Chart Advisor: Back in the Box – U.S. equities rebound as every sector closes in the green.

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Wednesday, 21st December, 2022

1/ Builders Are Back in the Box

2/ Investors Run From Risk

3/ CAT Makes New Highs

4/ Beans Provide a Base

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1/ Builders Are Back in the Box

One of the main themes we’ve discussed recently is how the strongest groups and indexes still require more basing before a sustained uptrend can take place.

One way we know this is through all the new highs that have failed in recent weeks. Home construction (ITB), a recent leadership industry, is now failing and rolling over at its August highs.

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Source: All Star Charts, with data provided by Optuma

We’re seeing a similar pattern form in other indexes, from the Dow Jones Industrial Average (DJIA) to the materials and financial sector SPDRs, to biotechnology stocks. Even the strongest stocks can’t seem to resolve higher from their bottoming formations. They are failing at the summer highs, and in many cases, like ITB above, they couldn’t even achieve overbought momentum readings during their latest rallies.

This tells us more base-building could be required before these groups can enter new bull markets. More sideways and trendless price action is what we may need to be prepared for. Bottoms are processes, not events.

2/ Investors Run From Risk

Yesterday we discussed the fresh breakdown in large-cap consumer discretionary stocks (XLY), as the sector ETF plunged below a shelf of support to its lowest level since July of 2020. 

Today, we will discuss the relative trend for these stocks. Below is a ratio chart of XLY versus the S&P 500 (SPY):

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Source: All Star Charts, with data provided by Optuma

The relative trend between any two indexes is one of the main things we look for to confirm price action on an absolute basis. The reason this works so well is because during true bull markets, assets tend to outperform their alternatives. During bear markets, the opposite is true.

In the case of XLY, the relative trend supports the pattern breakdown on absolute terms, as both are making multi-year lows. These fresh lows in XLY/SPY also speak to the defensive positioning among investors right now as XLY is a risk-on group. These stocks will need to stop falling on both absolute and relative terms before we can be assured that the broader market has bottomed.

3/ CAT Makes New Highs

Shares of Caterpillar (CAT) rose roughly 2.8% today as they resolved higher from a flag pattern, reaching fresh 52-week highs.

In the lower pane, you can see the ratio between the industrial conglomerate and the S&P 500 emerging higher from a multi-year base.

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Source: All Star Charts, with data provided by Optuma

These relative trends not only act as an excellent leading indicators but also confirm the price action in absolute terms.

If the breakout in the relative trend holds, we could expect this to be a valid resolution for CAT on absolute terms as well, and price could reach new all-time highs in the near future. If that happens, it will be a major bullish development for the broader market, as CAT is a bellwether stock for the global economy.

4/ Beans Provide a Base

Energy and other pro-cyclical commodities have taken a backseat to more defensive areas of the commodity space. These defensive groups include grains, softs, and the more ambiguous precious metals.

These groups are analogous to the consumer staples or utilities sectors in the stock market. They are the ones that tend to outperform in risk-off environments.

Soybeans provide an excellent example from the grain markets. Instead of completing multi-month topping formations, soybean futures quietly carved out a tradeable low on both absolute and relative terms, as shown in the lower pane:

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Source: All Star Charts, with data provided by Optuma

We’re noticing similar patterns developing in soybean, corn, and wheat contracts, among others.

As long as inflation remains elevated, these less economically-sensitive contracts could provide the best long opportunities as we head into 2023.

Originally posted 21st December 2022

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