Chart Advisor: Financials Falter – The selloff in energy and cyclical assets picks up steam.

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Wednesday, 7th December, 2022

1/ Financials Falter

2/ Big Bases in Big Pharma

3/ Dollar Fights Back Against Peso

4/ Tactical Trends Favor Treasurys

Investopedia is partnering with All Star Charts on this newsletter, which both sells its research to investors, and may trade or hold positions in securities mentioned herein. The contents of this newsletter are for informational and educational purposes only, however, and do not constitute investing advice.

1/ Financials Falter

Following a nearly 20% rally off the October lows, financial stocks just registered their fifth straight day of losses. Since late last week, corrective action has gripped the market as many sectors and indexes are at logical levels of overhead supply.

The chart below shows the large-cap Financial Sector SPDR (XLF) pressing against a critical level of former support which is now acting as resistance.

Source: All Star Charts, with data provided by Optuma

This polarity zone coincides with a shelf of former lows from last year and the pivot highs from August, making this a logical place for the current rally to take a breather.

In addition, momentum has been making lower highs with each subsequent high in price. Not only is there a potential bearish divergence in place, XLF could not achieve overbought conditions to confirm the latest highs.

We’re monitoring financials to see if they can reclaim this critical level. If they do so, it could be a very constructive development for the broader market.

2/ Big Bases in Big Pharma

Healthcare stocks were a rare bright spot in a sea of red for U.S. equity markets today. When we look beneath the surface at the healthcare space, the leadership from big pharma stands out.

Here is an overlay chart of Bristol Myers Squibb (BMY) and Merck (MRK), two of the largest drug manufacturers in the United States.

Source: All Star Charts, with data provided by Optuma

Both of these mega-cap pharma stocks are sporting massive basing patterns dating back to their dotcom bubble highs of the late 1990s and early 2000s. 

The only material difference between them is that Merck has already made a decisive upside resolution and is enjoying an explosive leg higher. Meanwhile, Bristol Myers Squibb is still absorbing overhead supply at the upper bounds of its range, potentially gearing up for a similar breakout.

These two stocks are positively correlated, as both companies compete within the same industry. As such, the current rally in MRK could be a bullish datapoint for BMY, and BMY could eventually follow higher.

3/ Dollar Fights Back Against Peso

The U.S. Dollar Index (DXY) has run into a logical level of support. While DXY remains relatively flat, the dollar is bouncing higher against commodity-oriented currencies of oil-producing nations. This makes sense given the recent weakness in crude oil futures and its distillates.

The Mexican peso (MXN) provides an excellent example of this development:

Source: All Star Charts, with data provided by Optuma

The USD/MXN currency pair has reclaimed a critical level of former support after printing fresh two-year lows in recent weeks. Rapid upside thrusts, like the one that occurred recently, could indicate a potential failed breakdown.

Suppose the peso continues to rally and is joined by the Canadian dollar and other commodity currencies. In that case, a more significant risk-off tone could fuel a rebound in the dollar.

For now, dollar strength remains isolated against commodity currencies.

Bonds have rallied over the past few weeks as yields have retreated. But as we noted yesterday, other long-duration assets, such as growth stocks, have not. 

If this dislocation between long-duration assets persists, we could expect bonds to outperform the other major asset classes in the near term. So far, that’s been the case.

The stocks vs. bonds ratio (SPY/TLT) has broken down to fresh multi-month lows:

Source: All Star Charts, with data provided by Optuma

As technology and growth stocks continue to weigh on the major stock market averages, bonds have been catching a bid across the board. Long-duration Treasury bonds in particular have been leading the charge higher.

Assets that are in strong primary uptrends tend to outperform their alternatives. As such, the recent relative strength from Treasurys suggests this could be the beginning of a sustainable rally for bonds as an asset class. However, much work remains to be done on an absolute basis before we can have any conviction of a rally.

Originally posted 7th December 2022

Disclosure: Investopedia The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy.  While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described on our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy. This information is intended for US residents only.

Disclosure: Interactive Brokers

Information posted on IBKR Campus that is provided by third-parties does NOT constitute a recommendation that you should contract for the services of that third party. Third-party participants who contribute to IBKR Campus are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Investopedia and is being posted with its permission. The views expressed in this material are solely those of the author and/or Investopedia and Interactive Brokers is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to buy or sell any security. It should not be construed as research or investment advice or a recommendation to buy, sell or hold any security or commodity. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: ETFs

Any discussion or mention of an ETF is not to be construed as recommendation, promotion or solicitation. All investors should review and consider associated investment risks, charges and expenses of the investment company or fund prior to investing. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: Forex

There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.