Chart Advisor: Rebound

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Monday, 27th February, 2023

1/ Tactical Levels for the S&P 500

2/ New Highs for the Two-Year Yield

3/ Looking Down on the Pound

4/ French Leadership

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1/ Tactical Levels for the S&P 500

The major U.S. equity benchmarks have experienced downside volatility in February, retracing a significant amount of their year-to-date gains.

When we look at the S&P 500 (SPX), it is bouncing off the 38.2% Fibonacci retracement of its rally from the October lows.

Source: All Star Charts, with data provided by Optuma

This level also coincides with the AVWAP from the 2022 lows, establishing a confluence of support. As such, this is a logical level for the selling pressure to pause.

From a tactical standpoint, the level to watch for is 3,928. Above this level, the bias could be higher toward the January highs. However, a violation of this area could send price to the 61.8% retracement at 3,762, or even the pivot lows from last fall.

2/ New Highs for the Two-Year Yield

The yield on the two-year Treasury note just hit its highest level since 2007.

It’s hard to argue the rising interest rate environment is behind us while the shorter end of the yield curve continues to climb.

Here is a long-term chart of the two-year yield as it closes in on 5%:

Source: All Star Charts, with data provided by Koyfin

Rising yields took their toll on risk assets last year, creating a challenging environment for stocks and bonds alike. 

While the major equity indexes are showing signs of turning the corner, fear remains elevated and the U.S. dollar buoyant. If rates make a new leg higher, it could add to the downside pressure and intermarket headwinds already in place.

3/ Looking Down on the Pound

The U.S. dollar retreated today amid a broader uptrend in recent weeks. Major global currencies have fallen lately as the dollar reasserts its dominance.

The British pound (GBP) is churning within a multi-month trading range that could easily break down:

Source: All Star Charts, with data provided by Optuma

How the pound and other currencies resolve in the coming days and weeks could foreshadow the type of environment that lies ahead.

If the dollar continues to climb, more potential reversal patterns favoring global currencies could fail. Under this scenario, risk assets including commodities, U.S. stocks, and international equities could face another bout of selling pressure.

On the other hand, an upside resolution for the pound could coincide with broad dollar weakness and a rally among global risk assets.

4/ French Leadership

International equities continue to lead and show strength on both an absolute and relative basis.

The MSCI France ETF (EWQ) provides a clear example of this, as it is breaking out and completing a decade-long base relative to the All-World Ex-US ETF (VEU).

Source: All Star Charts, with data provided by Optuma

If this base breakout holds, it indicates that French stocks could outperform over longer timeframes. This price action would also reinforce our bullish outlook for ex-U.S. stocks. This is particularly true for the developed European economies, as they continue to show broadening leadership.

Originally posted 27th February, 2023

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