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Chart Advisor: Decision Point

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Monday, September 14, 2020 Headlines

1.Stocks stage an uncertain rebound
2. Decrease in volatility may offer hope
3. Here is an important chart to keep an eye on

Market Moves

The major indexes began the week with what looked like a strong rebound from last week’s rout. The Nasdaq 100 (NDX), the S&P 500 (SPX) and the Dow Jones Industrial Average (DJI) indexes all made significant gains, though small cap stocks showed the most dramatic movement. The Russell 2000 index (RUT) closed almost three percent higher today as investors moved money from tech names into what they perceive to be stocks with a higher reward potential.

The sentiment among investors seems to be that collectively they are on the edge of deciding the market’s future trend. But it isn’t decided yet, and two sets of charts show just how much difference is apparent in the minds of investors.

The first pair, in the chart below, shows that the price action for iShares’ Russell 2000 index ETF (IWM) has a strongly bullish rebound that closes above the high for the past several days. This is usually a bullish signal, but the chart of Invesco’s Nasdaq 100 index ETF seems to be out of step. Its lackluster move today, compared to previous days, seems to indicate that investors are reluctant to buy at higher prices on the tech-heavy index.

Decrease in Volatility May Offer Hope

The next chart (below) further reinforces the indecision that is apparent in the markets with two important bellwether assets with what would seem to be conflicting indications.

On the left is the CBOE Volatility Index for the Nasdaq 100 (VXN). This is moving lower so strongly that it seems to be a very bullish indication. However, if the Nasdaq 100 implied volatility is falling, shouldn’t the most influential stock within that index be moving strongly higher? Indeed Apple (AAPL) shares did close three percent higher today, but a quick glance shows that most of that move came over the weekend, with very little follow through during today’s session. This weakness implies more conflict than one might expect and signals ambivalence within the collective market opinion.

Here is an Important Chart to Keep an Eye On

When chart watchers see such conflicting indications, they need to look for a tie breaker of sorts. The chart below shows one such comparison that may be useful for this purpose. It is a chart comparing the Australian Dollar and the Japanese Yen currency pair (AUD/JPY) with the S&P 500 index. The correlation study below the chart shows how remarkably similar these two instruments are.

A full six weeks before the pandemic made its influence felt on markets, this currency pair, which best signifies the carry trade nowadays, began trending lower. This signal was an important early warning to the markets. So far it has not begun to move lower, but it is hugging a recent support line and could easily break lower. If it does it will signal warning.

The Bottom Line

Stocks rebounded today, and small-cap stocks rebounded more strongly than large cap stocks. This seems to set up the expectation that buyers and sellers may contend for dominance to establish a new trend one way or the other. The Australian Dollar and Japanese Yen currency pair may give an early indication about which way the broad market will soon drift.

Originally Published on September 14, 2020

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