TAKEAWAYS
- Stocks, commodities, and crypto prices soared after China announced its stimulus package, but pulled back slightly after the news.
- Metal prices are still holding strong while oil prices pulled back.
- Escalating geopolitical tensions don't seem to be impacting the stock market much at the moment.
Tuesday's news from China pushed stocks, commodities, and crypto prices higher. China's central bank, the People's Bank of China (PBOC), took steps to revive its economy and increase consumer demand. These steps include plans to cut interest rates, lower reserve requirements for banks to support lending, provide special funds to allow companies to buy stocks, lower interest rates on existing mortgages, and reduce the downpayment for second homes. This is a big move by the PBOC, and there are probably more liquidity-easing measures on the horizon.
But will these moves be enough to reignite China's economy?
The equity market soared on the news, as did commodities and cryptocurrencies. Chinese equities also saw a drastic rise. However, the excitement fizzled a little on Wednesday.
The daily chart of the iShares China Large-Cap ETF (FXI) shows that price gapped up on Tuesday, but the rally did not follow through on Wednesday.
CHART 1. DAILY CHART OF FXI. After gapping up after the China stimulus news, FXI pulled back slightly. So far, the uptrend is technically still in place. Let's see what additional stimulus China injects into their economy.Chart source: StockChartsACP.com. For educational purposes.
Will the gap get filled? It could, given this was a news-driven event. The On Balance Volume (OBV) indicator in the bottom panel trended lower on Wednesday, in line with price direction. I would watch the OBV to see if the trend continues downward. That would indicate that investor interest is waning.
Looking at a longer-term view of FXI, you can see that Tuesday's price action may be significant, in that price crossed above its 21-day exponential moving average (EMA), but it's not enough to confirm an upward trend.
CHART 2. MONTHLY CHART OF FXI. The 23.6% Fibonacci retracement level could be a potential resistance level. Watch how FXI reacts to this level in the next few weeks.Chart source: StockChartsACP. For educational purposes.
Looking at the Fibonacci retracement levels from the 2021 high to the 2022 low, FXI is at its 23.6% retracement level. This could be a resistance level to watch and see if the ETF breaks above or falls below, retracing to the $25.40 to $26.60 sideways range it was in before gapping up. Remember, more stimulus is expected from China, so perhaps investors are waiting to see what those are and whether it'll help increase demand and inject more cash into the economy.
Commodities Pause
Gold prices reached a record high on Tuesday but stalled on Wednesday. Silver, oil, and copper followed a similar pattern (see chart below). Some analysts are now saying the gold rally is exhausted, but gold prices have the potential to rise higher. I won't analyze gold price action since we covered it in an earlier post, which clearly identifies how high or low gold could go.
CHART 3: GOLD, SILVER, COPPER, AND OIL. Commodity prices rose after China's news of a stimulus package. Oil prices seem to be falling but gold, silver, and copper are holding up.Chart source: StockChartsACP. For educational purposes.
The chart of the SPDR Gold Shares (GLD) still looks strong. Out of the four, oil pulled back the most, with its relative strength at 47.10. Copper and silver are still holding on to their uptrend.
Closing Bell
The China stimulus wasn't the only major news this week. Further escalations in geopolitical tensions in the Middle East occurred despite the United States' and France's work on a peace deal. China also tested the launch of an intercontinental ballistic missile into the Pacific Ocean. The Ukraine-Russia conflict has no end in sight.
While there is some froth bubbling, the CBOE Volatility Index ($VIX) is still relatively low. And even though stocks sold off today, they're still technically bullish. On Friday, we'll get the personal consumption expenditures (PCE) price index for August. Let's see if that shifts anything.
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.
Happy charting!
