Chart Advisor: Stocks Hold as Crude Folds

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Thursday, 4th August, 2022

1/ The New Leaders

2/ A Big Level for Small Stocks

3/ Crude Cracks Support

4/ Clues From Commodities#

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1/ The New Leaders

Biotech continues to be among the top-performing industry groups over shorter timeframes. They were among the first groups of stocks to bottom back in May. They were also first in line to complete a reversal pattern back in June. 

Source: All Star Charts, with data provided by Optuma

This is illustrated by the double bottom in the S&P SPDR Biotech ETF (XBI) above. After digesting gains in a tight range for most of July, biotech stocks are now resolving higher once again. We think the bullish resolution from this high and tight flag could offer a roadmap for what other growth stocks and indexes are likely to do in the coming weeks and months.

2/ A Big Level for Small Stocks

With U.S. equities continuing their run higher, we’re now looking for confirmation of the recent strength. When it comes to U.S. indexes, the Russell 2000 ETF (IWM) is full of information.

After successfully retesting the 2018 highs, IWM has bounced back to a critical level of resistance. This area represents the pivot lows from February and also coincides with the AVWAP from the pandemic lows. It is also just beneath the June pivot highs around 190. Long story short, there is a confluence of price memory at current levels.

Source: All Star Charts, with data provided by Optuma

If and when buyers absorb all the overhead supply at this zone, it would be a major point for the bulls and could act as excellent confirmation of the recent rally. However, if IWM is rejected here, there could be some backing and filling back toward those prior-cycle highs near 170.

3/ Crude Cracks Support

Crude oil is resolving lower from a multi-month range and breaking to its lowest level since February. This breakdown comes on the heels of a broad commodity correction that had — until now, left the energy contracts unscathed.

Now that crude oil is joining the long list of assets that have completed significant tops, what does it mean for the energy space?

Source: All Star Charts, with data provided by Optuma

First and foremost, it indicates risks could be to the downside. Crude rolling over to fresh lows does not bode well for other energy commodities and stocks alike.

We’ve already witnessed a bout of weakness in the energy sector. Now, we’ll have to wait and see if selling pressure hits gasoline and heating oil futures.

4/ Clues From Commodities

The breakdown in crude oil is top of mind today. What better time to review crude versus gold and how their relative performances trend with interest rates?

The chart below overlays the crude/gold ratio with the U.S. 10-year Treasury yield.

Source: All Star Charts, with data provided by Optuma

Notice how both lines follow the same path. Now that this ratio is catching lower, and long-duration assets are experiencing renewed strength, what does that say for interest rates? If crude continues to underperform gold, then rates could be on the decline.

We can consider this chart as another piece of the intermarket puzzle that might suggest U.S. yields could turn lower.

Originally posted 4th August, 2022

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