By J.C. Parets & All Star Charts
1/ Big Level for the S&P 500
2/ Stocks Catch Lower
3/ Sellers Take Europe
4/ Rates and the Dollar Tarnish Gold
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1/ Big Level for the S&P 500
With U.S. equities under pressure the last few weeks, we’re looking to potential support levels for major indexes and sectors.
The chart below shows the S&P 500 retracing back to the 4,300 level:
This area of former resistance represents the August highs from last summer and the 61.8% Fibonacci retracement, making it a crucial level of interest.
We couldn’t think of a more logical place for bulls to step in and halt the recent sell-off. After rebounding off this level to close near the highs of day on Friday, we saw bullish follow-through as the S&P snapped its four-day losing streak with a 0.69% gain.
However, if sellers regain control and price violates this critical area, investors should be prepared for further downside and increased volatility. This kind of move would invalidate the reversal pattern that was completed in June.
2/ Stocks Catch Lower
Growth stocks are trading like they just found out that interest rates are headed higher and staying there longer. While tech indexes run into key overhead supply zones following a few quarters of big gains, we think there is more to the corrective action this month.
Interest rates in the United States are threatening to resolve higher from well-defined trading ranges. When interest rates trend higher, long-duration assets like growth stocks come under pressure. Alternatively, these stocks tend to perform well when rates are falling. This is why the chart of 20-Year+ Treasury Bonds (TLT) looks so much like the Nasdaq 100 (QQQ):
From the 2021 top to the lows during Q4 of last year, these charts have tracked each other very closely, peaking and bottoming together throughout the last cycle. However, beginning in the first quarter of this year, the relationship began to diverge as stocks screamed higher despite Treasuries rolling over.
With TLT closing at its lowest level in over a decade today, it will require a much steeper stock market correction before this divergence clears itself up. While the relationship may not go back to how strong it was in recent history, we don’t see growth stocks continuing higher in an environment where rates are rallying to new heights.
3/ Sellers Take Europe
Sellers have taken control abroad.
Overhead supply is a global phenomenon within equities as more and more countries run into logical levels of resistance.
An excellent example of this theme are the United Kingdom ETF (EWU) and the Italy ETF (EWI):
As you can see, they got rejected at a shelf of former highs, halting their advance.
This tells us that they need more time to consolidate and build up the fuel before buyers absorb overhead supply at these resistance levels. Until then, we expect further sideways action overseas.
4/ Rates and the Dollar Tarnish Gold
Gold is hanging on for dear life as it barely holds above its former 2011 highs (prior commodity supercycle peak).
And from the looks of the foreign exchange (FX) and bond markets, lower may be in the cards for the shiny yellow rock.
Check out the Chinese yuan overlaid with the U.S. 30-year Treasury bond futures in the upper pane and gold futures in the lower pane:
These three markets have followed each other closely over the past two years.
The upper pane highlights a relentless U.S. dollar (via the yuan) and rising interest rates by way of falling bond prices. Both create formidable headwinds for gold.
As long as the uptrends remain intact for yields and the U.S. dollar, it’s most likely messy for longer when it comes to precious metals. But the outlook for gold appears dim if and when it trades below its former 2011 peak.
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Originally posted 21st August 2023
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