Yesterday’s Weak CPI Report Triggered the Biggest Day of the Year for Bulls

Here’s a look at how some exchange-traded funds fared

The rally following yesterday’s weak consumer price index (CPI) report was one of the biggest events of 2023 for equity bulls. The Dow rose almost 500 points, the S&P climbed almost 100 points and the Russell 2000 surged an eye-popping 5.44%. Below are eight exchange-traded funds (ETFs) in particular interesting setups following this mega-rally.

We start with the small caps, which have been range-bound for years. The Fibonaccis—a series of numbers in which each is the sum of the two preceding numbers—have had an extremely powerful influence, acting as either support or resistance in just the past couple of weeks. The iShares Russell 2000 ETF has rallied from one Fib (as support) to another (as resistance). The price is just about at the midpoint, which should provide a meaningful barrier to further price ascent without some important new catalyst to propel it over the midline.

IWM

The real estate fund has pushed into the pink zone defining the head and shoulders top, damaging the credibility of that pattern. The real test will come in the form of the price gap, which it has neither sealed nor exceeded. This is the one chart, incidentally, in which volume is also shown, because the extraordinary increase in volume yesterday (the highest in many, many months) is worth including.

IYR

One of the cleanest trendline-based setups is in the form of the Dow Transports, which is sporting a pitch-perfect tag of its broken trendline. That means the price has approached the line in its role as resistance instead of its former role as support. It is unlikely to go much higher.

IYT

For the past couple of years, the regional banks have had an outsized influence on market direction. Once again we have a price gap to watch—in the form of the horizontal drawn on the chart—as an important resistance barrier.

KBE

The bond market peaked about four and one half years ago, and although the rally over the past few weeks has been powerful, it does nothing to eradicate the longer-term bearish picture. The price gap here has already been sealed, and if assets are going to weaken at this point, they will probably be led by falling bond prices.

TLT

Perhaps the cleanest and most exciting setup of all these charts is in the former of the XHB homebuilders fund. Recent price action has brought it almost precisely to the apex of its already-broken wedge pattern. There could be a violent repulsion of price action from this interaction of the trendlines.

XHB

The less well-known "industrials" fund, XLI, is getting close to its own horizontal. This one constituted the base of an inverted cup-with-handle pattern that preceded the powerful sell-off earlier this year.

XLI

On a bullish note, the retail fund has been following a sinewave pattern with rare regularity, and its especially large leap on yesterday indicates how the gravitational pull of the present position in the sinewave cycle shows just how much sway this "pulse" has on prices.

XRT

Finally, the semiconductor index reached the highest point in human history, led, as always, by Nvidia. It took many months for the semiconductors to slip from the top of the range to a new low, but it took only a couple of weeks to completely undo all that damage. The key question at this point is whether semiconductors will fault above the range to more new highs. The key decision point for this is what happens with NVDA next Tuesday after the close, when it reports earnings. It’s an event that, in spite of representing just one company out of thousands, will probably move the entire market the following day.

SMH

Tim Knight, a charting analyst with 35 years of trading experience, hosts Trading Charts, a tastylive segment airing Monday-Friday. He founded slopeofhope.com in 2005 and uses it as the basis of his technical charting and analysis. Knight authors The Technician column for Luckbox magazine. 

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