As 2020 winds down, it seems the markets are finding direction, and pieces of the puzzle are falling into place. In the coming weeks I expect the markets to provide plenty of clues for the year ahead.
Bonds - Treasuries continue to top
Stocks - Decisively move higher
Commodities - Ready for advance
Currencies - USD finally resolves lower
Bonds
10yr. T-Note
The top forming process in the 10yr. T-Note continues. I relentlessly include this chart week after week because I believe it could provide a great trading opportunity. The overall market environment hints at higher rates, and this is the market I want to short.
TIPS
I included the chart of Treasury Inflation-Protected Securities because it glaringly points to higher interest rates. I have to listen to the fact that investors are positioning themselves for a higher rate environment. A tight consolidation forming above the 2012 highs remains bullish until proven otherwise.
HYG/LQD
I believe the Junk vs. Investment Grade Bond ratio is worthy of our attention. The chart below places the HYG/LQD ratio above SPY to display their relationship over the last ten years.
Notice a consolidation in HYG/LQD is accompanied by a consolidation in the S&P 500, highlighted by the shaded boxes. Also note that the breakouts from these consolidations took place at the beginning of a new presidential cycle, and the start of a new leg higher in equities. Exactly where we find ourselves today.
I believe that a rise in the HYG/LQD ratio is a story of higher rates and increased risk appetite, and it is reflected in US equities. But I think the key takeaways are:
We should see an increase in junk bonds relative to investment grade bonds as confirming evidence of the current market environment
The current uptrend in equities is just getting started
Stocks
GDOW
I included the Global Dow last week given that it is a diverse index of global stocks, and that it was pushing up against ATHs. This was extremely bullish for stocks worldwide.
The follow through in price action this past week builds upon that bullishness with an exclamation!
VLG
Last week I included VLA, the Value Line Arithmetic Index, which is a way of viewing the average stock value. This week I'm including the VLG, the Value Line Geometric Index, which is a way of viewing the median stock value. VLA has already broken out to all-time, weekly closing highs, and the VLG index is not far behind.
I wanted to show this chart because it is one of the few US equity indexes that did not post ATHs this past week, yet remains very constructive for higher prices.
XAL
I thought all the airlines were going bankrupt with the cruise lines. That doesn't appear to be the case. XAL had a strong breakout last week above former support turned resistance. Not bearish for airlines or stocks in general.
KOL
I chose the Coal ETF, KOL, as a proxy for the energy sector, and because of the idea that "coal is dead." Also, it belongs to one of the few sectors that did not post ATHs on the Friday close. If one of the worst components of the worst sector is finding support and approaching a 14-period RSI reading of 70, then its hard to be bearish stocks. This seems like more evidence of an environment in which stocks are going up.
XLF
The financial sector is another laggard. However, XLF is approaching a key area of resistance that acted as a breakout level prior to the March sell-off.
I have repeatedly heard J.C. Parets point out that we don't have bull markets in the US without financials. I think this is what he has been talking about.
A breakout above the 29 level would make it hard to refute the participation of financials, and would provide more evidence for the bull case in equities.
Commodities
TRCCI
Below is an equally weighted version of the CRB Index. I included this chart because it's a great overview of commodities. The TRCCI has tested overhead supply multiple times since 2015. We can expect this base to resolve higher in the current market environment. If it doesn't, it would call into question the global growth narrative.
WTI Crude Oil
Crude Oil futures followed through last week. I believe a 10-week rectangle has resolved to the upside, and that the next leg higher in Crude has begun. This also speaks volumes in regards to global growth and higher rates, while faced with the "oil is dead" narratives.
Copper
I pointed out the importance of this chart in last week's report. Copper found itself at a an inflection point, and ripped through overhead supply with strong, decisive price action to close the week. This supports everything we are seeing in global equities and interest rates. As 2020 comes to a close I get the feeling that all the pieces to the puzzle are starting to fall into place.
Gold
Interestingly, as Copper broke out to 6-year highs, Gold broke down out of its recent consolidation. I mentioned last week that the 1,850 support level on the daily chart was "sticky" in my opinion. It just seemed that price was attracted to support, and the more times a boundary is tested the more likely it will fail. That's exactly what happened.
Support now lies between the resistance zone established in '11-'12 at 1,780 and the 161.8% Fib expansion level around 1,760. If those levels are broken we could see a much deeper correction in Gold and the entire precious metals space.
Soybean Oil
I chose to narrow down the grain charts to the one I view as the leader amongst the bean complex and the grain market as a whole.
Wheat markets are still bottoming, and have been frustrating from my trading perspective.
Soybeans hover just above their 2016 highs and a key resistance zone, but have not decisively broken out of its base. While Soybean Meal remains well below its 2016 highs.
However, Soybean Oil has already broken out of its base, cleared its 2016 highs and pulled back to retest those same highs. This is a market I want to look for pyramiding opportunities in the form of flags and pennants.
Currencies
DXY
Friday's close below 92.00 has signaled a resolution to the downside in the DXY. I expect follow through next week.
EUR/USD
I have shown this chart the past few weeks, mentioning that it was a chart that I wanted to buy not sell. Last weeks price action produced a strong weekly candle and a breakout of a tight consolidation. Next stop for the Euro should be around 1.2500 and the 2018 highs.
CAD $
I continue to watch the Canadian Dollar. The fact that price has moved back into the same tight trading range from 2019, and that tests of overhead resistance have become more frequent, keep my attention. I would view a daily close above .7720 as a breakout with an initial target around .8200.
AUD/JPY
Last week's candle put in a strong close above 76.000. I view this as a breakout, but look for a swift follow through next. As noted in last week's report, this breakout confirms the risk appetite seen in global equities.
CEW
In past weeks I have included charts of the South African Rand, the Russian Rubble, the Korean Won and the Thai Baht to point out USD weakness and the likelihood of the continuation of its downtrend. The WisdomTree Emerging Currency Strategy Fund (CEW) holds all of those currencies mentioned above, as well as a number of other currencies from South America, Asia and eastern Europe.
The CEW recently broke above former support, turned resistance, after consolidating for five months. The breakout in CEW preceded last week's breakout in the DXY by almost a month, providing evidence that further USD weakness was in the cards. The CEW is a great addition in analyzing the USD and international currencies.
Crypto
Bitcoin
After testing the 2017 highs price fell back below the 161.8% Fib expansion level and found support at the 138.2% level. If the price of Bitcoin continues to decline the next significant areas of support lies at 12,330.
Ethereum
Ethereum ran into supply around the 38.2% Fibonacci retracement level and has begun to pullback. Next logical area of support stands at 418.00.
Litecoin
I think Litecoin could retest the breakout area but should find support around 65. Of course if the 65 level can not support price, then price action could continue to chop sideways and morph.
Thanks for reading! If you have any questions or comments, please feel free to contact me at ianculley@culleycharts.com
***My plan is to start posting shorter articles, more often, and to conclude the year with a larger more encompassing report. It should be fun!
DISCLAIMER: All information and opinions expressed by Culley Charts are strictly that, and should not be construed as investment advice. Market participation comes with inherent risk, and the responsibility of managing this risk lies solely with each individual investor.
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