Technical Strategy Video:
Key Takeaways
- Equity bounce ongoing, but has begun to lose some strength given Small and Mid-caps dropping, Transport weakness while Discretionary and Healthcare fell on Wednesday.
- Hot CPI print brought about a big drop in the US Dollar, while Commodities like Natural Gas, and Copper staged big breakouts to join recent strength in WTI Crude. Near-term, this decline in DXY looks to be close to intermediate-term Trendline support
- Emerging markets nearing key levels as EEM rallies up to its intermediate-term trendline resistance, while China, India have strengthened further. Not as much participation lately out of Latin America, nor South Korea. China looks increasingly more attractive
S&P’s bounce since Monday has stalled out after two Equal-wave bounces which were perfectly equal at 4741. It’s thought that this week’s bounce is nearing completion, yet we’ll need to see evidence of this reversing to expect any decline is getting back underway. Two key areas to pay attention to: 4706, and then 4673, representing the highs of the first push up off Monday’s lows. Undercutting this would lead back down to a retest of Mondays lows. On the upside, 4758 is key which represents the lows of the initial churning heading into 2022. (1/3/22 lows)
Wednesday’s “Hot” CPI print led the US Dollar sharply lower, which spurred on gains in both Emerging market stocks as well as Commodities. While this looks to be a likely outcome for 2022 as a whole, this minor pullback doesn’t yet look to be that meaningful technically.
As an hourly chart from mid-November shows below, this pullback looks to be hitting areas of importance near 95 which likely could spur on some support in DXY and an upcoming turn back higher. Given that the US Dollar pushed sharply higher in September and also November which directly correlated with US Stocks moving lower, keeping an eye out for a Dollar reversal looks important after this pullback to support.
Emerging markets (EM) have come alive, though similar to the US Dollar, charts of EEM show this recent move nearing important levels.
Much of this EEM 0.44% move (Ishares MSCI Emerging Index Fund) has been gains in India recently, Taiwan, and more recently, a serious bottoming attempt out of China. Meanwhile, areas within the LatAm space like Brazil remain laggards, and the ILF has barely budged after having trended down in recent months. South Korea also has not shown the kind of strength that might be expected on a potential start of a meaningful move higher in EM. Furthermore, Russia also, while normally apt to follow the move in Crude oil, has fallen on hard times in recent months, dropping more than 20% over the last couple months since peaking in late October.
Overall, I feel that Emerging markets could be bottoming. However, determining the best way to play this will prove tricky without much evidence of many of the key EM countries starting to strengthen. As discussed, China looks appealing and specifically, Chinese Technology KWEB 0.16% , which is similar to FXI 0.58% , has shown some initial evidence of trying to bottom out.
Commodity breakout might prove short-lived given momentum nose-diving
The Thomson Reuters/Jefferies CRB index has managed to break back out to new yearly highs this week on recent US Dollar weakness. Much of this has been spurred on by Energy lately, while during Wednesday’s session, commodities like Natural Gas and Copper made above-average breakouts. Moreover, Lumber has risen about 176% off its August lows in the last five months, while even Precious metals have bounced of late, but appear still like laggards.
Importantly, if my thesis on an upcoming bottoming out in the US Dollar materializes between now and February, along with EEM hitting resistance, it looks likely that Commodities might not show the immediate kind of follow-through that many are expecting given red-hot inflation data. As seen below, momentum has been waning in recent months, with weekly MACD having turned down below the Signal line and has been diverging after a pullback to multi-month lows.
