Technical Strategy Video:
Key Takeaways
- Trends & momentum remain negative for US Equities and could weaken further into end of week ahead of the long-awaited December bounce & Santa rally
- Negative Breadth of -5/1+Negative in Monday’s session was far worse than last Friday, as Small-Caps, Transports, Financials broke down sharply. This relative weakening means lows are still premature
- Commodities were hard hit during Monday’s session, and the decline in WTI Crude looks short-term bearish for prices to continue lower into January ahead of a bottom.
Monday’s break of 4600 has resulted in further near-term deterioration, but also suggests additional selling lies in store for SPX ahead of any low later this week. Reasons for continued deterioration have to do with unfinished Elliott-wave structure, lack of oversold conditions, and the start of more meaningful selling pressure of “FAANG” stocks and Financials. As discussed last week, breaks of this 4600 likely lead down to 4495-4500 near early December lows, but could reach even further on an acceleration which could target support near 4400 (4360-4410) ahead of bottoming. It’s important also to reiterate that while our market pullback has indeed felt severe, SPX lies just a bit more than 3% off all-time highs, hit just six trading days ago.
What’s promising to suggest lows could come about this week and allow for a Santa Claus bounce into year-end.
- Short-term Market cycles which coincided with peaks in mid-November should reach conclusion on Dec 22-23 this week. This also lines up with Gann’s Mass Pressure Index cycle which shows strength into early January ahead of possible January volatility
- Elliott wave structure of the unfolding pattern from Mid-November should be complete near-term by end of week
- Santa Claus rally period starts the last five trading days of the year and first three of the following, and has a higher track record of success than the first few weeks in December
- Sentiment has turned quite negative near-term, and bearish sentiment combined with bullish seasonality looks to be an effective 1-2 combo to buy dips ahead of Christmas
QQQ break of 383 from last week keeps the near-term trend negative here also, and should allow for extensions down to 371 before rallies into year-end get underway. This target would allow the initial selloff from November 22 peaks to equal the more recent decline from December 16 lower. Given that wave structure makes this appear very much like a counter-trend decline, I expect that this short-term weakness over the last month should still lead to a push higher into January
”FAANG” nears Make-or-Break levels near seven-month trendline support
The NY-FANG Composite index along with the addition of MSFT has neared “Make-or-Break” levels from a mild uptrend from Spring 2021 lows. Technically speaking, one should be on the lookout for a possible trend violation and break of December lows given recent volatility. This would result in some near-term deterioration in Large-Cap Technology Growth stocks, specifically stocks like AAPL, AMZN, FB, GOOGL, NFLX. Overall, further weakness in “FAANG” stocks likely will prove to be buyable into next week. However, if trends are broken, one will need to hold out for some evidence of stabilization.
Finally, Small-caps continue to be weakening, and the Invesco S&P Small-Cap 600 Equal-weight ETF dropped Monday to the lowest levels since late September.
Technically it’s expected that Small-cap indices likely do find support near Summer 2021 lows, which in the case of EWSC, happens near $77 on further weakness. After Monday 12/20’s close at 79.81, it looks early to buy into Small-caps and further evidence of stabilization is a necessity before having too much confidence of a bottom.