By J.C. Parets & All Star Charts
1/ Crude Oil Breaks Out
2/ What Will It Be for Yields?
3/ Overhead Supply Seizes the Russell
4/ Dollar Strength Broadens
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1/ Crude Oil Breaks Out
Energy is bringing the heat as Labor Day nears.
The Energy Sector ETF (XLE) is breaking to fresh highs. The Oil Services ETF (XES) is printing new multi-year highs. And even the crack spread is widening as demand increases for gasoline and heating oil.
But crude oil completing an eight-month reversal pattern takes the cake.
Not only is crude oil breaking to fresh eight-month highs, but it’s also resolving above an anchored volume-weighted average price (AVWAP) anchored from the June 2022 high.
The breakout above the AVWAP indicates that the bulls are now back in control of the market for the first time in over a year.
This supports our bullish energy thesis and a continuation of the stock market rotation already underway.
2/ What Will It Be for Yields?
When we look at U.S. Treasury yields, something is brewing.
As you can see, the U.S. 10-Year yield has been consolidating in a well-defined range since it peaked in October last year.
We’re asking ourselves if this is a massive top carving out or a continuation pattern that will resolve higher in the direction of the underlying trend.
We don’t know the answer, but if interest rates are going higher, we could see further selling pressure for risk assets, especially in growth and tech stocks, with potential opportunities in the most value-oriented groups.
3/ Overhead Supply Seizes the Russell
Sellers have taken control in the past few weeks as major U.S. indexes and sectors run into critical resistance levels.
The Russell 2000 ETF (IWM) illustrates this theme, as it halted its recent advance at a shelf of former highs.
This level represents the year-to-date and August highs from last year. It also coincides with the psychological barrier of $200.
Momentum, as measured by the 14-period relative strength index (RSI), has been waning lately, indicating that the bulls are tired and need a breather. The result is a potential bearish divergence as the price gets rejected at this critical level of interest.
As long as the price remains below $200, we could expect sideways action for the smaller stocks in the foreseeable future.
4/ Dollar Strength Broadens
The U.S. Dollar Index (DXY) is the most important chart in the world, again. But honestly, when is it not?
There’s no hiding from King Dollar—especially as the probability of renewed headwinds for risk assets increases with the failed breakdown in DXY.
Check out the triple-pane chart of the U.S. Dollar Index, our G-10 currency index, and the U.S. dollar advance-decline (A/D) line:
Our U.S. dollar A/D line went from failing to confirm the DXY breakdown last month to posting new multi-year highs this week.
To be clear, the level of the advance-decline line is not as important as the trend, which is undoubtedly higher.
These new highs indicate broadening dollar strength as more global currencies lose ground to a resurging USD.
Dollar headwinds are the last obstacle stock market bulls want to deal with heading into the holidays.
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Originally posted 9th August 2023
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