Chart Advisor: Rate Reversal

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Wednesday, 8th February, 2023

1/ Oil Services Reclaim Key Level

2/ Brokers Reach New Heights

3/ Bonds Aren’t Stressed

4/ A Sweet Retest in Sugar

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1/ Oil Services Reclaim Key Level

Today, the Oil & Gas Equipment & Services ETF (XES) rallied over 2% to its highest level in three years.

Price is breaking out above a shelf of former highs that coincide with the 61.8% Fibonacci retracement from the 2019-2020 bear market.

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Source: All Star Charts, with data provided by Optuma

As shown above, this is a critical level of interest, marked by several price peaks over the past few years.

The fact that XES has reclaimed this key level and is pushing against new multi-year highs in an environment where crude oil and other energy commodities are lagging suggests that this group of stocks could sustain its leadership role over the coming weeks.

2/ Brokers Reach New Heights

When we look at individual stocks, Interactive Brokers (IBKR) stands out as a leader, as it recently emerged to new all-time highs.

Just as we treat Caterpillar as an industrial bellwether and Freeport-McMoRan as a behemoth for the materials sector, we look to this high-net-worth retail broker as a benchmark for the capital markets industry. It provides us with excellent information regarding the broader financial sector.

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Source: All Star Charts, with data provided by Optuma

As long as price is above 80, the path of least resistance could be higher for IBKR. This makes sense in an environment where financials are making new highs. 

If one of the largest professional brokers in the U.S. is achieving record highs, it could bode well for the overall stock market and the global economy.

3/ Bonds Aren’t Stressed

When markets are under stress, it shows in credit spreads.

The bond market is the biggest segment of the capital markets, with a total valuation approaching $120 trillion. If there’s serious systemic risk in the stock market, credit spreads will notify investors. So far, these spreads are narrowing, not widening.

Below is an overlay chart of the S&P 500 ETF (SPY) with the High Yield Corporate Bond ETF (HYG) and U.S. Treasury Bond ETF (IEI):

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Source: All Star Charts, with data provided by Optuma

Notice how these lines have moved in tandem over the trailing twelve months. When the HYG/IEI ratio is falling (and credit spreads are widening), stocks tend to come under increased selling pressure.

On the flip side, equities benefit when credit spreads contract, and that’s exactly the environment they’re in now.

With more stocks making new 52-week highs and participation expanding to last year’s laggards, stock market bears have little to support their thesis.

4/ A Sweet Retest in Sugar

The tactical approach to trading a pullback or throwback is far from easy. There’s always a tradeoff or compromise every investor must make in these situations.

It’s easier to buy on strength above a particular breakout level, rather than below.

The chart below shows bullish characteristics emerging in the price chart for sugar futures expiring in March:

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Source: All Star Charts, with data provided by Optuma

Notice the long lower shadow on yesterday’s candle, signifying strong buying pressure at a shelf of former highs. The bulls are willing to defend last month’s breakout.

Momentum also remains above 50 on the 14-day RSI after reaching overbought conditions on the recent advance. This is another bullish data point, and the type of behavior investors want to see when considering buying weakness.

Originally posted 8th February , 2023

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