Friday, 3rd March, 2023
By J.C. Parets & All Star Charts
1/ Strong as Steel
2/ Greenback Against Gold
3/ Bonds Bounce at Support
4/ Will Wheat Futures Trap the Bears?
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1/ Strong as Steel
Steel stocks just closed out the week at their highest levels since 2011, providing another piece of evidence that commodity stocks are taking on a leadership role.
Here is a weekly candlestick chart of the VanEck Steel ETF (SLX) breaking out of a two-year base on top of a decade-long base:
If this cup and handle pattern makes a valid upside resolution and takes out the 2021 and 2022 highs, the bias could be higher for this group of cyclical stocks.
The largest holdings in SLX include Vale (VALE), Rio Tinto (RIO), Nucor (NUE), Ternium (TX), and Cleveland-Cliffs (CLF). Steel industry stocks and other commodity subsectors such as copper and coal could outperform over the coming months.
2/ Greenback Against Gold
The U.S. Dollar Index (DXY) is chipping away at supply at the 105 level.
Whether DXY absorbs that supply and moves higher could have broad market implications, particularly for gold and other precious metals. We’ve paired an inverted DXY chart with the SPDR Gold ETF (GLD) below:
Notice how tightly these two lines track each other. The negative correlation has been very strong since last year. This is highlighted in the lower pane by a 21-day correlation indicator.
With a current reading greater than 95%, it illustrates just how big an impact DXY has on precious metals. That could remain the case over the coming months.
While risk assets could struggle if DXY kicks off a fresh leg higher, precious metals could fare even worse.
3/ Bonds Bounce at Support
The 20+ Year Treasury Bond ETF (TLT) soared over 2% in today’s session, printing an island reversal pattern.
This pattern is comprised of two gaps at roughly the same price and in both directions, leaving behind an “island.”
The logic behind this pattern is that the established trend is exhausted and likely to reverse course, with a price gap kicking off a new leg in the opposite direction.
The inflection point for TLT is 99.60. Above that level, there may be potential for price to catch a strong bid and reverse higher. However, if price falls and fills the gap, the pattern will become invalid, and the bias could be to the downside.
4/ Will Wheat Futures Trap the Bears?
Last month, beaten-down tech names experienced short squeezes as short traders were forced to unwind their positions.
We could witness similar action from wheat contracts this month. Below is a price chart of Minneapolis wheat contracts expiring in May:
Price broke down beneath a shelf of former lows last week against a backdrop of strengthening upside momentum. Despite the bearish momentum regime, the 14-day RSI profile could support a healthy bottoming process.
An explosive rally could ensue if last week’s breakdown results in a bull hook or bear trap. Failed moves can prove to be the best trades.
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Originally posted 3rd March, 2023
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