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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Monday, August 17, 2020 Headlines

1. Stock investors seek risk at the highs

2. Consumer Staples stocks poised to break out

3. Ascending Triangles show nervous investor behavior.

Market Moves

Stocks edged higher today even though investors showed signs of nervousness as the S&P 500 index (SPX) approaches its old highs. Several notable large-company stocks actually traded slightly lower on the day, but small-cap stocks rose. This dynamic leaves investors hinting that they are willing to continue taking risks even with prices at current levels.

The chart below compares two volume-based indicators. The first is a technical study known as Accumulation/Distribution (first panel below chart). The second is called the On-Balance Volume (OBV) indicator (second panel below chart). The Accumulation/Distribution study multiplies price changes by the volume, to accentuate the effect of volume on shares. It offers a quick look at whether new volume is leading prices higher.

The OBV counts up the shares traded previously and adds today's shares to a running total if the stock or index price closes higher. If the price closes lower than the day before, the OBV subtracts the newest count. This has the effect of identifying trends within the volume count itself so that chart watchers can get a hint about where prices might go next. Today's chart shows that the OBV is not breaking to new highs for large-cap stocks, but has already done so for small-cap stocks. This preference for risk shows that investors aren't ready to give up on this bull market any time soon.

[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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Consumer Staples Stocks Poised to Break Out

As stocks move to meet old highs, the impact of the U.S. Dollar appears to be a considerable factor. The chart below shows how the dollar index (DXY) seems to closely follow the timing of price movements for the Consumer Staples sector as tracked by State Street's sector index fund (XLP).

This makes perfect sense because consumer staples stocks are sensitive to inflationary influences. If the value of the dollar weakens, then the inventory held by these companies becomes more valuable and profit margins are likely to increase in the short term.

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Ascending Triangles Show Nervous Investor Behavior

The chart below shows a frequently-appearing pattern nowadays: the ascending triangle. This is a bullish continuation pattern that seems to be about 55 to 60 percent reliable as a bullish indicator. Alphabet (GOOGL), Facebook (FB), Microsoft (MSFT), and Amazon (AMZN), have all risen from these patterns in the past, but seem to be doing so now only in a hesitant manner. This is consistent with the idea that investors are looking for riskier stock for at least some of their money, because the larger company stocks seem to be slowing in their rate of increase.

The Bottom Line

As stocks notched higher, some interesting patterns have started to appear. Small-cap stocks seem to be picking up in volume while Large-cap stocks seem to be consolidating around resistance lines. This implies that investors are nervous about prices at these levels, but they still want to hunt for growth wherever they can find it.