Douglas Busch

Discretion Advised? With recession chatter fading, the XLY:XLP ratio chart shows one of the possible reasons why (I thought the FDX whiff on Friday would heighten it). Notice the last 2 weeks showing strength for discretionary over staples as it powerfully broke above a downtrend. Perhaps one would say that is overwhelming because of the resurgence of AMZN and TSLA. And they would have a valid argument as the XRT is still within a downtrend (notice on the PRICE charts at the bottom here the smooth uptrend over the last 6 months while the XRT trades wide and loose). One has to also keep in mind that the XLP is waterlogged at the top as well with the top 4 holdings in PG COST WMT and KO combining for more than 50% of the ETF. Each of those names are well above both their 50 and 200-day SMAs and in nice uptrends. Getting back to the XLY, TSLA on its WEEKLY chart now sports a bullish inverse head and shoulders formation with a neckline of 260 that I think will be touched in Q4 (since last October it was above that 260 trigger intraweek 4 times, but zero CLOSED above it). A break above the pivot carries a measured move to 380. Give AMZN credit for a strong CLOSE Friday as many market participants faded, and a CLOSE above the 190.70 double bottom pivot. Expect a gravitational pull to the very round 200 number in October, and these two should provide the fuel for the continuing XLY:XLP advance.

Biotech Likes Falling Interest Rates Too:  Of course, we know precious metals enjoy falling yields but biotech does as well. A vast majority of these names rely on financing to keep their businesses afloat. Notice on this PRICE overlap chart how since the 10-year yield started falling in late April the XBI responded with an uptrend (notice the bullish ascending triangle on the bottom of the chart for the XBI against the IBB indicating a healthy appetite in the space). With the big 50-point cut Wednesday this group may be getting the fuel it needs to get over this stickiness to the very round par number. We have been highlighting this on the MONTHLY chart, and one can see why on the chart below which we also posted a few weeks back. It is looking for its first 5-month win streak since 2015, and looking for its second straight MONTHLY CLOSE above the 50 MONTH SMA and back-to-back bullish hammer candles. The WEEKLY chart is attractive too as it could be ready to break above a bullish ascending triangle (notice how at the lows of the pattern is recorded a bullish harami cross (doji week ending 4/26). The daily chart sports an inverse head and shoulders, although they often are spotted near lows, and a move above the 102 neckline here carries a measured move to 113.

Worn Out "Socks": The semis have been lagging and will there be some more softness before things get better? The MONTHLY chart of the SOXX below displays some exhaustion candles, notably the doji in August which had a nearly 50 handle range top to bottom. That is indicative of toppy action with very volatile behavior. The WEEKLY chart confirms this theory with 5 of the last 9 weeks moving up or down more than 9% on a CLOSING basis (three up and two down), right after the bearish shooting star candle the week ending 7/12 at all-time highs. There is a real tug-of-war going on beneath the surface. The ETF is now right on the arbitrary definition of a bear market down nearly 20% from that mid-July peak. Notice too on the WEEKLY chart the back-to-back touches of the 50 MONTH SMA in early August and September, too soon in my opinion as this should have launched off this secular line like it did last October with a bullish engulfing candle (only other touch of the line since Q1 2023). The technical damage still needs to be worn off and top holding plays in AVGO and NVDA which make up 20% of the fund are floundering a bit (NVDA and AVGO making lower highs since June). With the IGV holding the baton (we wrote about this in our 7/8 Technology Note) in tech as the semis try to get their act together, they recorded a bearish dark cloud cover and doji candle 2 of the last 3 days. The semis need to step up here.

Washed Out: Energy is a group whose sentiment is so low now it seems like no one is talking about it. Usually, this is a time to take a deep dive into an industry to see what is taking place, for me through a technical lens. I have used this chart in the past from Novel Investor and notice how for the last 10 years the sector has either finished atop the major S&P sectors or in the cellar (twice it was 10th out of 11 in 2017 and 2023). At what point do salty traders start looking toward 2025 for a possible rebound toward being the best like it accomplished in 2016, 2021, and 2022, or will it be a dog once again? The XLE has already surpassed its average decline in September of close to 4%, and could be looking forward to a traditionally strong performance in October and November, easily its best consecutive gains over the last 4 years. Looking at the XLE WEEKLY chart we can see it has lost its 50-WEEK SMA but each time since March 2023 (in squares on the chart) it has quickly recaptured it after keeping in close proximity to it (each time fell below it in the 3-5% neighborhood before rebounding). The WEEKLY ADX signal line is now starting to curl higher (circled on the chart) which has been accurate in having the fund move higher in PRICE since October 2022, sometimes powerfully so. A move above 88 would put a double bottom base with a 94.61 pivot in focus into year-end.