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By J.C. Parets & All Star Charts
Tuesday, 2nd May, 2023
1/ Banks Break Lower
2/ Energy Is on the Brink
3/ Communicating a Change in Trend
4/ The Bigger the Base…
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1/ Banks Break Lower
Late last week, First Republic Bank (FRC) was placed under FDIC receivership, and subsequently sold to JPMorgan Chase (JPM) early on Monday. Just when it seemed the volatility in the financial sector might be behind us, another regional bank has collapsed.
And not surprisingly, we’re seeing a material reaction from the entire industry group. Here is a daily candlestick chart of the SPDR Regional Banking ETF (KRE) dating back to early 2020:
After the first bank failures in March, KRE resolved lower from a massive distribution pattern, or a head and shoulders top. The ETF followed through aggressively to the downside, before finding its footing and coiling in a bearish continuation pattern.
Continuation patterns are called as such because they tend to continue in the direction of the underlying trend. That’s exactly what we’re seeing today as KRE is down more than 6%, marking a decisive resolution from the short-term bearish pattern.
With the index now losing half its value since its highs from last year, the question is how low banks can go.
2/ Energy Is on the Brink
Last week, we mentioned that the strength of individual energy stocks has been deteriorating for some time now.
However, when it comes to the energy sector indexes, the shelf of former highs from 2018 and 2016 could be our line in the sand:
The chart above shows the Energy Sector SPDR (XLE) and the Equal Weight Energy ETF (RYE) coiling just above a critical polarity zone.
If prices hold, these structural uptrends could remain intact. On the other hand, if bears take control at current levels, we could expect selling pressure to grip the entire energy complex. This is likely to happen in an environment where crude oil and its derivative contracts are also violating their prior-cycle highs.
3/ Communicating a Change in Trend
Trends don’t usually shift from up to down, or vice versa, in rapid fashion. More often than not, there is a prolonged period of sideways, or trendless price action between the uptrend and downtrend phase.
We call this process basing. Here’s what it looks like, using the SPDR Communications ETF (XLC) as an example:
Notice how price bottomed out late last year and rallied back to the August highs before correcting back to the 200-day moving average (MA). At this time, momentum hit overbought conditions and shifted back into a bullish regime.
However, the 200-day MA was still flat or even downward-sloping at the time, suggesting more basing was likely in store for XLC. It has since tested those pivot highs twice: once in April, and again this week. While buyers have yet to force an upside resolution, more of the overhead supply at this key level is absorbed with each test. It could only be a matter of time until XLC resolves higher from this reversal pattern, setting the stage for a new uptrend.
4/ The Bigger the Base…
When it comes to big basing formations in the currency markets, it’s difficult to beat the Swiss franc (CHF):
The Swiss franc is forming a decade-long base, challenging the neckline of a potential inverted head and shoulders pattern. The path of least resistance could transition higher on a decisive breakout of this bottoming formation.
On the other hand, it could be an uncertain market until then. The U.S. dollar is likely to strengthen in an environment where the Swiss franc rolls over, producing stiff headwinds for stocks and commodities.
If and when the Swiss franc resolves higher from this long-term base, it could mark the start of a sustained uptrend that would run into the latter half of the decade.
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Originally posted 2nd May 2023
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