Chart Advisor: Will Markets Follow Financials?

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Thursday, 4th April, 2023

1/ Financials Flirt With Disaster

2/ Micro Caps Lead the Way Down

3/ Cattle Futures Print New Highs

4/ Gold Challenges Its Former All-Time Highs

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/ Financials Flirt With Disaster

In yesterday’s note, we discussed the importance of the pre-financial crisis highs in the Financial Sector SPDR (XLF). This critical level of interest also acted as resistance in 2018 and early 2020. Bulls are hoping it acts as support over the coming days.

While XLF gives us a good look at what the largest and most important financial institutions in the U.S. and the world are doing, due to its cap-weighted structure, it doesn’t tell us the whole story. For a broader representation of financial stocks’ performance, we tend to use the Invesco Equal-Weight S&P Financials ETF (RYF):

Source: All Star Charts, with data provided by Optuma

As you can see in the daily candlestick chart above, RYF finds itself at a critical juncture. This ETF slipped to its lowest level in over two years today, despite recapturing about half of its losses throughout the session.

Due to the intraday recovery, RYF was able to close the day above its 2018 highs around 47.50. These former highs were also successfully tested back in March after the first string of bank failures. If bears are able to take control and force a violation of this key support zone, it could warrant a more cautious approach to the overall market. XLF is likely to break down beneath its equivalent level under this scenario.

2/ Micro Caps Lead the Way Down

With U.S. equities under pressure this week, we’re keeping close watch on the cycle’s culprits for leading evidence of further downside.

The weakest areas of the market are generally the first to break down and lead the rest of the market lower. Here is a chart of the Russell Micro-Cap ETF (IWC), representing one of the weakest areas of the market right now:

Source: All Star Charts, with data provided by Optuma

Price is not only making multi-year lows but is also undercutting its former highs from 2020.

If bears force a downside resolution in micro-cap stocks, we could expect a fresh leg lower for this group. Under this scenario, there’s a high chance that the broader market will also experience heightened selling pressure.

3/ Cattle Futures Print New Highs

Some of the strongest areas of the commodity space are running into logical areas of overhead supply. Cattle futures offer a prime example. 

Here are live cattle futures printing all-time highs last month off a key extension level:

Source: All Star Charts, with data provided by Optuma

The extension level near 175 could indicate potential resistance. Unsurprisingly, sellers have defended that level by driving prices lower in recent sessions.

While there’s nothing more bullish than new all-time highs, prices do not move in a straight line. A period of digestion after the recent rally could be a healthy and constructive development for the next leg higher in cattle futures.

4/ Gold Challenges Its Former All-Time Highs

While cattle futures enter a period of consolidation after an explosive rally, gold could be preparing to break out. 

The June contract for gold came within $4 of posting an all-time high today. Notice how price is carving out a two-year base, slowly digesting overhead supply:

Source: All Star Charts, with data provided by Optuma

This is the opposite of what we witnessed in the live cattle futures chart. Cattle futures are potentially reaching the end of an expansion phase, or run-up in price.

On the flip side, gold futures are nearing the possible end of a lengthy period of contraction or accumulation. All eyes are now on gold futures as gold bugs push toward an upside resolution.

Originally posted 4th May 2023

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