Chart Advisor: Playing Defense

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Tuesday, 25th April, 2023

1/ Playing Defense

2/ First Republic Falls to a Record Low

3/ NOK/SEK Hints at Cheaper Oil

4/ Heating Oil Posts Fresh 52-Week Lows

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/ Playing Defense

Stocks finished solidly in the red today, but not all areas of the market took a direct hit. Utilities, consumer staples, and real estate withstood today’s selling pressure while the rest of the market struggled.

Defensive sectors of the stock market are turning the corner and catching higher. Here is our equal-weight index of the utilities (XLU), consumer staples (XLP), and real estate (XLRE) ETFs:

Source: All Star Charts, with data provided by Optuma

The chart looks constructive. Our index is carving out a multi-month base, and it’s violating a downtrend line. While the trendline violation isn’t necessarily a trade signal, it could imply that a potential trend reversal is underway.

To be clear, these stocks have a lot of work to do before the structural bias can turn higher. Nevertheless, defensive sectors are proving their value.

2/ First Republic Falls to a Record Low

After First Republic Bank (FRC) said it lost over $100 billion in deposits, analysts and ratings agencies overwhelmed the stock with negative reports. Shares lost half their value today, plunging to new all-time lows:

Source: All Star Charts, with data provided by Optuma

After completing a long-term distribution pattern in March, the stock plummeted almost 90% and began coiling in a bearish continuation pattern. Today, that pattern resolved lower in decisive fashion.

There is no floor for FRC at the moment. If more banks follow the path of First Republic this earnings season, we could expect the broader financial sector to follow suit to the downside. The results have been mixed so far.

3/ NOK/SEK Hints at Cheaper Oil

The U.S. dollar and yields are churning above key levels, crude oil remains resilient despite increased selling pressure, and the S&P 500 is challenging the upper bounds of a multi-month trading range.

But not all markets are trapped within a trading range at the moment. In fact, there’s one forex (FX) currency cross breaking down, suggesting lower yields and cheaper oil could be on the horizon.

Here is a ratio chart of the Norwegian krone (NOK) and Swedish krona (SEK) charted alongside crude oil futures and the U.S. 10-year Treasury yield:

Source: All Star Charts, with data provided by Optuma

The three charts appear similar, with the exception of recent breakdowns in crude oil and the NOK/SEK ratio.

The strong relationships between these markets are rooted in the Norwegian economy’s reliance on crude oil exports. So as NOK/SEK breaks to fresh 52-week lows, selling pressure could be in store for crude oil.

We still want to give crude oil and energy stocks the benefit of the doubt as long as they hold above key support levels, but we can’t deny the bearish implications outlined by the intermarket landscape.

4/ Heating Oil Posts Fresh 52-Week Lows

As evidence mounts suggesting a breakdown in black gold, crude oil isn’t receiving much help from its distillates.

Heating oil continues to fall, while gasoline futures are hugging a downward-sloping 200-day moving average (MA).

Below is a chart of heating oil futures as they print fresh 52-week lows:

Source: All Star Charts, with data provided by Optuma

It’s hard to picture crude oil finding support and catching higher while demand dwindles for refined products. This is more evidence suggesting more near-term weakness could be in store for oil and the energy sector.

Crude oil and energy stocks remain resilient, but if the underlying demand for heating oil and gasoline dries up, it could be only a matter of time before the rest of the energy space feels the effects in the form of new lows.

Originally posted 25th April 2023

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