Technical Strategy Video:
Key Takeaways
- Prices pushed up to important trading resistance post FOMC surge, and getting above Monday’s peaks would go a long way towards thinking gains into year-end are underway
- Reversal of -3/1 negative breadth and volume was a positive as Technology, Materials and Crude all reversed, but arguably have some work to do, technically
- Healthcare has taken the lead in turning higher this month, and Pharmaceuticals look very close to breaking out vs Biotech, which would be an interesting development
Wednesday’s post FOMC snapback brought prices up to just under Monday’s highs. Getting above 4713-SPX and 4723-S&P Futures would be a positive which would then cancel out the recent bearish count for S&P (Similar for QQQ lies at 400.20 on a close) Thus, Market Bears have little wiggle room and above these levels adds a lot of conviction that the worst for December is behind us (4744 is the level over which long bets would be increased into year end. I had held out on trying to make any larger trading call ahead of FOMC and felt it necessary to wait on an End of Day close. This remains a vital part of this process and cannot be ignored.
While it’s tempting to think Wednesday’s FOMC increased Taper announcement & more clarity on rate hikes helped to reset the market’s expectations in a way that should cause the market to rip back to new highs, there remain several important factors that are NOT in place technically and need to happen before expecting a more meaningful push higher.
First, Wave structure for S&P and NASDAQ cannot immediately be called bullish- (NASDAQ 100 ETF (Invesco -QQQ) chart shows prices up against important levels. This resistance needs to be surpassed before expecting a rip-roaring finish to 2021.
Second, both Financials and Technology should join the breakout recently seen in Healthcare. Given that these three sectors comprise nearly 60% of SPX, both XLF and XLK would seem to require a bit more as both ETF’s are up to key resistance, similar to SPX and NDX.
Third, some of the short-term cycles I rely on call for a turn near 12/20-12/24. This was thought initially to be a low but if prices rally uninterrupted into next week, this would cause a bit of a quandary, as this is thought to be an important time.
Bottom line, it all comes down to technical structure, first and foremost. The negative comments with regards to Defensive positioning, DeMark “sells” being confirmed, and Junk yield spreads widening out remain in place. But I’ll look to participate in a rally, if and when SPX and NASDAQ can start to push back to highs, with Value Line Geometric Average getting back over 673, which thus far held on the initial “Gap-Fill”. The next two days should be important as to evidence of follow-through, or reversal. Stay tuned.
Invesco QQQ Trust, shown below. As discussed, little wiggle room for the bears, and getting above this “red” downtrend would change trends for the better.
Pharmaceuticals starting to gain real strength within Healthcare compared to Biotech.
As discussed in the last week, Healthcare has turned up sharply and should be favored for outperformance in the month of December. Stocks like PFE, LLY, CVS, INCY, ABBV, ANTM, HCA, UNH, BMY, DGX have all risen more than 5% in the last week. Of the top performing, it’s interesting how many Pharma stocks have shown some of the strongest performance within this list of the top 10 performers in the last week. This might not seem surprising during a time of Defensive outperformance, but normally with Equity markets within 5% of all-time highs, Biotech is the natural leader, while Pharma struggles.
This chart below, however, shows a rather different picture of this relationship. This highlights the SPDR S&P Pharmaceuticals ETF vs the SPDR Biotech ETF. This has trended lower for quite some time, but has shown the opposite behavior from February lows, 10 months ago. Pharmaceuticals have outperformed Biotech for the last 10 months, and look to be on the verge of breaking out of this downtrend from 2018 given the rapid recovery back to highs after its last failed test of resistance this past Summer. A breakout of this downtrend argues for intermediate-term strength in Pharma vs Biotech. Furthermore, many of the stocks I’ve discussed in recent weeks like PFE, BMY, LLY which have been strengthening remain attractive intermediate-term risk/rewards, despite being stretched near-term.
Bottom line, this looks to be coming to fruition in the near future, and it will be an interesting development if the Pharma ETF can exceed this downtrend vs Biotech which seems increasingly likely. Stay tuned.
