By J.C. Parets & All Star Charts
Wednesday, 23rd November, 2022
1/ Will Caterpillar Follow Deere?
2/ Biotech Stocks Build a Base
3/ Bonds Pump the Brakes
4/ Decision Time for Gasoline
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1/ Will Caterpillar Follow Deere?
Deere & Co. (DE) tested its all-time highs today as the market welcomed the company’s third-quarter earnings report. The industrial machinery conglomerate reported the ultimate earnings “hat trick,” beating on revenue and earnings, while raising its forward guidance.
The chart below illustrates just how closely Deere trades with another industrial heavyweight, Caterpillar (CAT).
As illustrated by the chart, these two stocks have a very strong positive correlation. Whenever DE has resolved higher from a consolidation, CAT is usually not far behind, and vice versa.
If today’s breakout in DE proves to be a valid one, we could expect CAT to join DE on the list of new highs. This could be a bullish development for the global economy, which isn’t likely to slip into recession in an environment where these bellwether stocks are breaking out to all-time highs.
2/ Biotech Stocks Build a Base
Like many areas of the market, biotech stocks have been building a base since the summer. As such, they’ve made far more progress than most other groups.
The chart below highlights the iShares Biotechnology ETF (IBB) on the verge of resolving higher from an inverse head-and-shoulders reversal pattern.
If and when we get a decisive breakout, it could act as confirmation that these stocks have finally bottomed, and that a new uptrend is underway.
3/ Bonds Pump the Brakes
Bonds have stopped falling as many fixed-income instruments are reacting to potential support levels, whether this refers to former lows or downside extension levels.
The Vanguard Total Bond Market ETF (BND) provides a good example:
BND is bouncing off its global financial crisis lows, finding support as the 14-period relative strength index (RSI) posts a bullish momentum divergence. Notice how a bearish divergence marked a critical inflection point heading into late 2020. Two years later, we’re seeing a potential bullish divergence.
While daily momentum divergences often carry little weight, divergences on a weekly basis tend to carry more weight.
Whether bond prices catch higher or chop sideways from here could be a welcome development for stock and bond market bulls alike, as lower bond market volatility favors both asset classes.
4/ Decision Time for Gasoline
The 2018 highs remain in focus for top commodity contracts. These former highs mark prior-cycle peaks and a critical level of former resistance for many risk assets.
Gasoline futures provide an excellent example. After breaking to fresh all-time highs earlier this year, gasoline futures are retesting their 2018 highs and finding support.
If the bulls are going to step in and support a bid in gasoline, now could be the time. With price trading below a 200-day moving average (MA) and momentum currently in a bearish regime, a breakdown to fresh lows could be imminent.
If bulls can dig in and drive prices higher, it could go a long way in supporting energy stocks and commodities. On the other hand, cyclical areas of the market could come under increased selling pressure if gasoline continues to slide and violates its prior-cycle highs.
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Originally posted 23rd November, 2022
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