Chart Advisor: Energy Holds the Line

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Thursday, 5th January, 2023

1/ Energy Holds the Line

The energy sector gained today as the majority of the market succumbed to renewed selling pressure. Its relative strength comes as no surprise, as energy sat atop the leaderboard throughout 2022.

However, the strong uptrend for energy stocks could be in danger as price retests a trendline anchored from the 2020 lows.

2/ Buying European Banks

European financials (EUFN) have been among the best-performing industry groups over the past three months. As you can see, price recently reclaimed a critical level of interest and is pushing against six-month highs.

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Source: All Star Charts, with data provided by Optuma

We monitor this group closely, as these stocks provide vital information on global risk. If EUFN presses higher, it’s hard for us to entertain a bearish thesis for stocks. As long as investors are buying European financials, we could be entering an environment where the broad market manages to weather bouts of selling pressure.

3/ It’s Time to Look Overseas

Although international stocks have consistently underperformed their U.S. counterparts for over a decade, there is evidence that this may be changing.

With some progress in global equities as of late, we are watching for a potential reversal in the relative trend that favors international stocks in the near term. A trend reversal in this ratio also favors cyclical stocks more broadly, as relative strength from international markets highlights the benefits of reduced exposure to tech stocks.

4/ The Pound Drops

The U.S. dollar is off to a good start in 2023, with major peer currencies feeling the pressure. This is particularly true for the British pound (GBP), which is currently trading below a critical shelf of former lows at approximately $1.1963.

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Source: All Star Charts, with data provided by Optuma

If the bulls fail to defend this level soon, we could witness downside follow-through in the pound. A sustained breakdown from current levels could create a favorable scenario for the dollar, and by default, stock market bears.

On the other hand, if the pound manages to reclaim former multi-year support, risk assets could receive a reprieve from today’s renewed selling pressure. In its current position, the pound now represents downside risk as it drops below a crucial support level.

Originally posted on 5th January 2023

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