A Perfect Financial Storm For The Stock Market

There are a number of reasons for investors to remain bullish on stocks, that’s for sure. The economy continues to remain open, earnings estimates are increasing, the Federal Reserve has indicated it will maintain monetary stimulus for the foreseeable future, plus tax rate cuts, and on a technical basis, the market remains in an uptrend.

If you can completely ignore the fact that most businesses are struggling, COVID is returning in some areas of the country, and that unemployment levels are extremely high, then the bullish items will make you want to own stocks.

No Matter Who Wins

As for the upcoming U.S. presidential election, I think the outlook is bullish for stocks no matter who wins.

Trump tweeted the other day from the hospital that he plans for the biggest tax rate cut ever if he wins, and higher stock market prices. If Biden wins, I feel stimulus will skyrocket at a faster pace, which would also be bullish for stocks.

COVID-19 has put a stranglehold on business and shoppers. This favors working from home which means technology and tech services will continue to be in high demand. Also, the largest tech companies like Amazon will continue to grow and pull the stock market’s value up with it.

This is the perfect storm for higher stock market prices because tech stocks have the lion’s share of market value.

BAN (Best Asset Now) Strategy

I use a proprietary relative strength strategy I call Best Asset Now (BAN), where I focus on owning the performance leaders and steer clear of the laggards. From a statistical perspective stocks/sectors that have been leading the rest of the market for three or more months have a 70% probability to continue to lead the market. In other words, stocks or sectors that have been leaders tend to lead for long periods of time. This is why I like to own leaders on breakouts or buy them during oversold dips.

Strong Relative Strength Sectors

An interesting sector that has been silently leading the way higher during the rally this year is solar power energy. Exposure to the sector can be attained through the Invesco Solar ETF (TAN) as it has outperformed every other asset and index this year. Another clean energy ETF, Invesco WilderHill Clean Energy ETF (PBW), takes second place.

You can see in the enclosed weekly chart for TAN that it has continued to progress into new trend highs even as the wider market fell into a correction over the past six weeks or so. TAN was up as much as 243.4% at its recent high of $72.60 since it hit the March swing low at $21.14.

Potential Resistance Zone – TAN

Nevertheless, in the short-term TAN may be getting extended. Even though upward momentum has accelerated since the last new trend high breakout on September 28, TAN has been up for each of the past eight consecutive days and gained almost 26% since the breakout. From the last swing low of $47.98 on September 4 the ETF has advanced over 51%. That is a healthy move in a short period of time.

Further, we have several Fibonacci levels close above, with a range from $72.47 to $76.94. This creates the first potential resistance zone.

Also, note that price just formed a narrow range doji candlestick pattern, while both the daily and weekly charts are in overbought territory based on the 14-period Relative Strength Index (RSI) indicator. The doji candle reflects a degree of indecision or consolidation within the day. A breakout higher or lower may resolve the indecision.

I should also note that short term and speculative traders have started buying and running up the stock price. Take a look at the rise in short term traders owning TAN from the RobinHood brokerage list.

The price of TAN shares in pink, and the amount of traders who own this ETF in green. The key take away from this chart is that when short-term traders are piling into an asset like we they did during February, and again now, you should expect wild price swings and some type of pullback in the near future that could last a few weeks or months.

Weakest Performer – Energy Sector

The worst performing sectors are also energy stocks heavily weighted in oil (dirty energy) as there is no demand as everyone works from home and travel is a fraction of what it once was. Also, Global X Uranium ETF (URA) which is a uranium equities ETF (also dirty energy), is the second worst performer.

The SPDR Energy Sector ETF (XLE) broke down from a large head and shoulders top reversal pattern in January of this year before it made a very rapid dive to the $22.88 low hit mid-March. That was a 63.4% drop from the last swing high (before breakdown) in December 2019, and a greater than 77% decline off the record high reached in June 2014.

Since that low, XLE retraced a little more than the first primary Fibonacci retracement level of 38.2%, before falling again to a low of $28.20, hit last week. If that low holds then XLE would have completed a 78.6% Fibonacci retracement of the prior rally (A to B).

ABCD Pattern Targets $52.25

This price behavior sets up a potential measured move or ABCD pattern – where a continuation of the initial rally started in March (first leg up) may be seen. If this happens, then the pattern would complete around $52.25. That is where the CD leg of the pattern would match the price appreciation see in the first AB leg up, thereby reflecting symmetry in price swings.

Concluding Thoughts:

In short, all the talk this year feels like its been about tech and biotechs. I hope I shed some light on a few sectors that should not be ignored. While I feel there will be some near term head winds for solar and clean energy, I feel there is a change in sentiment post COVID where people want to focus on being healthier, and to support our plant by going green.

As a technical analyst and trader since 1997, I have been through a few bull/bear market cycles in stocks and commodities. I believe I have a good pulse on the market and timing key turning points for investing and short-term swing traders. 2020 is an incredible year for traders and investors.  Don’t miss all the incredible trends and trade setups.

For a look at all of today’s economic events, check out our economic calendar.

Chris Vermeulen
Chief Market Strategies
Founder of Technical Traders Ltd.

>>> ATTN: CHRIS – additional charts:<<<

TAN Daily chart (Source www.tradingview.com)

TAN Weekly chart

TAN Monthly chart

XLE – Daily Chart

XLE – Weekly Chart

XLE – Monthly Chart