Technical Strategy Video (Recorded Monday, October 18th):
Key Takeaways
- S&P and DJIA exceeded key resistance last week that changes the near-term technical structure to bullish for a push back to new highs into December
- Multiple lagging sectors have started to show improving near-term momentum that give confidence that an “Everything Rally” is indeed likely given no real deterioration
- Consumer Discretionary has broken back out vs Consumer Staples on a cap-weighted basis, a sign of risk-on appetite returning at a time when sentiment remains muted
Last Friday’s close above 4465 necessitates a bullish view structurally, invalidating the near-term structure as being bearish. While a move back to new highs shouldn’t be a straight line, technically, it makes a long stance necessary. Dips into late October should be a chance to buy weakness, and doubtful that early October lows are violated given momentum and breadth improvement.
Short-term Technical Improvements:
- Traditional technical momentum indicators like MACD have turned back positive while weekly momentum is no longer overbought given September’s consolidation
- Downtrend from September was exceeded by SPX, NDX, and DJIA.
- Structurally, Elliott-wave patterns have turned more positive near-term given SPX move back above 4465
- Multiple sectors like Industrials, Materials and Consumer Discretionary, Real Estate joined Technology in turning in strong performance last week, and these groups are close to breaking back out of consolidation ranges since May
- Breadth gauges like “Percentage of Stocks above 20, 50-day moving averages (m.a.) have all jumped sharply in the last two weeks, signaling a broad-based rally is starting
- Cycles based on Gann’s Mass Pressure Index turned back up in early October and should allow for strength into mid-November before any material weakness
- Junk bond Spreads have not materially widened out further, and September’s Equity index decline largely led to tighter spreads, not wider
- Leading sectors like Transportation have begun to make their own structural progress, exceeding trendlines from this Spring
- Defensive groups like Utilities and Staples have continued to underperform and failed to outperform during a time of Fall market weakness
- Sentiment remains largely subdued, despite some minor progress in recent weeks
As seen below, Consumer Discretionary broke back out vs Consumer Staples after months of consolidation. This is seen as a bullish development in the attitude towards risk
Consumer Discretionary vs Staples had already broken out earlier in 2021 on an Equal-weighted basis (See Ratio charts below of RCD vs RHS) which gave reasons for optimism as Defensive outperformance has been largely absent for most of this year. Now, large-cap dominated XLY also breaking out gives reasons to think this risk-on shift has some staying power. Auto parts stocks like AZO, AAP, ORLY, GPC are particularly bullish in showing very good strength during this move.
DJ Transportation Average, meanwhile, has retraced nearly an exact 61.8% of the former consolidation from May peaks in just under three weeks’ time. This is an excellent comeback that gives optimism of this leading sector rebounding which had largely been absent in recent months. Air Freight, Trucking, and Shipping remain more bullish than the Airlines technically.
