By J.C. Parets & All Star Charts
Friday, 9th December, 2022
1/ Crude Cracks Through Support
2/ China Over World
3/ Silver Bugs Are Back
4/ A Bear Market Base
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1/ Crude Cracks Through Support
Prior-cycle highs often represent a critical zone of support, regardless of which asset class we’re looking at.
Crude oil futures are now undercutting their prior-cycle highs from 2018.
As of midday, crude oil was set to print its sixth consecutive down day, and is on par for its worst week since March. The lower pane highlights the one-week rate of change in price.
Bears have inflicted significant structural damage to the uptrend in crude. The question now becomes whether the selling pressure will spill over to energy stocks and commodities in general.
So far, that has not been the case. However, energy stocks could struggle as long as crude trades below its prior-cycle highs.
2/ China Over World
Chinese equities have not only soared in absolute terms, but they have consistently outperformed their international counterparts for nearly two months now.
This leadership is illustrated by the relative trend between the China Technology ETF (CQQQ) and the All Country World Index (ACWI):
As you can see, the ratio is reclaiming its all-time lows from 2012 and registering a failed breakdown as it confirms a bullish momentum divergence. As long as CQQQ/ACWI remains above this shelf of former lows, Chinese stocks could retain their leadership role among international equity markets.
3/ Silver Bugs Are Back
Few assets appreciate a falling U.S. dollar quite like silver. Silver is rising on an absolute basis and relative to gold.
The latter point is more important for gold bugs and those with a bullish bias for precious metals. A higher silver-to-gold ratio indicates a healthy risk appetite for the entire precious metals space.
The chart below highlights the silver-to-gold ratio (SLV/GLD), which is printing fresh six-month highs:
Silver often goes by the moniker “gold’s crazy cousin” since it is far more volatile than the shiny yellow rock. In a way, the SLV/GLD ratio is similar to the high beta vs. low volatility ratio. It gives us information about the risk-seeking behavior of investors.
4/ A Bear Market Base
While every large-cap sector SPDR index was lower on the week, defensive groups posted the smallest losses. It’s common for utilities and consumer staples stocks to show relative strength when the broader market is under pressure. Due to their low volatility and recession-resistant business models, these are the areas investors like to seek safety in during bear markets.
Here is a look at the relative trend between the large-cap Staples Sector SPDR (XLP) and the S&P 500 (SPY) in a weekly line chart.
The ratio is pressing on the upper bounds of a bearish-to-bullish reversal pattern as it closes at its highest level since September 2020 on a weekly basis. A valid upside resolution from this rounding bottom could suggest further leadership from consumer staples in the near future. This type of price action could be consistent with an environment where stocks and risk assets remain in downtrends.
On the other hand, if this potential reversal pattern fails at a logical resistance level, it could speak to an improving risk appetite among investors. This type of price action could suit an environment where stocks are making a durable bottom and coming out of the current bear market.
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Originally posted 9th December 2022
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