Chart Advisor: Commodities Kick It Into Gear

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By J.C. Parets & All Star Charts

Monday, 9th January, 2023

1/ Copper Clears a Major Hurdle

2/ A New Direction For Consumer Discretionary Stocks

3/ Social Media Snaps Back

4/ A Renminbi Recovery Favors Risk

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1/ Copper Clears a Major Hurdle

After Friday’s delayed Santa Claus rally, copper futures are reclaiming a critical shelf of former lows as futures reach their highest levels since June of last year.

Source: All Star Charts, with data provided by Optuma

It’s hard to decipher today’s price action as anything but bullish for commodities, stocks, and risk assets in general.

From a tactical perspective, copper is still messy as it trades back within a broad range. Nevertheless, it’s hard to make a bearish argument above $4.00. With signs of risk appetite returning, this move could have legs.

2/ A New Direction For Consumer Discretionary Stocks

A few weeks back, we discussed the bearish resolution in the Discretionary Sector SPDR (XLY). After violating its pivot lows and pre-pandemic highs, we were anticipating a downside reaction, but it never came.

Fast forward to today, and XLY is retesting this key level from below, threatening a bull hook and a potential upside reversal.

Source: All Star Charts, with data provided by Optuma

As long as XLY is above 133, the risk could be to the upside for discretionary stocks. Despite the weakness in major components like Tesla (TSLA) and Amazon (AMZN), the sector is still holding up on a cap-weighted basis. When we combine this with the fact that bears can’t take down the weakest indexes, these are very bullish developments and could support an environment where stocks have bottomed.

3/ Social Media Snaps Back

Social media stocks have been among the weakest industry groups during the current market cycle. But recent price action suggests those days are well behind us now.

As you can see in the chart below, the Social Media ETF (SOCL) has soared over 20% in the last three months, reaching its highest level since August.

Source: All Star Charts, with data provided by Optuma

While bulls still have a lot of work to do, the fact that we’re seeing these stocks catch a strong bid is an optimistic signal for equities and risk assets in general.

4/ A Renminbi Recovery Favors Risk

Emerging market currencies are taking advantage of the weaker dollar, from the Thai baht to the Chilean peso. Another excellent example is the Chinese yuan renminbi (CNY), gaining over 5% over the trailing three months.

Besides revealing broad U.S. dollar weakness, a stronger yuan tends to favor risk assets, especially U.S. stocks. Below is an overlay chart of the S&P 500 ETF (SPY) and the CNY/USD exchange rate:

Source: All Star Charts, with data provided by Optuma

Notice how the mid-summer rally in SPY was followed by strong selling pressure as CNY/USD continued to slide lower. Fast forward to today, and it is a very different story. The yuan is climbing to fresh four-month highs as the S&P 500 attempts to carve out a higher low. As long as emerging market currencies such as the yuan continue to trend higher, risk assets could stand to benefit.

Originally posted 9th January, 2023

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