Innovating New Leadership

Steve Strazza
October 16, 2020

From the desk of Steve Strazza @Sstrazza

Thanks to everyone for participating in this Week's Mystery Chart. It featured a nice base breakout that had extended higher and was digesting its gains near our Fibonacci extension levels.

When we posted the chart earlier this week, price was pressing up against its most recent objective near the 423.6% extension.

We posed the following question: will price correct lower and confirm the potential bearish momentum divergence, or would momentum catch up with price and confirm it's latest all-time highs.

Your responses were overwhelmingly bullish due to the strong uptrend and momentum characteristics... and we would agree.

The mystery chart was the Ark Next Generation Internet ETF $ARKW. Let's have a look.

Its components include some of the strongest tech names in the market, so it's no surprise the ETF is outperforming as aggressively as it is. Tesla $TSLA, Roku $ROKU, Square $SQ, Facebook $FB, and Pinterest $PINS are some of the highest weightings.

These market leaders have helped propel ARKW higher as it continues to post new all-time highs this week.

The ETF has already tripled off its March lows, so we do want to approach this with a bit of caution. In terms of the bearish momentum divergence, we're not too concerned about that as it continues to print bullish readings above 70. Even if RSI is making lower lows it is still hitting overbought extremes on a regular basis. This is unequivocally bullish.

We want to be long ARKW with a 6-12 month timeframe if and only if we're above 120 with a target at 170.

In this environment, we also want to be looking for long ideas with asymmetric risk/reward profiles in its individual holdings. We've already been putting out long ideas in many of these names, but we can always dig deeper and find more opportunities.

It's also important to point out that this incredible outperformance is not just an ARK Next Gen ETF (ARKW) story, we're seeing it from just about all the ARK ETFs.

This is illustrated well in the bubble chart, below.

We dove into the outperformance from these niche ETFs in our Q4 playbook, noting that the majority of them haven't just outperformed off the March lows (x-axis) but are also very much above their Q1 highs (y-axis). As you can see, this is not something that many areas of the market have been able to achieve... at least not to the level of the ARK ETFs.

The multi-pane chart below shows a handful of these innovation-focused ARK ETFs.

These charts simply reinforce what we're seeing in the bubble chart (above). These are all very strong uptrends, and as we know, the great thing about uptrends is that they are likely to resume higher in the direction of the underlying trend.

So back to the Next Gen Internet ETF. Just how strong is ARKW? Well, it's outperforming one of the leading industry groups, the Dow Internet Index $FDN by a long shot.

Look as hard as you want, you're not going to find many ETFs that can say the same. FDN has been a secular leader for several years. The fact that ARKW has outperformed it by a mile since the March lows is an indication that this is an area we should be focused on.

As you know, we're constantly looking for leadership as well as opportunities to invest in the strongest names within the strongest areas of the market. This is definitely one of them.

Thus naturally, we want to continue to focus on this area, as well as the other ARK ETFs in the months/quarters ahead.

Do you want to invest in these leaders, or do we have this wrong? Let us know what you think.

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Allstarcharts Team

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