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By J.C. Parets & All Star Charts
Friday, 30th September, 2022
1/ Bear Flags Are Breaking Down
2/ Three Quarters in the Red
3/ Rough Times for Real Estate
4/ Commodities Reach for Support
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1/ Bear Flags Are Breaking Down
Yesterday, we discussed the bearish implications of the Dow Jones Industrial Average (DIA) consolidating below the June lows and pre-pandemic highs. Today, we’re looking at the Dow again, but with a more tactical view. Late last week, DIA printed a breakaway gap, taking out key potential support at the June lows.
Prices spent the majority of this week digesting the recent losses and coiling in a bear flag just below this critical level. During Wednesday’s rally, this former support zone was tested from beneath. After a lack of bullish follow-through yesterday, the Dow rolled over and resolved from this bearish continuation pattern today. This action suggests another leg lower for stocks could be upon us.
2/ Three Quarters in the Red
With both stocks and bonds finishing another week at new lows, it’s an appropriate time for a review of the overall environment. The chart below shows the quarterly return for both asset classes dating all the way back to 1976.
For the first time in the history of our dataset, both stocks and bonds have booked three consecutive quarters of negative returns.
As we’ve highlighted in red, it is not the first time either asset class has experienced a stretch of consecutive quarterly losses this bad. However, it is the first time that we’re seeing both of them record three straight down quarters at the same time.
This is an excellent illustration of the lack of alternatives for investors this year. As long as the dollar remains strong, we could expect this to continue.
3/ Rough Times for Real Estate
With volatility picking up in the last days of the third quarter, weakness has spread across the market, pushing many indexes and sectors to new lows.
When it comes to U.S. equities, real estate (IYR) has been the worst sector during the trailing month, crashing 13.60% to its lowest level in almost two years.
With prices back beneath the pre-pandemic and financial crisis highs, there is structural damage to the primary trend. Like real estate, many other groups look vulnerable at current levels.
As long as IYR is below the 2007 highs, the path of least resistance could be lower.
4/ Commodities Reach for Support
After months of selling pressure, the most economically sensitive commodity contracts are testing critical potential support levels.
More importantly, these polarity zones represent the prior cycle highs, marked by the 2018 peaks. If there was ever a place where the bulls needed to step in and repair the damage, this would be it.
Below is the dual-pane chart of copper and crude oil:
Both are digging in right where we could expect them to, defending those 2018 highs. Commodities and their related assets may carve out tradeable lows as long as the prior cycle highs hold. But if these levels fail, we might have to reconsider the structural uptrend in commodities and the outperformance of cyclical value sectors of the stock market.
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Originally posted 30th September, 2022
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