Chart Advisor: Big Benchmarks Lose Key Levels

By J.C. Parets & All Star Charts

Friday, 24th February, 2023

1/ Big Benchmarks Lose Key Levels

2/ Will the Dollar Follow Yields Higher?

3/ Ditch the Yield Curve

4/ Are Soybeans Next?

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1/ Big Benchmarks Lose Key Levels

The major indexes have been under increasing selling pressure this month, losing key levels as sellers inflict more damage to the tactical trend.

The Value Line Geometric Index represents the performance of the median stock and provides an excellent representation of the broader market.

As you can see, price has found resistance at its 2018 highs, which is a logical level for the latest advance to halt and reverse. That’s exactly what’s been happening.

As long as the Value Line Index is below the 595 level, stocks could remain under pressure.

2/ Will the Dollar Follow Yields Higher?

The U.S. dollar and interest rates were key themes in the markets last year. Both went on epic rallies, sending bonds and risk assets on steep sell-offs.

Today, our focus turns to a U.S. dollar rally as yields are on the rise again. Here is a dual-pane chart of the U.S. Dollar Index (DXY) and the five-year U.S. Treasury yield (FVX):

Now that the five-year yield has broken to fresh year-to-date highs, the question becomes whether DXY will follow suit.

Given last year’s strong positive correlation, these charts are unlikely to resolve in opposite directions.

If the dollar and yields keep moving up and to the right, we could expect further downside pressure for bonds and equities.

3/ Ditch the Yield Curve

The yield curve has been so deeply inverted in recent months that it’s become difficult to analyze the implications.

The overlay chart of the Consumer Staples Sector ETF (XLP) relative to the S&P 500 (SPY), alongside the two-year/10-year Treasury yield spread conveys important information:

Despite an inverted yield curve, the relative downtrend in consumer staples remains intact. Why does this matter?

Defensive leadership (from defensive sectors like consumer staples) accompanied by an inverted yield curve is often a precursor of a recession. This was the case in 2000 and late 2019.

Consumer staples have been falling relative to the broader market since December, indicating we could avoid a potential recession.

4/ Are Soybeans Next?

We shouldn’t ignore the soft commodity contracts trading on the NYMEX. Coffee, cocoa, and orange juice futures are all surging. It could only be a matter of time before sugar, cotton, and soybeans join them.

Below is a price chart of soybean futures contracts expiring in May:

Soybean futures are running into resistance at the former June 2022 highs, continuing to absorb overhead supply. If and when the bulls push prices above last year’s high, the path of least resistance could be higher.

If they do, we’re keeping our eyes on the 14-day RSI for any overbought readings above 70 to confirm the breakout.

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Originally posted 24th February, 2023