Chart Advisor: Selloff Intensifies – Stocks continue to give back their gains from earlier in the week.

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Thursday, 6th October, 2022

1/ Key Lows for High Yield Bonds

2/ Telecom Tanks

3/ Bear Market Bases Fail

4/ Failure Provides Useful Information

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1/ Key Lows for High Yield Bonds

International bond markets have been on a wild ride in recent months, as a rising dollar and the Federal Reserve‘s interest rate hikes have destabilized markets abroad.

When we look at some of the riskiest bonds in the world, represented by the Emerging Markets High Yield Bond ETF (EMHY), the index just revisited its lows from the March 2020 bear market.

Source: All Star Charts, with data provided by Optuma

As you can see, EMHY first tested this key support level back in July, and successfully held it. However, after a dead cat bounce that ended in August, it fell right back to this level.

This time around, bears were able to knock prices below the former lows, but not keep them there. EMHY hooked higher this week, and is now back above the support zone. If this move holds, international bond markets could stabilize. This would be a big positive for global bond markets.

2/ Telecom Tanks

When we think about the weakest stocks and sectors of 2022 so far, the telecommunications sector is at the top of the list. It comes as little surprise that the sector would be the first to retest its March 2020 lows.

Shown below is the iShares U.S. Telecommunications ETF (IYZ) rolling over after testing its 2020 lows from below.

Source: All Star Charts, with data provided by Optuma

Momentum, as measured by the 14-period Relative Strength Index (RSI), confirmed the breakdown by printing its lowest reading since 2012 a few days ago. This means sellers became increasingly aggressive when the index violated this critical support level.

As for the relative trend, IYZ is making new all-time lows relative to the S&P 500, making it one of the biggest laggards in the market right now.

As long as we’re below the pandemic lows, the bias for telecoms could be to the downside, and we may expect further underperformance for these stocks.

3/ Bear Market Bases Fail

Defensive sectors including utilitiesconsumer staples, and other low-volatility stocks tend to outperform during bear markets, as investors flock to low-risk, high-quality assets.

This is exactly what we’ve seen since late last year, as utilities have been the second-best-performing sector in the S&P 500, behind only energy. This is illustrated in the ratio between the SPDR Utilities Sector Fund (XLU) and the S&P 500 (SPY).

Source: All Star Charts, with data provided by Optuma

If this multi-year base were to resolve higher, we could anticipate an acceleration in the outperformance from utilities. This could be accompanied by further selling pressure for the broad market.

However, we’ve seen just the opposite occur over the past few weeks. The relative trend failed to hold its breakout, and just experienced a swift move lower. The XLU/SPY ratio is now testing multi-month lows and sporting its lowest momentum reading in several years, confirming the recent price action. This is a positive development for the bulls as it could suggest a major unwinding in defensive positioning.

4/ Failure Provides Useful Information

Whether we’re discussing commodities or stocks, energy is currently synonymous with strength. The resilience of these assets has been considerable, as the sector refuses to roll over. 

Heating oil futures provide an excellent example.

Source: All Star Charts, with data provided by Optuma

After carving out a multi-month distribution formation, heating oil put in a potential failed breakdown last week. Upside follow-through above the October pivot highs could validate the move and confirm a failed top. 

This could be another clear positive for the energy bulls.

Failed patterns often yield valuable insights. If the current consolidation in heating oil turns out to be a continuation pattern, the next leg higher could be explosive.

Originally posted 6th October, 2022

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