Energy strengthening short-term; Yet more needed for long-term conviction

Trend bullish- Expect rally up to SPX 4500 and QQQ 395 before possible stallout; Pullbacks buyable when they occur for additional strength into July 21

Minor consolidation happened Wednesday to kick off the first full day of trading in 2^nd Half 2023 which finished with a fractional loss to end the session.  Despite minor weakness, trends remain bullish and SPX is unlikely to undercut 4348 before pushing back to new highs for July. 

While many blamed China’s economic weakness for declines in US and European Equity performance, this stalling out could have been foreseen simply by examining the consolidation on hourly charts following the open gap and subsequent run-up into Monday’s shortened session.

For those familiar with Elliott-wave theory, these open gaps often represent wave 3 advances of a five-wave pattern.  This is helpful as one can immediately use key areas of this ongoing advance for risk management purposes. 

First, the area prior to the gap higher is considered the first area of importance.  This lies just below SPX 4400 at 4398.  Second, the area at 4348 is also considered a possible strong area of downside support. Thisrepresents the highs of wave 1 since Monday June 26^th lows.  Overall, both of these areas can have significance, but it’s 4348 that defines the highs of wave 1 which cannot be breached without turning short-term trends bearish.

Bottom line, in plain English, the minor pullback on Wednesday isn’t likely to prove too severe and should not undercut 4348 before turning back higher to 4500 or higher.

Source: Marketsmith

WTI Crude making minor two-month downtrend line breakout

Energy looks to be starting to stabilize and this is directly coinciding with gains in WTI Crude, which continued on Wednesday given the recent news of Saudi Arabia extending its recent output cut. Russia is also expected to cut output by 0.5 million barrels a day, but there remains skepticism that this will happen amid the need for revenue during the Russia/Ukraine war.

Wednesday’s success in regaining $71.75 represents the first successful breakout of the downtrend from early April highs that had successfully contained two prior bounces.

While it will take gains back over $75 to have more confidence that Crude, and by extension, Energy, have bottomed, this looks like a temporary positive which could positively boost the Energy sector. 

I expect that Wednesday’s rally likely can help Crude extend to the mid-$70’s which also can help the Energy sector work over the next few weeks.

What’s necessary for intermediate-term conviction on WTI Crude & Energy

Energy’s bounce is certainly a welcome development for many investors;  Yet, more is needed to be able to truly embrace this rally as having the power to extend into this Fall.

The Energy rally having surpassed June peaks should allow for additional gains up to $72 in RSPG 0.48%  (Invesco’s Equal-weighted Energy ETF)

As daily charts show, the ability to exceed $72 in RSPG would be the first actionable signal which would help to add conviction towards Energy outperforming in the 2^nd Half, and for now this remains premature.

Such as development would both exceed April 2023 highs as well as help recoup the entire downtrend from last November’s peaks.  This would be truly a bullish development and makes April highs much more important than June to recapture. 

At present, the last couple days gains are considered a short-term positive and should help Energy extend a bit more over the next few weeks.  Yet, more work needs to be done. 

Leisure and Entertainment likely to make a much bigger rally

Hotels, casinos and Cruiseliners have largely fueled the Consumer Discretionary trade in recent months.  This sector has gained more than 33% YTD (based on Sector SPDR ETF- XLY 2.37% ) and has soundly outperformed S&P 500.

Yet, it’s other areas within Consumer Discretionary which now look to be taking “center stage” and can outperform in the weeks to come.

This daily chart represents the Leisure and Entertainment ETF by Invesco (PEJ 0.42% ) This ETF contains top holdings in stocks like FOXA 1.27% , MAR -0.16% , SYY, BKNG -0.20% , CMG 0.47%  and LVS 1.00%  which all represent more than 4%.

As can be seen below, PEJ has largely been range-bound for the last 10 months, but has formed a very bullish ascending triangle pattern which is now reaching conclusion.  Prices grinding sideways in a range-bound consolidation with a smaller and smaller range sets up for an upcoming breakout of this pattern.

Overall, movement above $42.13 would lead PEJ to the highest levels since last Spring, breaking out of this larger range and looks likely in the days/weeks to come.

Within PEJ, stocks like BBY 0.32% , CZR 2.57% , ULTA, GM 0.58% , and POOL -0.89%  are all up more than 10% in the last month while still being down more than 10% off their 52-week highs.

Interestingly enough, there hasn’t really been an extreme example of mean reversion from worst to best in this sector.  The top 20 year-to-date (YTD) performers all show positive three-months and also positive one-month performance.  Thus, while some attempt to forego and avoid the strongest names, these have consistently been the ones that are driving performance on most timeframes. 

Looking at those with strongest one-month performance, which are 10-20% off their All-time highs might shed some light as to names which might have the potential of gaining ground on the stocks already at all-time highs.  However, this process takes time.

Bottom line, PEJ looks ripe for a breakout, and above $42.13 likely results in gains to the mid-to-high $40’s.