LI - Under The Radar Strength In Commodity And Emerging Market Stocks (Technical Analysis)

2023-06-18 10:31:30 ET

Summary

• Emerging markets and commodities are showing strength amid a weak USD, which has a historical negative correlation with these sectors.
• Risk-on currencies like the Australian Dollar and Canadian Dollar have broken out against the USD, providing a supportive backdrop for emerging markets and commodities.
• If the USD breaks below its support, it could lead to a further decline, potentially triggering powerful uptrends in commodity and emerging market stocks.
• Emerging market stocks are breaking out higher - including China Technology, Latin America, and even Argentina.

After a data-filled week (US CPI, FOMC), we can now take stock on the technical picture of the markets. Overall, despite looking a little extended, the uptrends in multiple sectors continue to look healthy.

Emerging markets and commodities setting up for move higher

I am intrigued by the strength in emerging markets (including China) and commodities. The USD concluded the week on a weak note; this is key as the USD historically has had a negative correlation against emerging markets and commodities (weaker USD = stronger EM, stronger commodities).

From the daily chart of the Dollar Index below, we can see that the USD is now trading below its key moving averages (10, 20, 50, 200 day). It looks on course to test the 100–101 supports, and if those break, the USD could begin its next leg lower.

Daily Chart: Dollar Index

Risk-on currencies are also looking constructive against the USD, which provide a healthy backdrop for emerging markets and commodities to advance. Here is the Australian Dollar, which has broken out higher from a multi-month base against the USD. The Australian Dollar has positive correlations with copper prices , iron ore prices , and China stocks .

Daily Chart: AUD/USD

The Canadian Dollar, which has a high positive correlation with oil prices , given that Canada is a large oil exporter, has broken out against the USD.

Daily Chart: USD/CAD

Within the commodity equity space, I am watching copper miners ( COPX ) closely. I think copper miners look better than their commodity peers - steel miners ( SLX ), as well as oil & gas stocks ( XOP ) ( XLE ) (XOP) ( OIH ) ( FCG ). I like that copper miners have been building a base for 2 years, and price has risen above the key weekly moving averages.

Weekly Chart: COPX

China technology ( KWEB ) has broken out above downtrend resistance that has contained prices since January. I am watching to see how the sector holds up during its next pullback.

Daily Chart: KWEB

Pinduoduo ( PDD ) is one of the stocks I hold in this space. The stock broke out higher from a mini base after beating earnings. I went long at 76.91 (green line), with a stop at 70.90 (red line), and have since trimmed a third of my position.

Daily Chart: PDD

Here is NetEase ( NTES ), another leader within the China technology sector. The stock has broken out higher from a multi-month base.

Daily Chart: NTES

Li Auto ( LI ) is not a technology stock, but is another leader within the China space. It broke out from a multi-month base after its recent earnings beat back in May. Since then, the stock has been trending higher, and has benefited from another catalyst this week, which showed new highs on its weekly sales numbers. I went long at 29.41 (green line), and have since moved my stop to breakeven. I have reduced my position by a quarter.

Daily Chart: LI

Vipshop ( VIPS ) is another leader within the China technology space. Notice how the stock was going sideways when the sector was selling off, and then breaking out higher from this range ahead of its peers. I took a long position at 17.99 (green line), after Powell's speech this week.

Daily Chart: VIPS

Away from China, other emerging markets are also seeing strong momentum. Argentina ( ARGT ) (surprise, surprise...) has been a strong outperformer this year, and recently broke out from a large base.

Daily Chart: ARGT

Latin America ( ILF ) has broken out from a large multi-month base.

Daily Chart: ILF

Overall, this week's big economic events have led to a pullback in the USD, which is now vulnerable to another 1.5% drop before it meets with supports.

While the market's attention has been on the resurgence in AI, semiconductor, and technology stocks, the recent weakening in the USD has coincided with strength in commodity and emerging market stocks. Arguably, this has gone under the radar.

Commodity stocks have gone sideways for months, and China stocks are on the cusp of coming out from one of its most painful bear markets. I believe that if the USD breaks below its supports, it would pave the way for its next leg lower. Concurrently, commodity and emerging markets could transition into powerful uptrends.

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