tab. This functionality was added in the most recent release and is available to all StockCharts members.

CHART 1: SAMPLE SCAN LIBRARY. This can be accessed from Your Dashboard or the Charts & Tools tab.Chart source: StockCharts.com. For illustrative purposes only.

Here, you’ll have access to various scan protocols covering a wide range of technical criteria.

2. Search for and Run the Bullish Engulfing Scan

This pattern is one of the built-in models on the page, and it can be found in the candlestick patterns section.

CHART 2: CANDLESTICK PATTERNS SECTION OF THE SCAN LIBRARY. There are several candlestick patterns to choose from.Chart source: StockCharts.com. For illustrative purposes only.

3. Organize the Results

Every trader has their own preferences regarding trading volume, sector, or any other fundamental and technical criteria. For the sake of example, let’s rank the scan results according to StockCharts Technical Rank (STCR) score. After all, you’re looking for favorable “technical” results, right?

But there’s a caveat with this pattern: since bullish engulfing patterns work best for downtrending stocks, the SCTR scores will likely be low, considering its “potential” recovery from a downtrend.

When you run the scan, you’ll get a list of several stocks. For the sake of demonstration, let’s zero-in on a few stocks in the last. The lesson here is that, no matter the pattern or technical ranking, context is always king.

4. Analyze the Context

Note: None of these stock examples are meant to be “tradable” examples. They are intended for educational purposes only and aimed at demonstrating the StockCharts scan engine, and not necessarily the stocks.

Based on the Bullish Engulfing stats mentioned earlier in this article, there are certain scenarios you want to avoid. For the favorable scenarios, you still have a lot of set-up homework to do.

Hypothetical Scan Example 1

CHART 3: DOING A DEEPER DIVE INTO THE SCAN RESULTS. Adding indicators such as the MACD and Chaikin Money Flow can help confirm whether a trend reversal is likely.Chart source: StockCharts.com. For illustrative purposes only.

The bullish engulfing pattern is pretty evident, but the volume is low.Although you can argue that it’s “bottoming,” with the Moving Average Convergence/Divergence (MACD) turning up and the Chaikin Money Flow trying to claw its way up to the zero line, look at the 50-day SMA, which hints at crossing below the 200-day simple moving average (Death Cross?).See the thick Ichimoku Cloud, which hints at a potential resistance level?

Maybe not the best prospect for a swing trade. Still, it’s a sketchy trade prospect.

Hypothetical Scan Example 2

CHART 4: ANOTHER EXAMPLE OF ANALYZING SCAN CANDIDATES. This candidate may present a more favorable prospect.

This gives you a different picture.

The Chaikin Money Flow looks like it’s about to tip back over the zero line, having descended from positive territory.The MACD is above the baseline and hints at turning up as well.The 50-day simple moving average (SMA) is trading above the 200-day SMA and is rising.Price found support at the Ichimoku cloud (K=aka, “kumo”).Although the current price action seems to be reversing the previous day’s bullish engulfing pattern, the cloud’s position as support keeps the trade relatively “valid.”

Compared to the first example, this might look like a more favorable prospect.

And Here’s the Lesson…

Running a technical scan will present you with several trading opportunities. Although it may take some scouring to find a more favorable or ideal trading setup, using the scan will save you a lot of time.

Context is king, and a single technical chart pattern can take the form of numerous trading scenarios. It goes without saying that pattern-scanning technology isn’t a panacea but more like a “research assistant” — you can use it to your advantage, or abuse it to your disadvantage.

The Bottom Line

Remember that technical patterns can change based on the context, but if you’re open to exploring technically-based trading opportunities, tools like StockCharts’ scan library can help you find them. Running a technical scan can quickly reveal numerous potentially tradable scenarios. Even though it might take a bit of effort to pinpoint the perfect setup, using scans can save you time and even help you discover a few opportunities that you might have missed without the right tools.

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.

In this episode of StockCharts TV‘s The MEM Edge, Mary Ellen highlights the new uptrend in the S&P 500 and which areas are now reversing downtrends. She also reviews themes taking place in already-strong Software stocks.

This video was originally broadcast on March 31, 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 5pm 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.

Partial Look at the Models and Positions

On Friday, I was part of the Festival of Learning, sponsored by Real Vision, to help new and experienced traders. The topics that came up were in line with what everyone who trades wants more insights on:

FOMOPosition SizingRisk ManagementEntries Stops and ExitsPortfolio ManagementManaging Emotions

One question was on AI and Robo Trading, something we know a lot about.

First off, having decades of discretionary trading experience, evolving into algos was a process. All of our rule-based, structured disciplined approaches as discretionary traders are an integral part of the quant models and blends. Our goal is to create an “edge” using equity trends from various markets and asset classes.

The reason I bring this up today is because many of the positions are inline with our personal view of the macro. And many of the positions are following our trend-strength indicators that have placed us in sectors we could have potentially overlooked on our own. What fascinates me, right now, is the injection of liquidity by the Fed, which of course is not being called by its rightful name–Quantitative Easing.

That leads me to think–what else can we buy now, that hasn’t been crowded by the FOMO crowd?

As you can see in the Bloomberg chart, cause/effect for tech, but also for many different sectors begging for the Fed fix.

The Economic Modern Family, though, has many other issues. As the 1st quarter ended, only Semiconductors closed above the 2-year or 23-month business cycle to show expansion. The rest of the Family did not, and Retail and Regional Banks still way underperform. Which could mean more QE on the way, with the rest of the indices and key sectors following SMH, or it could mean a wakeup call for the 2nd quarter.

Either way, we still believe that most are #lookingforinflationinallthewrongplaces.

Sure, the market loves the liquidity in the name of saving any future bank issues. But everything though the Fed does, as we well know, has a cost.

Last week, I wrote about agricultural commodities and DBA, the Ag ETF. Since that Daily, DBA has risen over 4%. So, what should we look for next?

I wrote about long bonds (TLT). TLTs rallied with the market. The good news is that long bonds are underperforming SPY, which is risk on. If yields fall further, however, will that be good for the market when, all of a sudden, the Fed has to become more aggressive again to control rising inflation? Haven’t we learned yet that the more “QE”, the more spending, the more inflation, and so on?

So, watch the bonds. Consider the grains. And since the PCE released Friday excludes food and energy, keep track of precious metals, sugar and crude oil.

Our quants have not gotten into oil yet, so, from a macro perspective, over $82, we are interested.

Look for momentum to clear the 50-DMA along with price. Then, the risk will be minimal, and the reward substantially great.

But also, the cost to the economy.

For more detailed trading information about our blended models, tools and trader education courses, contact Rob Quinn, our Chief Strategy Consultant, to learn more.

IT’S NOT TOO LATE! Click here if you’d like a complimentary copy of Mish’s 2023 Market Outlook E-Book in your inbox.

“I grew my money tree and so can you!” – Mish Schneider

Get your copy of Plant Your Money Tree: A Guide to Growing Your Wealth and a special bonus here.

Follow Mish on Twitter @marketminute for stock picks and more. Follow Mish on Instagram (mishschneider) for daily morning videos. To see updated media clips, click here.

Mish in the Media

Mish talks with CNBC Asia about hope, fear, and greed, and what could happen going forward.

On the Thursday edition of StockCharts TV’s Your Daily Five, Mish walks you through where we are in the economic cycle at the end of the first quarter, then highlights what to look for (and trade) as we enter the second quarter.

In this appearance on CMC Markets, Mish gives you clear actionable information to support why commodities look to go higher from here.

Mish talks looking for stock market opportunities on Business First AM.

Mish discusses long bonds, Silver to Gold and the Dollar in this appearance on BNN Bloomberg.

Mish sits down with Kristen on Cheddar TV’s closing bell to talk what Gold is saying and more.

Mish and Dave Keller of StockCharts look at longer term charts and discuss action plans on the Thursday, March 17 edition of StockCharts TV’s The Final Bar.

Mish covers current market conditions strengths and weaknesses in this appearance on CMC Markets.

Mish sees opportunity in Vietnam, is trading SPX as a range, and likes semiconductors, as she explains to Dale Pinkert on ForexAnalytix’s F.A.C.E. webinar.

Mish and Nicole discuss specific stock recommendations and Fed expectations on TD Ameritrade.

Coming Up:

April 4th: The RoShowPod with Rosanna Prestia

April 24-26: Mish at The Money Show in Las Vegas

May 2-5: StockCharts TV Market Outlook

ETF Summary

S&P 500 (SPY): 405-410 back in focus.Russell 2000 (IWM): 170 support, 180 resistance still.Dow (DIA): Needs a second close over 332.Nasdaq (QQQ): 329 the 23-month moving average–huge.Regional Banks (KRE): Weekly price action more inside the range of the last 2 weeks–still looks weak.Semiconductors (SMH): And she’s off–255 key support, 270 resistance.Transportation (IYT): Cleared the weekly moving average, so now has to hold 225.Biotechnology (IBB): Good performance but not enough yet, unless clears 130 area.Retail (XRT): Ran right to big resistance at 64.

Mish Schneider

MarketGauge.com

Director of Trading Research and Education

On this week’s edition of StockCharts TV‘s StockCharts in Focus, Grayson kicks off a series of scanning-focused episodes by sharing two of his favorite ways to run and review your scan results. He demonstrates how the CandleGlance view for SharpCharts can help you quickly and easily narrow down a large list of charts; then, he jumps over to ACP, showing you how to run scans directly from the platform and explain how to use the multi-chart layouts feature to seamlessly chart your scan results in multiple timeframes on one screen.

This video was originally broadcast on March 31, 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.

On this week’s edition of Moxie Indicator Minutes, TG explains that, barring any crazy event, the SPX will close its second month over the Monthly 10-SMA. This moving average is his primary tool for assessing whether a longer-term trend is bullish or bearish. The SPY continues to hold up, albeit sideways, but that is progress for the bulls. It does not have to last, but it is something to note until it changes or improves. Market breadth still isn’t great, but there are opportunities out there for to take.

This video was originally broadcast on March 31, 2023. Click this link to watch on YouTube. You can also view new episodes – and be notified as soon as they’re published – using the StockCharts on demand website, StockChartsTV.com, or its corresponding apps on Roku, Fire TV, iOS, Chromecast, Android, and more!

New episodes of Moxie Indicator Minutes air Fridays at 12pm ET on StockCharts TV. Archived episodes of the show are available at this link.

On the weekly RRG, the tail for XLY, Consumer Discretionary, is inside the improving quadrant and heading at an RRG-Heading of roughly 90 degrees. Not ideal; Somewhere between 0-90 is stronger as it indicates that the trend is still picking up speed, but not wrong either.

With only two sectors inside the leading quadrant, XLK and XLC, it makes sense to see if we can identify the next leading sector. Consumer Discretionary seems to be a good candidate.

Drilling into individual stocks

When we dive into the members of the Consumer Discretionary sector and use XLY as the benchmark, an interesting image shows up. Not one of these individual stocks is positioned inside the leading quadrant. This is because of the strong rotation of TSLA recently, which is pushing all other stocks in the opposite direction.

This distortion can be avoided by switching to RCD, the equal-weight sector ETF for the Discretionary sector.

On this RRG, you can see a much more evenly spread universe. I have zoomed in to visualize better the rotations which push TSLA off the grid, but we know where it is.

Looking at this image, quite rapidly, a few exciting tails can be identified. These are highlighted in the RRG below.

Inside LEADING: MGM, LEN, NVR, ULTA, TSCO

Inside IMPROVING: TSLA, AMZN, F, CMG, GM, HLT, MAR

Inside LAGGING: MCD, ORLY, DRI

Going over the charts of these companies, these three popped up as particularly interesting.

ULTA – ULTA BEauty Inc.

After breaking out of its range towards the end of 2022, ULTA started moving in a nice rising channel and this week managed to take out its previous high. This confirms the strength of the underlying trend, as it is visible in the series of higher highs and higher lows.

The recent break of resistance is a move into uncharted territory, opening up much more upside potential for ULTA. At the same time, the downside is well protected by the previous resistance level around 530 and the rising support line that marks the channel’s lower boundary slightly below that 530 area.

The RS line and the RRG-Lines in the chart above use RCD as the benchmark, just like on the RRG. The stable relative uptrend and the recent turn back up in both the JdK RS-Ratio and RS-Momentum lines suggest a new up-leg in this relative trend is underway.

AMZN – Amazon.com

THE biggest stock inside the Consumer Discretionary sector is Amazon at almost 25%. So it is safe to say that “When Amazon moves, the sector moves.”

Looking at the chart above, we can see how Amazon literally halved in price from 180 back in November 2021 to 80 at the end of 2022. The raw relative strength for AMZN against RCD has already started moving in a downtrend since the start of 2021.

This resulted in the RS-Ratio line remaining below 100 for over two years. The price decline seems to have halted after the low set in December, and improvements are starting to become visible from that trough.

A first higher low is now in place around 90, and the chart is now pushing for a break above double resistance offered by the horizontal level that lines up multiple highs and lows going back as far as 2018 and the falling resistance line that runs over the price peaks since late 2021.

A break above 103-105 will be a significant signal, confirming that the downtrend has ended and signaling the start of a new uptrend. It will undoubtedly help the raw RS-Line to turn around and get back into its, still, slightly falling channel and move to the upper boundary of that channel.

When Amazon turns around, that will very likely also be a driver for the further movement of the S&P 500.

MCD – McDonald’s Corp

The third chart is for MCD. Although the tail is still inside the lagging quadrant, it has made a nice turn back up and into an RRG-Heading between 0-90 degrees.

These rotations into a strong RRG-heading are always a sign of strength, regardless of which quadrant they occur. But what makes this one extra interesting is the break of price to new highs, new All-Time-Highs, into uncharted territory.

In October 2022, MCD pushed above horizontal resistance around 260, but shortly after that break started to move in a slightly down-sloping range while using 260, the former breakout level, as support.

These weeks’ jump above the upper boundary of that consolidation and above the previous highs at 278 is signaling a new phase in this uptrend. There is no overhead resistance anymore, and the downside is protected around the 270 area, where the former upper boundary of the trading range can now be expected to offer support.

Overall, it is interesting to see that the Consumer Discretionary sector is showing a mix of stocks that are either, very close to, breaking to new all-time highs or close to completing very large basing patterns after prolonged downtrends. Both are strong contributors to overall stock market health when they materialize.

#StayAlert and have a great weekend, –Julius