Chart Advisor: Bulls Stage a Bounce – Stocks rally as bond yields and the U.S. dollar retreat.

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Wednesday, 28th September, 2022

1/ Bulls Stage a Stock Market Bounce

2/ Material Weightings

3/ Commodities Complete a Top

4/ ANGL Loses Its Wings

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1/ Bulls Stage a Stock Market Bounce

Stocks rebounded across the board today, sending most of the major indexes back above their mid-June lows.

Small-cap stocks led today’s rally, holding their June lows better than most of the large-cap indexes. In fact, the Russell 2000 never broke below its June lows on a closing basis.

Source: All Star Charts, with data provided by Optuma

It’s constructive to see the major indexes back above their June lows, but the bulls would need to see upside follow-through over the coming days for confirmation that a durable low has been made.

2/ Material Weightings

We’ve been discussing the weakness in materials stocks over the past month. The chart below shows the past two years of price history within two of the sector’s largest components and index weightings.

Together, Linde PLC (LIN) and Sherwin Williams (SHW) comprise just under 25% of the index weighting of the Large Cap Materials Sector SPDR (XLB).

Source: All Star Charts, with data provided by Optuma

With both stocks completing large topping formations and breaking down to fresh lows, it could be difficult for the index to find a floor here. Materials bulls would like to see these two large weightings reverse higher and repair the damage over the coming days. If they do not, we may need to prepare for further downside.

3/ Commodities Complete a Top

The correction in commodities has been underway for some time now, as sellers have remained in full control since the summer months.

After several weeks of intense selling pressure, our equal-weight commodity index has slipped below last summer’s lows, completing a large topping formation.

Source: All Star Charts, with data provided by Optuma

Buyers would need to dig in and repair the recent damage soon. As long as prices are trapped beneath this overhead support level, the path of least resistance could be lower, and result in downside risk for commodities as we head into the fourth quarter.

4/ ANGL Loses Its Wings

The wild swings in the U.K. 30-year gilt yield tell a cautionary tale, as developed European bond markets come under increased stress.

Here in the U.S., we’re watching high-yield bonds for potential signs of trouble. A steep selloff in high-yield bonds could imply reduced market liquidity

Source: All Star Charts, with data provided by Optuma

Notice how the Fallen Angel High-Yield Bond ETF (ANGL) has a tendency to bottom with the S&P 500 (SPX) at significant turning points. As such, these fresh multi-year lows in ANGL could make a bottom for stocks increasingly unlikely. This price action also raises concerns for growing stress in the U.S. bond market.

Stock and bond market bulls alike would want to see these high-yield bonds dig in and repair the damage soon. If they don’t, selling pressure could persist for risk assets.

Originally posted 28th September, 2022

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