Spotting the Breakdown: How Relative Weakness in XLF Warned of a Sell-Off

 

In the top pane I’m looking at a 5-minute chart of XLF, the financial sector ETF. Below that, I’ve got a 5-minute chart of the SPY, which tracks the S&P 500. Around 1:00 PM, something important caught my eye: while the SPY was making a new intraday high, the XLF was actually forming a lower high. That divergence immediately signaled relative weakness in the financials. Sure enough, shortly after the SPY began to roll over, the XLF didn’t just dip—it fell hard, essentially collapsing in price compared to the broader market. This setup is a classic example of how relative weakness can offer a powerful early warning. The financials weren’t keeping up with the broader market strength, and once momentum shifted, they became the first to break down. Watching sector performance in real time, especially during key turning points in the market, gave me an edge. It’s this kind of relative analysis that helps me anticipate sector-specific sell-offs before they become obvious on the broader tape.

Silver's Bullish Outlook: Undervaluation Signals Further Upside Potential

 

The chart above provides valuable insight into the relative valuation of silver compared to gold over the past two years. In the upper panel, we see a daily chart of silver, showcasing its price movement. Meanwhile, the lower panel features a ratio chart, which compares the performance of silver relative to gold. This ratio serves as a useful tool for identifying points of undervaluation and overvaluation in the silver market.

Two key lines are marked on the ratio chart: a green line, representing levels where silver is historically undervalued compared to gold, and a red line, indicating points where silver tends to be overvalued. Observing past performance, we see that when the ratio drops to the green line, silver typically rallies, as it is considered undervalued in relation to gold. Conversely, when the ratio rises to the red line, silver often peaks, signaling overvaluation.

Currently, the ratio line is climbing higher after having been in the undervalued zone near the green line. This upward movement suggests that silver has been regaining strength relative to gold, and the corresponding rise in silver’s price confirms this trend. Notably, since the ratio has not yet reached the red line, which signals overvaluation, it implies that silver may still have room to run. Therefore, we could expect further upside in the silver market in the coming weeks as the ratio continues to climb, with the possibility of silver approaching or even surpassing recent highs before reaching overvalued levels. This dynamic highlights the ongoing potential for bullish momentum in silver prices.

XOM’s Relative Strength and Potential Breakout: Tracking Oil Correlation

The daily chart of XOM, paired with Crude Oil Futures in the lower pane, demonstrates a notable correlation between the two. Historically, XOM's price movements closely mirror fluctuations in oil prices; when oil rises, XOM generally follows suit, and vice versa. Over the past six weeks, a key observation is XOM's ability to make higher lows despite declining oil prices, signaling relative strength. This suggests that XOM is outperforming oil in this downtrend. Additionally, XOM faces a defined resistance level at $120.20. Should oil prices rebound, keep an eye on XOM for a potential breakout above $120.20. Such a breakout could signal a continuation of upward momentum, presenting an opportunity for gains as XOM responds to positive shifts in oil prices.

The Dangers of Buying Stocks in a Falling Market

As someone who’s been tempted to buy stocks during a market downturn, I understand the allure of snagging what seem like bargains. But I've learned that this strategy comes with significant risks that can lead to more harm than good.

1. Catching a Falling Knife

One of the biggest dangers I've faced when buying stocks in a falling market is the possibility of prices continuing to drop. It’s often referred to as "catching a falling knife," and I've been there, thinking I’ve found the bottom, only to watch prices fall even further. Buying too soon can lead to substantial losses, and timing the bottom is incredibly difficult.

2. False Bottoms and Dead Cat Bounces

I’ve also been tricked by what’s known as "dead cat bounces"—those brief, temporary recoveries that can make it look like the market is stabilizing. I’ve jumped in during these false recoveries, thinking the worst was over, only to see prices plummet again. It’s frustrating and can lead to significant losses if I'm not careful.

3. Increased Volatility and Uncertainty

During these market downturns, I've noticed that volatility and uncertainty tend to spike. Economic data, corporate earnings, and global events can send the market into a tailspin, making it tough to figure out the true value of stocks. This environment is stressful and makes it harder to make sound investment decisions.

4. Emotional Decision-Making

I’ve also found that market downturns can really mess with my emotions. The fear of missing out on bargains or the desperation to recover losses can lead me to make impulsive decisions. It’s easy to let emotions take over, but I've learned the hard way that this usually results in poorly timed purchases and more risk.

5. Long-Term Impacts

Buying stocks in a falling market can have long-term consequences. If the market takes a long time to recover, or if I’ve picked stocks that continue to underperform, my portfolio could suffer for years. It’s not just about the immediate losses but the impact on my overall financial goals.

To avoid these pitfalls, I’ve learned to take my time, do thorough research, and keep a long-term perspective, rather than rushing into the market during a downturn.

Analyzing Relative Strength: MSTR Outperforms Bitcoin with Bullish Breakout

      Above is a weekly chart of MicroStrategy Incorporated (MSTR) and Bitcoin. In this comparison, Bitcoin's price action showed a lower low, while MSTR exhibited a higher low. This divergence is a clear indication of relative strength in MSTR compared to Bitcoin, suggesting that MSTR is outperforming Bitcoin during this period. The higher low in MSTR hints at the presence of aggressive buyers accumulating the stock, as they are stepping in to purchase shares at higher price points despite Bitcoin's decline.

Further supporting this bullish outlook for MSTR, the stock is seen breaking out, a positive technical signal that often suggests the beginning of a new upward trend. Although not depicted in the chart, an increase in trading volume accompanies this breakout. Higher volume on a breakout reinforces the validity of the move, indicating strong market interest and participation from institutional investors or large traders. This combination of relative strength, evidenced by the higher low, and the breakout with increased volume, provides a compelling case for MSTR's potential for continued upward movement. These technical factors together suggest that MSTR may continue to perform well, driven by strong buying interest and positive market sentiment.