Technical Strategy Video:
Key Takeaways
- US Equity trading lows look near; Yet, Friday’s churning hasn’t provided confirmation yet, which likely happens next week, either at lower or higher levels.
- Sector-wise, the rising US Dollar looks to have hurt Industrials this past week, and Discretionary and Materials also underperformed, while Tech held up relatively better
- ARK Innovation ETF looks like a good risk/reward to bottom out in the short run, after a 50% decline in nearly the last three months.
This week’s churning hasn’t been sufficient to make a short-term trading call that Lows are in. As has been mentioned in recent days, it’s going to be necessary for SPX to get back up above 4450 on the upside or down to near 4180-4200 before there’s a more definitive buy signal. However, as discussed also, the path of least resistance is likely higher into March. Thus, markets seem close to bottoming and it’s worth taking a stab in various things that have weakened substantially. SPX hourly chart below shows the two areas of interest: First the downtrend of the last couple weeks will need to be exceeded (In White). Second, any move down under 4292 should have little to no real support until 4180-4200. Overall, the next few days should shed some light on this. (SPX hourly chart shown below.)
Sector Developments over the last week show many groups playing “catch-up” to Technology
Despite a choppy, range-bound market, groups like Industrials, REITS, Discretionary and Materials all fell more than 2%, while Technology actually held up as one of the few groups that were positive this past week (As of 2:30 EST). As we can see from this SPX SPDR ETF list, Energy remains the sole positive gainer with one trading day left in January. This should have positive implications for how Energy does as a whole. As discussed during my 2022 Outlook, Energy has finished in the top 3 groups for the month 11 out of a total of 18 times, and 8 of those times it continued its outperformance throughout the year. Thus, with ongoing geopolitical concerns coupled with a good Supply/demand picture and excellent technicals, Energy still looks like the right place to position.
ARKK -0.34% finally looks close to bottoming. (Ark Innovation ETF (ARKK- $66.50))
Incredibly enough, ARKK -0.34% has declined nearly 50% within the last three months, and is down a whopping 58.70% just since it peaked out nearly a year ago, back on 2/16/21. This looks interesting to consider after such a huge decline, for five technical reasons:
1) ARKK has gotten quite oversold with daily and weekly Relative Strength index (RSI) readings down in the low 20’s.
2) Wave equality- Its pullback has carved out two nearly equal “Waves” in price points lost, since last February’s peak.
3) Evidence of counter-trend exhaustion per DeMark indicators on daily charts
4) Broader market looks very close to bottoming out after January 8%+ decline in SPX
5) Cyclical positives for market into March 2022
Bottom line, I expect a bottoming out in 1-2 weeks and for ARKK to bounce from current levels up to 85-95 with support near 62 on any further weakness. Thus, the risk/reward story looks appealing, and this should be close to forming a good trading low.
Breadth signaling an upcoming low is near
Breadth-wise, we’ve seen the market’s Advance/Decline numbers get quite compressed in recent weeks. Only 11% of all SPX issues now trade above their 20-day moving average (m.a.). The percentage of stocks above their 50-day m.a. has reached 27.7%, less than 1/3. Meanwhile the percentage that are still trading above their 200-day m.a. is down to 39%, also the lowest since the March 2020 low.
It should be noted that in December 2018, the percentage above 200-day m.a. did drop to a low of 14%, and this hit Low single-digit territory back in March 2020 after the sharp 33% drop in 33 calendar days (1 Unit of Price per unit of Time in SPX) Overall, I feel the short-term breadth erosion is buyable and markets should make lows and turn higher soon.
