By J.C. Parets & All Star Charts
1/ China’s Internet Sector Is Down
2/ Will BABA Hold?
3/ Key Risk Ratio Fails to Confirm Recent Lows
4/ Searching for Support
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1/ China’s Internet Sector Is Down
The Chinese Internet ETF (KWEB) has gapped down to start the week, posting a 14% decline on its way to new all-time lows.
The tech companies in this index are among the largest companies in China. Seeing these names continue to break down to new lows does not bode well for the world’s second-largest economy.
Emerging markets have had some bright spots, such as Brazil. Yet, China can’t catch a bid.
We’re keeping our eyes on the technology sector and other growth stocks for signs of similar weakness.
2/ Will BABA Hold?
Alibaba (BABA), the Chinese retail bellwether, posted a 12.5% loss today as Chinese ADRs collapsed on the heels of geopolitical headlines.
As you can see, prices gapped lower to start the week and are now testing the all-time lows from 2015, not long after the company went public in the U.S.
Gaps represent an overwhelming amount of either supply or demand entering the market at a certain level. It is not uncommon to see them occur at significant areas of interest, such as the record lows BABA tested today.
For now, the stock recovered and closed above this potential support zone. If buyers are able defend this level, it could go a long way to stop the bleeding not just for BABA, but for Chinese equity indexes and funds. There is no sign of it happening yet.
3/ Key Risk Ratio Fails to Confirm Recent Lows
Last week, we mentioned that the consumer discretionary vs. consumer staples ratio is an excellent leading indicator for the overall market at major turning points.
Zooming in on today’s trading session, XLY/XLP is showing a positive divergence as it hasn’t made a lower low, despite the S&P 500 doing so a few weeks ago.
We wouldn’t expect to see this ratio pointing higher in an environment where the stock market is about to break. In such a case, it should be trending lower, confirming the lower lows in the S&P 500.
As long as XLY/XLP continues to make higher lows, it could point to an increase in risk-seeking behavior among investors.
4/ Searching for Support
Last week, USD/JPY broke to fresh 32-year highs, surging past a key extension level to challenge its 1998 high. Friday’s volatility has spilled over into the start of the week as traders search for support.
When markets ignore critical levels on the way up, they often respect them on the way down. Notice how price surged past the 130 level during the spring, only to pull back and find support at that critical area a few months later.
Now that USD/JPY has disregarded the 147 level in similar fashion, we’re watching it closely to see if it could come into play as support following the next correction.
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Originally posted 24th October, 2022
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