Technical Strategy Video:
Key Takeaways
- While a short-term bottom could materialize for US equity indices this week, it’s right to expect further weakness into late January before any meaningful low is at hand
- Sector strength in Financials and Energy continues to hold markets up, creating a sloppier selloff than what would be the case if all sectors were falling at once
- Technology’s breakdown is a key factor why market indices like SPX, NASDAQ have finally begun to show more weakness like the rest of the market started back in November
Nasdaq 100’s QQQ ETF, the Invesco QQQ Trust, remains vulnerable into the back half of January, but made an impressive stand at an area that was sorely needed Monday after plummeting down under 370 early in trading, Monday. While this area is indeed important given the 10-month trendline, it’s also important to note that momentum remains quite weak right now. Moreover, Elliott-wave structure still argues for a greater than average probability for a pullback down to 358-360. Overall, Monday’s lows at 369.31 are important to hold, but bounces likely find strong resistance at 386, with 391 being also important. SPX has strong support at 4500.
Overall, while Financials and Energy have been outperforming lately, both groups are nearing channel resistance which could limit gains in the weeks to come. Given that these groups have been the driving force behind markets, while Tech has weakened, both groups are thought to be important to keep a close eye on in the next couple weeks.
Below we see Consumer Discretionary, which has taken a turn for the worse given some of the above-average weakness seen in Retailing recently, with ETSY, POOL, SBUX, ROST, NKE, TPR, UAA, ULTA all falling more than 7% in the rolling one-week period. At present, this sector has not broken down sufficiently to suggest underperformance. Yet the extent of this recent drop last week was far more than expected out of such a strong group after a great rally to finish 2021. Breaks of 190 in the Consumer Discretionary SPDR S&P ETF, or 145 in the Equal-weighted Invesco ETF, (RCD) would warn of a much bigger break in Discretionary.
Technology remains key to this entire puzzle at 28.3% of SPX. Its break last week of a one-year uptrend vs SPX makes it premature to buy dips, regardless of indices seemingly having held trendline support.
Daily charts of Invesco’s Equal-weighted Technology vs SPX show two important things, technically. First, the break in Tech vs SPX on an Equal-weighted basis did violate one-year trends (Shown in YELLOW). However, the longer-term uptrend (Shown in RED) was not broken, and thought to be more important support to watch for evidence of Technology breaking down. Until/unless this happens, weakness in Tech should be buyable into late January, and this Tech selloff remains a temporary affair, not the start of a larger decline for Tech.
Treasury yields look to have moved a bit too far, too quickly, but any pullback in US 10-Year Treasury yields would still represent a chance to sell Treasuries
In recent days, we’ve seen 30-Year yields start to stall out a bit after their run-up, while 10-Year yields exhibited a similar kind of move Monday. Meanwhile the front end of the curve continued to escalate. Thus, the broader yield curve flattened out, and I suspect this might continue to be the case in the days/weeks ahead. However, the direction for yields has gone from choppy, to bullish and any pullback in TNX in the days ahead down to 1.65-1.70% should be a chance to sell Treasuries for a push up in yields up to 2-2.10%. Given that many feel these have directly correlated with Technology withering, (and I don’t disagree) a further escalation in yields near-term likely puts further pressure on Tech. However, this might be concentrated more in Large-Cap “FAANG” names vs the high growth deterioration we’ve seen recently.
