Earlier today, Andrew Thrasher put out a great piece on what he believes are the most important charts to be monitoring in the current market environment. The thing I love most about Andrew’s charts? The simplicity. These charts (and his thoughts on each) are very straightforward.
One of the more growth-oriented aspects of the market right now is, of course, Technology. But within this Sector, there is a large focus on “the cloud”. As Andrew points out, “Because of the spotlight given to cloud tech, it can be a good barometer for trader’s risk appetite.” And while this area has seen a great rally so far in 2019, we are still below some key levels: one being the 200-day MA and the other being the $55-56 range that is defined below (red line). While the last couple of months have been great, we really need to get above both of these price points to see a significant move higher in broad market indices. Another important area that Andrew mentions, and probably the most talked about space in markets over the past two calendar years, is Software. As we can see below, while RSI never dipped below 30 during the Q4 2018 selloff, it also never got above 70 during the subsequent rally. On top of this, there’s been a major bearish divergence going back almost two years. From a price perspective, we are also seeing a rejection/failed breakout near all-time highs. However, from a Relative Strength point-of-view, Software remains in healthy uptrend against the S&P 500.
As mentioned above, Technology (the largest weighting in the S&P 500) is a very important Sector to watch. But almost as important are Financials. As Andrew points out, if these two areas cannot sustain an uptrend, “it’s very tough for the broad market to trade above its own [200-day MA] without them”. In fact, the last time we truly saw indices move higher with both of these below their respective 200-day MAs was 2011…and that eventually led to a correction. As of right now, Financials are still below a couple key levels shown below.Andrew also brings to our attention the relationship between “offensive” and “defensive” areas of the market, which he monitors with a custom index. Unfortunately for the “risk on” crowd, we are still below the 200-day MA, which broke down last October, in stride with markets as a whole. While not a “market timing” tool, this gives us more solid insight to “risk appetite” for participants.And what about China? I think Andrew really gives an interesting perspective on this area. As you can see from this chart, when Chinese equities move “too quickly” (measured by the 40-day slope of the rally), there tends to be a short- to intermediate-term correction around the corner. We have reached extreme levels, according to Andrew’s indicator. It seems that the market would rather see a slower march higher in price rather than quick, extended rallies. In the past, smaller, steadier gains have been more apt at producing new highs.While Andrew points out that there are many charts that can be considered “important”, the ones mentioned in his article are the areas he is specifically watching in order to gain more confidence in the move we have seen since Christmas Eve. If we do not see these charts “firm up”, then Andrew believes another leg downward could be on the horizon. We must see continued momentum in these areas for the broad rally to continue higher.