Technical Strategy Video:
Key Takeaways
- Biggest two-day SPX decline since October 2020 and closing on lows still makes it premature time-wise too expect meaningful low
- Technology outperformance has broken out of a trend from Last year on an Equal-weighted basis in RYT v SPX that is bullish for Technology relative strength to continue
- Broader market rolling over while Tech holds up is a bit disconcerting; Yet, Russell 2k, and Value Line Geometric Avg likely find strong support near this year’s lows
Breakdown in SPX showing the biggest two—day decline in over a year is heading towards support likely by end of week given a combination of a number of various Technical factors. SPX is indeed now into my initial “zone of support” at 4500-50. Unfortunately a few other timing pieces of the puzzle are not quite there to suggest buying immediately for those with ultra—short-term trading type time horizons. Yet, I do feel 4435 can be important for SPX under 4500. Any near-term bounce into Thursday towards 4575-4610 still could prove to be short-lived before a final flush into end of week/early next.
Bottom line, risk/reward for shorts is growing poor into end of week, and better to concentrate on buying dips into Friday/Monday than pressing short bets. How one plays another 50-75 point S&P decline all depends on one’s timeframe and risk tolerance, but a low should be approaching cyclically in about 2-4 trading days.
Technical Developments:
- Momentum is negative but not yet oversold
- Fear starting to creep into the market quickly, as per low Fear and Greed Index readings, while VIX is spiking to highest since February 2021
- No real evidence of capitulation as per Breadth is being seen just yet in market; Positive breadth eroded to finish at 4/1 negative in Advance/Decline as well as volume, but no evidence of TRIN (Arms index) spiking in a way that could signal an upcoming low
- Broader market rollover has not really been seen in Technology, to its credit. Tech in Equal-weighted Terms has broken out vs SPX going back since May which is a positive
- Sector roll-overs being seen in many former sector-breakouts warrants paying attention, as XLF, XLY, XLI, XLB, IWM, have all erased breakouts to new highs
- As discussed yesterday, the deterioration in many High Yield gauges is interesting and negative in the short run, despite Credit gauges being in good shape
- Cycles which peaked in September suggest an upcoming short-term low is possible in 2-4 trading days; Yet, Gann’s Mass Pressure index remains “choppy” until Dec 22
Value Line Geometric Average, the Equal-weighted 1700-stock average, has completely lost its breakout to new highs and now down near multi-month lows. This is a much different picture than what the SPX and NDX are showing and worth keeping an eye on this broad-based gauge as it nears July ‘21 lows. Initially, I expect this should hold and bounce.
Technology breakout promising in relative terms
While many parts of the market have not worked out well in recent weeks, it’s worth reminding ourselves that Technology, at 27% of SPX is working just fine and a notable tailwind for equities likely in the back half of December. Equal-weighted Tech gauges like RYT (Invesco Eql-Wgtd Tech ETF) have broken out of trends vs SPX going back since May. This is a very constructive development for Technology overall, at a time when Growth has broken out again vs Value.
Finally, it’s worth keeping a close eye on Small-caps and the Russell 2k. Ratios of IWM to SPY have broken down again, and this area of the market has been quite disappointing and looks to trend further to the downside relatively speaking. Thus, while IWM looks to be nearing an absolute low, investors should be right to still favor Large-cap vs Small Cap, and Growth vs Value.
