By J.C. Parets & All Star Charts
Wednesday, 26th October, 2022
1/ The Line in the Sand for Stocks
2/ Will Internet Retail Come Back Online?
3/ Euro Shows Signs of Life
4/ The Riskiest Bonds Look Best
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1/ The Line in the Sand for Stocks
When it comes to the equity markets, few charts are more important right now than the Value Line Geometric Index (VLG).
This index represents the performance of the median stock, and is the broadest portrayal we have of the overall stock market.
As you can see, VLG is hooking back above its prior-cycle highs from two decades ago. This level not only represents where prices peaked before the dotcom and subprime mortgage crashes, but it also coincides with the June lows, making it a critical level of interest.
When we look at the momentum readings in the bottom pane of the chart, there is a bullish divergence in place as the 14-period Relative Strength Index (RSI) makes higher lows despite the lower lows in price. That divergence is being confirmed this week, as prices rally back above the June lows.
As long as price remains above the shelf of former highs, the rally in stocks could remain intact. On the other hand, if the level is violated, it could represent significant damage to the structural trend for equities.
2/ Will Internet Retail Come Back Online?
As the U.S. equity market continues to make progress in carving out a durable low, we’re noticing a growing list of indexes and individual issues finding support at key prior-cycle lows.
The Online Retail ETF (IBUY) is an excellent example of this theme. The chart below shows the performance of the fund since its inception in 2016:
Earlier in the month, IBUY hit its lowest level since the pandemic crash lows in March of 2020. On a weekly closing basis, this level also coincides with the 2018 bottom near 38. We’ve also included the weekly momentum indicator in the lower pane, which shows a potential bullish divergence in the 14-period RSI.
This could be a logical place for buyers to step in and put a floor in IBUY. With Amazon (AMZN) reporting earnings tomorrow, a big earnings beat could serve as the catalyst for a sustained rebound. On the other hand, if IBUY violates these critical prior-cycle lows, we could anticipate a fresh leg lower.
3/ Euro Shows Signs of Life
The euro has been depreciating against the dollar for most of the year, but it could be ready to finally turn things around.
Yesterday, EUR/USD violated a multi-month trendline while reclaiming a crucial level of former support-turned-resistance.
In addition, the 14-day RSI reading is breaking out of a bearish regime. The shift in both price and momentum indicates that the bulls now hold court.
If they take control, a rally in the euro could profoundly impact the U.S. Dollar Index (DXY), given the euro’s large weight within the index. And, as is typically the case, stocks could benefit from a weaker dollar.
We’re keeping our eyes on this currency pair as a falling dollar could suggest easing macroeconomic headwinds.
4/ The Riskiest Bonds Look Best
As the dollar takes a hit, U.S. Treasury yields have been falling across the entire yield curve. Short-term reversal patterns dominate the charts.
However, not all bond yields have experienced the same steep decline. Unlike Treasuries, high-yield corporate bonds have been basing for several months now.
The High-Yield Corporate Bond ETF (HYG) has broken back above its June lows, completing a multi-month inverted head-and-shoulders pattern. Momentum is also improving after printing a bullish divergence last month.
As long as HYG holds above its June lows, this could prove to be a valid reversal pattern. Under this scenario, the path of least resistance for the riskiest of bonds could be higher.
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Originally posted 26th October, 2022
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