A Perfect Financial Storm For The Stock Market
There are a number of reasons for investors to remain bullish on stocks, that is for sure. The economy remains open, earnings estimates are rising, the Federal Reserve has announced that it will maintain monetary incentives and tax cuts for the foreseeable future, and technically the market is still in an uptrend.
If you can completely ignore the fact that most companies are struggling, COVID is returning in some regions of the country, and unemployment is extremely high, then the bullish posts will make you own stocks.
No matter who wins
As for the upcoming US presidential election, I think the outlook for stocks, no matter who wins, is bullish.
Trump recently tweeted from the hospital that he is planning the biggest tax cut of all time if he wins, and higher share prices. If Biden wins, I think the stimulus will skyrocket faster, which would be bullish for stocks too.
COVID-19 has gotten a grip on the business and shoppers. This favors working from home, which means that technology and technical services will continue to be in high demand. Even the largest technology companies like Amazon will continue to grow and increase the value of the stock exchange.
This is the perfect storm for higher market prices as tech stocks make up the lion's share of market value.
BAN strategy (Best Asset Now)
I use a proprietary relative strength strategy that I call Best Asset Now (BAN). In doing so, I focus on owning the performance leaders and staying away from the laggards. From a statistical perspective, stocks / sectors that have led the rest of the market for three months or more have a 70% chance of continuing to lead the market. In other words, stocks or sectors that have been leaders tend to lead for long periods of time. Because of this, I like to own executives on breakouts or buy them on oversold dips.
Strong relative strength sectors
One interesting sector that is silently pointing the way up during this year's rally is solar. Exposure to this sector can be achieved through the Invesco Solar ETF (TAN) as it has outperformed all other assets and indices this year. Another clean energy ETF, Invesco WilderHill Clean Energy ETF (PBW), takes second place.
You can see from the attached weekly chart for TAN that it has continued to hit new trend highs even though the broader market has been correcting for the past six weeks or so. The TAN rose 243.4% to its recent high of $ 72.60 since hitting the March low of $ 21.14.
Potential resistance zone - TAN
However, the TAN can be extended at short notice. Although the upward momentum has accelerated since the last outbreak of the new trend on September 28th, the TAN has risen for each of the last eight consecutive days and has increased almost 26% since the outbreak. Since the last low of $ 47.98 on September 4th, the ETF is up over 51%. This is a healthy move in a short time.
Additionally, we have several Fibonacci levels close to the top, ranging from $ 72.47 to $ 76.94. This creates the first potential resistance zone.
Also note that price has just formed a tight Doji candlestick pattern as both the daily and weekly charts are in the overbought territory based on the 14-period Relative Strength Index (RSI) indicator are located. The doji candle reflects a level of indecision or consolidation within the day. A higher or lower breakout can resolve the indecision.
I should also note that short-term and speculative traders have started buying and pushing the stock price. Take a look at the surge in short-term traders owning TANs on the RobinHood brokerage list.
The price of the TAN shares in pink and the number of traders who own this ETF in green. The key takeaway from this graph is that when short-term traders pile into an asset like February and now expect wild price swings and a pullback that could last weeks or months in the near future.
Weakest performer - energy sector
The worst performing sectors are also energy stocks that are heavily weighted with oil (dirty energy) as there is no demand as everyone works from home and travel is only a fraction of what it used to be. The Global X Uranium ETF (URA), a uranium stock ETF (also known as Dirty Energy), is the second worst performer.
The SPDR Energy Sector ETF (XLE) broke away from a large head and shoulders reversal pattern in January of this year, before falling very quickly to a low of $ 22.88 in mid-March. That was a 63.4% decrease from the last swing high (before the collapse) in December 2019 and a decrease of more than 77% from the record high in June 2014.
Since that low, XLE has tracked a little more than the first Fibonacci primary retracement level of 38.2% before falling back to a low of $ 28.20 last week. If that low holds, the XLE would have completed a Fibonacci retracement of 78.6% from the previous rally (A to B).
ABCD sample goals $ 52.25
This price behavior establishes a potential measured move or ABCD pattern - with a continuation of the first rally that started in March (first leg) can be seen. In that case, the pattern would complete itself around $ 52.25. Here the CD section of the pattern would match the price increase in the first AB section, reflecting the symmetry of the price fluctuations.
In short, all of the conversation this year seems to be about technology and biotech. I hope I have highlighted a few areas that should not be ignored. While I feel like there will be some headwinds to solar and clean energy in the near future, I do have a feeling that the mood will change after COVID when people want to focus on being healthier and our plant too support by going green.
As a technical analyst and trader, I've gone through a few bull / bear market cycles in stocks and commodities since 1997. I think I have a good pulse in the market and timing turning points for investment and short-term swing traders. 2020 is an incredible year for traders and investors. Don't miss out on all of the incredible trends and trading configurations.
In our economic calendar you will find all economic events of today.
Main market strategies
Founder of Technical Traders Ltd.
>>> ATTN: CHRIS - additional diagrams: <<<
TAN daily chart (source www.tradingview.com)
TAN weekly chart
TAN monthly chart
XLE - daily chart
XLE - weekly chart
XLE - monthly chart
This article was originally published on FX Empire
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