There’s a technical ‘triple threat’ for stocks, but also places investors can hide
The rallies in Treasury yields, oil prices and the dollar are sending a warning to the stock market, as the S&P 500 broke below a key technical level. – Getty Images/iStock There’s a growing worry among some chart watchers that three technical strikes called last week in three different markets will set up stocks for…
The rallies in Treasury yields, oil prices and the dollar are sending a warning to the stock market, as the S&P 500 broke below a key technical level. – Getty Images/iStock
There’s a growing worry among some chart watchers that three technical strikes called last week in three different markets will set up stocks for more losses. It’s not all bad for bulls, however; there are areas they can hide out to stay in the equity game.
Even with a bit of stabilization on Friday, it was a tough week for stocks. Part of it was of its own doing, as disappointing earnings reports from Alphabet GOOGL GOOG and Tesla TSLA cast a pall on Big Tech and the artificial-intelligence trade.
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But the even bigger problems faced last week were the surges seen in crude oil prices CL00 and Treasury yields BX:TMUBMUSD10Y, as the Iran war intensified, that took them above key technical levels that appeared to confirm breakouts. That boosted the odds that the Federal Reserve will raise interest rates sooner rather than later.
But there was also a breakout for the U.S. dollar DXY that suggested a long-term uptrend was now in play. A rising dollar reduces the value of sales and profit that multinational companies earn overseas. Given that strong earnings growth has provided the fundamental fuel for stocks for the past year, anything that might drain that fuel adds to the negativity.
The following charts show what Craig Johnson, chief market technician at Piper Sandler, said formed a “triple threat” that pushed the S&P 500 index SPX below its 50-day moving average, which many chart watchers use to track shorter-term trends.
There are also some charts to indicate the sectors that may provide technical havens for those who worry about further volatility but aren’t quite ready to get out of the market altogether.
Technical ‘triple threat’
The benchmark 10-year Treasury yield, which mortgage rates are based on, surged last week above chart resistance marked by the May 19 closing high of 4.66%. Even with the slight dip on Friday, the yield ended the week at 4.68%, the highest weekly closing yield since January 2025.
– FactSet, MarketWatch
The breakout rally suggests the rising trend channel this year has entered a new bullish phase.
There’s also the breakout in WTI crude oil futures above the 50-day moving average.
– FactSet, MarketWatch
What the chart shows is that the 50-DMA, once the WTI futures climb above it, tends to provide support on pullbacks. The 50-DMA ended Friday at $84.21, according to FactSet data, while upside levels to watch start at the May highs in the $105 to $107 range.
The third threat is the ICE U.S. Dollar Index DXY, a gauge of the greenback’s strength against a basket of six major foreign currencies, has confirmed the breakout of a long-term consolidation pattern, to suggest a new long-term uptrend was starting.
– FactSet, MarketWatch
The actual breakout occurred in June. But breakouts often get tested, and the pullback the dollar saw to set support took the form of a “flag” pattern, shown below.
– FactSet, MarketWatch
Flag patterns that follow a significant trend depict a short-term consolidation of that trend, and are often resolved in the same direction of the trend that followed them.
The dollar index’s flag led to a test of support at the breakout point, and was resolved in the direction of the uptrend that preceded it to confirm the long-term breakout.
The technical triple threat has led the S&P 500 to a breakdown, below its 50-DMA.
– FactSet, MarketWatch
Piper Sandler’s Johnson sees this action warning of “a potential correction pullback occurring this summer.”
But he also sees the breakdown as creating some opportunities, as it leads to “a more defensive rotation” into sectors showing some technically bullish tendencies.
The chart below shows the State Street Energy Select Sector SPDR ETF XLE has surged above its 50-DMA, and is threatening to break out of its recent flag-consolidation pattern in the direction of the previous uptrend.
– FactSet, MarketWatch
The State Street Financial Select Sector ETF XLF looks technically strong, as it has accelerated to the upside — it reached a record high earlier this month — after support at the 50-DMA passed a big test in early June.
– FactSet, MarketWatch
Fundamentally speaking, the sector beat second-quarter earnings expectations by wide margins, and has seen the largest revenue growth rate of the S&P 500’s 11 key sectors, according data provided by John Butters, senior earnings analyst at FactSet.
And keep in mind, higher longer-term rates can provide a boost to bank earnings, as they earn more spread between long-term assets, like loans, that they fund with lower-rated shorter-term liabilities.
Piper Sandler’s Johnson also noted that the industrials XLI, utilities XLU and healthcare XLV sectors showed “relative strength above their 50-DMAs” last week.
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