By J.C. Parets & All Star Charts
1/ S&P 500 Finds Support
2/ Will Industrials Hold the Line?
3/ Banks Outperform
4/ German Yields Have a Bund in the Oven
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1/ S&P 500 Finds Support
With selling pressure picking up steam since last week, our focus is shifting to identifying logical levels of support. Are buyers likely to step in and defend prices here, or are we in for further downside? These are the kinds of questions we should all be asking ourselves right now.
When we look at a short-term chart of S&P 500 futures, the current level stands out as an important one. Here is a daily chart showing price testing its June pivot highs following a few days of corrective action:
The S&P 500 stopped and reversed at this 4,500 level twice already this summer. Not only is this a well-tested polarity zone, but it also represents the anchored volume-weighted average price (VWAP) from the June highs.
Today, this former resistance area turned into support as bulls showed up and staged a rally. As long as we hold above these pivot highs, it is likely that the current dip will be bought just like the others were earlier in the year.
If, however, bears take control and we violate 4,500, we’ll be looking to last August’s highs around 4,320 as the next line in the sand. This coincides with the gap from June.
2/ Will Industrials Hold the Line?
The Industrial Sector (XLI) has the highest correlation to major U.S. averages, making it a great indicator of market health.
After breaking out of a multi-year base last month, price has been coiling in a tight pattern above the former highs.
The line in the sand lies at the $107 level for XLI:
This begs the question as to whether it will hold and price will soon catch higher, or alternatively, if this is a failed breakout in the making. In the case of the latter, sellers are likely to take control and force a leg lower.
As long as demand overwhelms supply at this crucial level, it is a bullish development for the broader market. However, if price returns to the old range, we could see the overall market come under further pressure as well.
3/ Banks Outperform
Banks were among the worst-performing stocks in the first half of the year.
However, in the past few months, we have seen some strength brewing from this critical industry group.
Money-Center Banks (KBE), Regional Banks (KRE), and Community Banks (QABA) are all reaching four-month highs after recently reclaiming the 2020 lows relative to the S&P 500:
After briefly violating a shelf of former lows, buyers reclaimed these support levels, resulting in major failed breakdowns, or bear traps.
As long as this economically sensitive group continues to outperform, it is a positive sign for the overall market, and it supports the healthy sector rotation taking place since July.
4/ German Yields Have a Bund in the Oven
Rates are rising worldwide. Inflationary pressure and bond market volatility aren’t confined to the U.S. Instead, they’re a global phenomenon.
This simple fact has proven useful. For over a year now, we have looked overseas for clues to the direction of U.S. rates, specifically in developed Europe.
And from the look of German bund yields, yields might be heading higher here at home:
The long-term German interest rate is challenging a shelf of former highs. A break above those highs places the 30-year bund at its highest level in almost a decade.
The U.S. 30-year will likely follow suit if and when its German counterpart breaks to the upside.
We are continuing to monitor the rotation into cyclical value-oriented sectors, leaning on those market areas for investment opportunities as rates rise.
However, we are less bullish about opportunities in the bond market.
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Originally posted 7th August 2023
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