November Strategy Session: 3 Key Takeaways

November 10, 2022

From the desk of Steve Strazza @Sstrazza

We held our November Monthly Strategy Session Monday night. Premium Members can access and rewatch it here.

Non-members can get a quick recap of the call simply by reading this post each month.

By focusing on long-term, monthly charts, the idea is to take a step back and put things into the context of their structural trends. This is easily one of our most valuable exercises as it forces us to put aside the day-to-day noise and simply examine markets from a “big-picture” point of view.

With that as our backdrop, let’s dive right in and discuss three of the most important charts and/or themes from this month’s call.

1. Dethroning King Dollar

It's no secret that the relentless US dollar strength has produced severe headwinds for risk assets this year. However, there is mounting evidence that the parabolic advance in King Dollar is ending as the dollar index $DXY stalls at a logical level of overhead supply.

Atop the list of that evidence is the extreme volatility we’ve witnessed since price peaked in late September. It is not uncommon for volatility to spike in both directions at turning points in the primary trend.

In late September, DXY registered both its largest single-day gain and largest single-day loss since March 2020, which is when the dollar index last peaked.

These extreme momentum swings signal both exhaustion on the side of buyers as well as the potential initiation of a new downtrend. Last Friday, DXY experienced strong downside follow-through when it booked its worst daily performance since 2015. It's on pace for another one of its worst performances in recent history today as the index is resolving lower from a pennant formation. This action supports the initial bearish momentum thrust from September.

If today's downside resolution is a valid one (and we have no reason to think it is not), it will give us confirmation that the peak is in and a new downtrend is likely underway for the dollar. If this is the case, we expect risk assets like stocks, cryptos, and commodities to receive a much-needed boost.

2. The Most Important Charts In The World

When it comes to US equities, two of the market's most sensitive areas have successfully held their prior cycle highs since July.

We're talking about Financials $XLF and Home Construction $ITB. These groups are an excellent gauge for the health of the broader market as well as investors' appetite for risk. Usually, as they go, the market goes too.

Both of these indexes pulled back to the same levels they peaked at just before the financial crisis and have held support at these polarity zones for several months now.

As long as XLF and ITB remain above these former highs, the structural trend is intact for US equities. We're looking for a bottom to form and a new uptrend to eventually take hold off these levels. With both groups having their best single-day performance since 2020 today, maybe this is the start of it.

3. Clean Bill of Health from Dr. Copper

Copper is one of our favorite procyclical assets as it provides us valuable information on risk-seeking behavior and acts as an excellent barometer for global growth.

Last week, copper posted its best single-day return since 2009. These bullish momentum thrusts tend to precede rallies and often occur at the birth of new uptrends.

This is an incredibly bullish development as Dr. Copper is telling us the overall outlook for risk is improving. It also supports the bullish price action in the materials sector and other cyclical value areas that have been leading the market.

We think last week's momentum thrust is just what copper needs to kick off an upside resolution from the basing pattern that has formed at the 2018 highs since this summer. We want to be prepared for a new leg higher from the entire commodity complex and related equities.

Those are some of the main takeaways from this month’s strategy session.

Thanks for reading, and please let us know if you have any questions!

Allstarcharts Team