Chart Advisor: China Charges Lower

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Wednesday, 24th May, 2023

1/ China Charges Lower

2/ Agribusiness Breaks Down

3/ All Eyes on August Highs

4/ Cracks in the Kiwi

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/ China Charges Lower

While most international equities have performed well this year, China has continued to lag.

After a nice rally from its October lows, the iShares China Large-Cap ETF (FXI) has built a topping formation all year. Today, price has succumbed to the broad selling pressure, breaking down from this short-term distribution pattern to its lowest level since November. Here’s the daily chart:

Source: All Star Charts, with data provided by Optuma

This topping formation would complete on a decisive downside resolution below the pivot lows of $27.25.

As long as we’re below this level, the path of least resistance turns downward over the short term, and we could see further downside in the coming days and weeks. A retest of last year’s lows, which remains a possibility, would represent more than 20% downside risk.

2/ Agribusiness Breaks Down

Over the past few months, money has rotated into growth stocks at an accelerating rate, whereas cyclical groups have continued to show relative weakness.

With selling pressure gripping the markets this week, the Agribusiness ETF (MOO) is resolving lower from a classic distribution pattern:

Source: All Star Charts, with data provided by Optuma

Not only is price making two-year lows, but momentum as measured by the 14-period relative strength index (RSI) is reaching oversold conditions. This means that sellers are becoming increasingly aggressive as they take out this critical level.

If the bulls do not step in and repair this damage immediately, there is a risk for significant declines in the agribusiness sector.

3/ All Eyes on August Highs

When we look at individual stock charts these days, we find ourselves discussing the August highs more and more. This is a major line in the sand, as the promise of a new uptrend lies just above these key levels for so many names.

When it comes to the indexes, it’s the same story, with the Nasdaq 100 (QQQ) currently testing its August highs as the S&P 500 (SPY) is just a stone’s throw away.

Here’s a look at the S&P 500 along with the percentage of components above their respective highs from August:

Source: All Star Charts, with data provided by Optuma

The indicator in the lower pane is simply telling us how many stocks beneath the surface are above their equivalent levels. Things haven’t been moving in the right direction for the bulls, as this indicator peaked in the first quarter and has drifted lower since.

While there is no magic number for the percentage of stocks that bulls would like to see above these former highs, it would be a bullish signal to see improvement. For market internals to confirm new highs at the index level, we would need to see an increasing number of stocks reclaim their old highs beneath the surface. Participation would need to expand if the S&P is going to move higher from current levels.

4/ Cracks in the Kiwi

The U.S. dollar takes center stage as a risk-off tone pervades the stock, commodity, and foreign exchange (FX) markets.

Check out the New Zealand dollar (NZD) pulling back to retest its Q1 pivot lows:

Source: All Star Charts, with data provided by Optuma

Unlike the British pound and the euro, the NZD failed to complete a potential reversal pattern after last year’s selloff. Instead, it has chopped sideways, never quite able to absorb overhead supply despite improving momentum.

This risk-on currency is now on the verge of printing fresh six-month lows. And those upside resolutions in the pound and euro are failing.

Currency markets suggest trouble ahead for stock market bulls. On the other hand, it’s hard to imagine the U.S. dollar rally getting far if buyers can step in and support the NZD/USD at this shelf of former lows.

Originally posted 24th May 2023

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