Chart Advisor: A Quiet Close – Major indices close relatively flat as the energy sector posts moderate gains.

By J.C. Parets & All Star Charts

Saturday, 31st December, 2022

1/ Getting Ready for Expansion

2/ China Flips the Switch

3/ Dollar Remains Resilient Beneath the Surface

4/ Separating the Wheat from the Chaff

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1/ Getting Ready for Expansion

Bitcoin’s volume and volatility have taken a holiday, with the biggest cryptocurrency’s monthly Bollinger bandwidth contracting to its third-lowest level in the last five years (highlighted by the blue line in the lower pane). While the lack of market action might seem appropriate this time of year, Bitcoin approaches an extreme.

Source: All Star Charts, with data provided by Optuma

As markets become more coiled and contracted, buyers or sellers are ultimately forced to step up to the line. A strong move in BTC could happen sooner rather than later as contractions in volatility on this scale often lead to expansions in price. While we don’t know what direction that will be, the resolution of this range could set the tone for the coming weeks and months.

2/ China Flips the Switch

Chinese stocks have not only soared during Q4 but are becoming more attractive on relative terms. One way to look at this is by comparing Chinese tech to top U.S. tech stocks. Here’s a relative ratio of the China Internet ETF (KWEB) versus the Nasdaq 100 ETF (QQQ).

Source: All Star Charts, with data provided by Optuma

KWEB has been working on a major trend reversal against QQQ for over a year. As you can see, the ratio is pressing against the upper bounds of its range this week.

If and when we get an upside resolution, Chinese stocks would likely outperform. However, current levels could represent a logical place for U.S. growth stocks to reclaim their leadership role. For now, we’re focusing on those relative highs from earlier this summer for clear signs of leadership.

3/ Dollar Remains Resilient Beneath the Surface

The U.S. Dollar Index (DXY) posted fresh six-month lows as the USD continues to slide. It’s a similar picture when we expand our universe to include Group of Ten (G-10) currencies. But when we look beneath the surface at our USD A/D line, it’s far more buoyant than the DXY and our G-10 currency index:

Source: All Star Charts, with data provided by Optuma

This disparity is likely due to the hardest-hit currencies—mainly in developed Europe—snapping back after steep selloffs earlier in the year. Remember, the pound retested its all-time lows! Our G-10 index and the DXY reflect those forceful mean reversions. However, more resilient currencies during this year’s USD rally, especially the commodity currencies, continue to chop sideways. If and when these currencies begin to catch higher, we could expect the dollar decline to intensify.

4/ Separating the Wheat from the Chaff

Defensive leadership is a key theme for commodities and stocks heading into the new year. When it comes to stocks, that means utilities, staples, and healthcare sectors.  The corresponding groups for commodities include agriculture and precious metals. One of our favorite defensive contracts belongs to the wheat complex. Check out the continuation chart of Kansas City wheat:

Source: All Star Charts, with data provided by Optuma

It’s a clean chart, respecting key Fibonacci levels during the past 36 months. Plus, it’s a great representative of other wheat contracts, including Chicago and Minneapolis spring wheat. All three contracts currently carve out potential bottoms below their respective October pivot highs. If and when these commodities take out those former highs, we could be in store for some explosive rallies next spring.

Originally posted 31st December 2022

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