By J.C. Parets & All Star Charts
Tuesday, 6th December, 2022
1/ Is Energy Out of Gas?
2/ Dollar Index Retests Old Highs
3/ Long-Duration Assets Diverge
4/ China Reclaims Former Lows
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1/ Is Energy Out of Gas?
Gasoline futures continue to slide. Today, they’re posting fresh 52-week lows as they slip below their prior-cycle highs from 2018.
These former highs mark a critical level of former resistance turned support, indicating risks could now be to the downside. When we zoom out, we see that gasoline’s decline started with a failed breakout earlier this year.
Notice the failed rally to new all-time highs in the above chart, peaking in June (highlighted in red).
Today’s breakdown is a continuation of that failed move, potentially kicking off the next leg lower for gasoline. This might not bode well for other energy contracts and stocks, as similar breakdowns materialize throughout the energy space.
With the bears taking control of this former leadership group, energy may warrant caution for now.
2/ Dollar Index Retests Old Highs
The U.S. Dollar Index (DXY) is running into support at a shelf of former highs. How it reacts could dictate how stocks fare heading into the end of the year.
The chart below depicts DXY futures retesting the breakout level of a massive seven-year base:
This could be a logical level for the dollar’s steep decline to pause. What follows could mean the difference between the end of another bear market rally or the ushering in of a more significant advance for risk assets.
If the principle of polarity kicks in and DXY bounces higher, selling pressure could resume for stocks. On the other hand, if the dollar slips back below support, we could expect a tailwind, or boost for risk assets worldwide.
3/ Long-Duration Assets Diverge
Bond prices have surged ever since yields peaked and rolled over in late October. Longer-duration bonds are outperforming their shorter-duration counterparts as short-term yields have been among the most resilient.
However, not all long-duration assets have enjoyed the same tailwind from yields cooling off. The chart below shows the performance of the iShares 20+ Year Treasury Bond ETF (TLT) and the ARK Innovation ETF (ARKK) over the past year:
The 21-day rolling correlation in the lower pane shows us that a positive relationship exists between these two funds. This makes sense, as speculative growth stocks, like the ones ARK invests in, perform significantly better in low interest rate environments. For these types of equities, the direction of yields tends to have an even greater impact than the direction of the dollar.
However, a notable divergence has recently formed between the two, as TLT is up over 15% while ARKK is still resting on the lower bounds of its range, threatening to make new lows. If these new highs for T-Bonds hold, we could expect ARKK to dig in and defend this critical support zone again. On the other hand, bonds could head lower if ARKK resolves this consolidation to the downside.
4/ China Reclaims Former Lows
We’ve written about the relative strength coming out of China over the past few weeks. These stocks stopped declining in October and have been moving higher in a near-vertical line ever since.
Two of the most popular ETFs for these stocks are the China Internet ETF (KWEB) and the China Technology ETF (CQQQ). As you can see, both are currently trying to reclaim a critical level of former support.
As long as KWEB and CQQQ hold above these key polarity zones, upside potential exists for Chinese equities. China is one of the most important players in the global economy. If Chinese equities can achieve a durable low and reverse higher, it could mark a very bullish development for global equities and risk assets worldwide.
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Originally posted 6th December 2022
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