Chart Advisor: Stocks Search for Support

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Wednesday, 22nd February, 2023

1/ Stocks Search for Suppor

2/ Europe Takes the Lead

3/ Inflationary Trends Persist

4/ Dollar Strength Broadens

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/ Stocks Search for Support

U.S. indexes are under pressure as sellers are once again in control. As a result, the S&P 500 (SPX) continues to churn below a major horizontal resistance zone near 4,100.

This level represents the 161.8% Fibonacci extension of the March 2020 pandemic crash and coincides with several key pivot highs and lows, making this a logical level for the recent advance to halt.

Source: All Star Charts, with data provided by Optuma

Bulls would like to see the S&P 500 catch higher and break through this key level of interest to confirm a new uptrend at the index level. 

However, if prices remain trapped below overhead supply, we could see further corrective action.

2/ Europe Takes the Lead

When we look at global indexes, Europe continues to stand out with a growing list of individual national benchmarks hitting new all-time highs.

Here’s the U.K.’s FTSE 100 Index resolving from a half-decade base to its highest level on record.

Source: All Star Charts, with data provided by Optuma

Because European equities have relatively little technology exposure and are heavily weighted toward cyclical stocks and asset classes, it is reasonable to see them leading to the upside.

This kind of relative strength speaks to broadening participation overseas and indicates we could be in for a major leadership change that favors ex-U.S. stocks.

Breakeven inflation rates and cyclical assets such as crude oil refuse to break down.

Here is an overlay chart showing the 10-year breakeven inflation rate and crude oil futures finding support at their prior-cycle highs. 

Source: All Star Charts, with data provided by Optuma

It’s difficult to make a bearish case for commodities or argue inflation is behind us as long as these charts hold above their respective 2018 peaks.

If these former highs hold, we could witness renewed strength from cyclical assets and international equities.

On the flip side, a breakdown in either of these charts could signal trouble for cyclical assets and the inflation trade in general.

4/ Dollar Strength Broadens

The U.S. Dollar Index (DXY) is printing fresh one-month highs amid choppy market conditions.

The triple-pane chart below of the DXY, the inverted view of our G-10 currency index, and our U.S. dollar advance/decline (A/D) line could reveal important information:

Source: All Star Charts, with data provided by Optuma

Dollar strength has broadened in recent weeks, as evidenced by the new year-to-date highs in the dollar A/D line in the lower pane. Currencies worldwide are beginning to slide against a dollar bid, even though the DXY has yet to reach respective levels.

Our U.S. dollar A/D line is comprised of 29 currency pairs, and is not limited to major currencies such as the pound, euro, and yen. When viewed this way, the outlook would appear quite bullish for the dollar.

Originally posted 22nd February, 2023

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