Chart Advisor: The BOJ Raises the Roof – The BOJ pivots and the yen reels as shockwaves reverberate across markets.

By J.C. Parets & All Star Charts

1/ 1, 2, 3… Break!

2/ Discretionary Takes a Dive

3/ Getting Low With Pot Stocks

4/ The Bull Flag in Deutsche Bank

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/ 1, 2, 3… Break!

Today, the Bank of Japan (BOJ) raised the ceiling on the country’s benchmark 10-year yield from 25 basis points (bps) to 50 bps. The forex (FX) market reacted with swift directional moves favoring the yen, triggering momentum thrusts across multiple timeframes.

Today’s price action from the yen raises questions regarding some of the strongest-trending markets this year, particularly the U.S. Dollar Index (DXY) and the 10-year U.S. Treasury yield (TNX).

Now that USD/JPY and DXY have decisively resolved lower after violating their respective trendlines, will the 10-year yield soon follow?

So far, U.S. yields across the yield curve continue to rise, and the same is true for developed European yields. Regardless of whether TNX rolls over in the coming days and weeks, two of the most significant trends of 2022 appear to be reversing.

2/ Discretionary Takes a Dive

The large-cap Consumer Discretionary SPDR (XLY) broke below its pre-pandemic highs around $132 today. This level has already been tested several times this year, so it’s not surprising to finally see it give way

Two of the sector’s largest component stocks, Amazon (AMZN) and Tesla (TSLA), have been weighing it down recently, as both stocks have also sunk to multi-year lows.

The recent price action in XLY provides a great illustration of how the weakest stocks are performing. We’re seeing many bearish consolidations in growth indexes resolving lower over the past few days, with several others on the brink of doing so.

It’s also concerning to see this sector break down on both an absolute and relative basis from a risk-appetite perspective. During bull markets, discretionary stocks tend to outperform, while the opposite is true during bear markets. That’s what is taking place currently, as XLY is also making new lows relative to the S&P 500.

3/ Getting Low With Pot Stocks

Cannabis stocks have been laggards during the current bear market, as they have been in a relentless primary downtrend for some time.

The Alternative Harvest ETF (MJ) is making new all-time lows today after failing to hold its September lows. This is what true laggards do, leading directional moves to the downside just as leaders lead price advances.

Momentum has remained in a bearish regime as it has not been able to reach overbought conditions since early 2021.

For now, this continues to be an area of extreme relative weakness. As long as these new lows hold, we could witness a fresh leg lower for MJ.

4/ The Bull Flag in Deutsche Bank

While the weakest stocks of the current cycle are making new lows, one of the weakest stocks over the past 15 years—Germany’s notorious Deutsche Bank (DB)—is actually breaking out to new highs.

After carving out a formidable rounding bottom reversal for the better part of this year, DB just resolved higher from a tight bull flag and reclaimed the 38% Fibonacci retracement level.

We’re looking for an overbought momentum reading to confirm these new highs in the coming days. If we get it, the breakout could stick, and we could expect another leg higher toward the 62% retracement level. Seeing one of Europe’s main pro-cyclical bellwethers enter a new primary uptrend can only be viewed as a positive for international equity markets.

—

Originally posted 20th December 2022