foxex: Lingering Fear

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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Thursday, August 20, 2020 Headlines

1. A bull market climbs a wall of worry

2. Big tech stocks notch big gains

3. Tesla closes above $2,000 per share

Market Moves

Big tech stocks took the spotlight again as the Nasdaq 100 index (NDX) closed 1.4% higher today. The S&P 500 index (SPX) also closed higher, but by only one-third of a percent, reflecting a lingering hesitation among investors. This seems corroborated by the price action on the CBOE Volatility Index (VIX) shown in the chart below. It brings to mind the old maxim that bull markets climb a wall of worry.

While the SPX (darker candles) generally rises and remains inversely correlated with the VIX (lighter candles), a subtle difference appears between these indexes over the last two trading days. The SPX stages a relatively strong rebound that takes the closing price well into the previous day's trading range. The resulting candle formation is known as a Piercing pattern. Candlestick traders consider this a short-term bullish indication.

However, the VIX ends up with a different pattern as the second (downward) candle does not penetrate below yesterday's open, even though it comes close. This pattern is less well known and is referred to as a kicker pattern. It also has a short-term bullish forecast, but in this case (being read on the VIX), it implies a downward move for the inversely correlated SPX.

The disparity between these two chart patterns likely reflects the fact that the S&P 500 is sitting near its old highs, and traders think it may struggle to go higher in the coming days ahead. The fact that no such hesitation exists with Nasdaq stocks further supports this point of view.

[NEW READER SURVEY: We are running another two-week survey of our U.S.-based readers to gauge your sentiment and see what moves, if any, you have been making with your money given the market recovery, and current economic conditions. We'll share the results, as always, and we thank you for your time and participation.]

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Big Tech Stocks Notch Big Gains

Nasdaq stocks rocketed higher today after yesterday's subdued trading. This dynamic generated a number of stocks where a bullish engulfing candle pattern emerged. The chart below revisits the ascending triangle patterns (featured in last Monday's edition of the Chart Advisor), and shows how the recent price action has progressed on the chart. This progression not only shows continuing bullish movement, but forecasts further upward trending to come.

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Tesla Closes Above $2,000 Per Share

It wasn't too long ago that Tesla (TSLA) was making a rapid run higher and two other stocks seemed to be riding its coattails: Virgin Galatic Holdings (SPCE), and Nikola Corp. (NKLA). As Tesla launched to a new high ahead of its 5-for-1 stock split, the other two stocks have remained grounded. While that could possibly change in the weeks ahead, it now seems unlikely since the stocks have shown no correlation to TSLA shares for over two months. The two laggards have lost forty percent or more from their previous highs. This likely shows that traders and investors have grown more selective about the stocks they are considering for speculation.

The Bottom Line

Stocks notched higher today with big tech companies leading the way. The Volatility Index showed signs that some investors are still nervous about the new highs made by many stocks right now. Tesla shares seem to be an exception to the rule because there appears to be no sign of hesitation in the price pattern made by enthusiastic investors.