Chart Advisor: Selloff Persists – Global equity markets are rocked by another day of selling pressure.

By J.C. Parets & All Star Charts

1/ Banks Tank

2/ China Charges Higher

3/ The Uptrend Remains Intact for Global Yields

4/ Bearish to Bullish for Bios

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1/ Banks Tank

The SPDR Regional Banking ETF (KRE) just registered its lowest weekly close since January of 2021. Not only is it trading near its lowest level in almost two years, but price is threatening to break down from a massive topping pattern.

As sellers look to send the stock below the neckline of this head and shoulders pattern, price is violating its AVWAP from the March 2020 lows, which is now intersecting the neckline. Momentum is also hitting oversold for the first time since 2020, confirming the bearish price action.

If KRE holds below this key polarity zone near 58, it may confirm a valid topping formation. Under this scenario, the path of least resistance could be lower, resulting in a leg to the downside.

2/ China Charges Higher

Today was a sea of red for global equity markets, but not for China.

While one day’s price action never constitutes a trend, the bullish momentum extends back far longer. Chinese equities have been showing impressive relative strength since bottoming back in October. They have outpaced nearly every international diversified and country-specific index over that time. Today’s action was merely a microcosm of the leadership we’ve been seeing lately.

The MSCI China ETF (MCHI) recently found support at the same level it bottomed at back in 2011 and 2016. This is polarity at its finest.

There is an even more important development taking place, which is shown in the lower pane. Not only is price digging in at a logical support zone, but the reaction off this level has been so strong that MCHI has registered a historically large momentum thrust.

At over 30%, the five-week rate of change has never been so high. Extreme momentum thrusts like this one are not uncommon in the early stages of a trend reversal. With price challenging a multi-year downtrend line, a reversal may be exactly what’s taking place. A new uptrend could be underway for Chinese stocks.

3/ The Uptrend Remains Intact for Global Yields

It’s difficult to argue U.S. interest rates are headed lower as long as they hold above their June pivot highs, particularly if yields of European developed economies are doing the same.

Below is the overlay chart of U.S. and German benchmark rates:

Both are finding support at key pivot highs from earlier this year. Given the strong positive correlation between the two, U.S. yields are unlikely to roll over while European yields catch higher.

The rising rate environment has been a global phenomenon, as benchmark European yields have surged alongside U.S. Treasury yields. We could expect U.S. yields to rebound off this key support level and move higher over the coming days and weeks.

4/ Bearish to Bullish for Bios

This week, biotechnology was one of the most attractive industry groups, with the iShares Biotechnology ETF (IBB) remaining flat while the overall market took a big hit.

When we assess biotech on a relative basis, it has been in a base-building phase since May.

The chart above shows IBB resolving higher from a bearish-to-bullish reversal pattern relative to the broader market. If and when we get a decisive resolution with some upside follow-through, we could expect the relative strength from biotech stocks to accelerate, and for these stocks to enjoy sustained leadership over the intermediate term.

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Originally posted 16th December 2022