Technical Strategy Video:
Key Takeaways
- Trends snapped back Tuesday in what many felt was the beginning of a late year push higher. However, despite the strong 7/1 Positive breadth, price has some work to do
- Financials and Discretionary both pushed back into recent consolidations that were on the verge of being broken. Meanwhile “FAANG” looks to be arguably breaking its trend from Spring lows
- The trading action over the next few days will be very important towards seeing whether this bounce within a weak tape can follow-through, or needs a final pullback. Stay tuned
Tuesday’s ability to have bottomed out looks to have held the 2.5 month trend for SPX going back since early October thus far. Momentum indicators like MACD remain negatively sloped, while RSI is mid-range. Overall, despite the above-average 6/1 breadth statistics (NYSE Advance/Decline) which give confidence to a bottoming out in breadth in the short run, prices require more than one day of “UP” before weighing in on a push back to new highs right away. Overall, while I do suspect this is close, the Elliott wave structure appears suspect near-term on hourly charts, and momentum remains bearish. The next 2 days should give some answers.
SPX hourly charts don’t yet show this to be the start of a push back to new highs- Simply stated, while price did make some meaningful progress in regaining about 50% of the recent drawdown on very positive breadth, prices still didn’t accomplish enough to think Santa had come early just yet. Mid-Cap and Small-cap indices have not broken out of near-term downtrends, and Elliott-wave structure (Shown below) still gives this a chance to weaken short-term before a move back to highs. Given that cyclically there looked to be a chance of bottoming on 12/22-23rd, one still can’t rule out a pullback into the days ahead which would then carve out a possible low. While those who aren’t as short-term focused might be better suited to just buy into this, and keep buying on pullbacks, most who care on direction will need to see a bit more progress before buying into this rally, and much of this has to do with technical structure. The rush to get onboard any December bounce at the first signs of liftoff, in thinking a Santa Claus rally is here despite poor ongoing momentum and breadth (i.e. Tuesday 12/21’s good numbers) and recent broad-based deterioration in groups like Transportation and Financials likely remains a bit premature.
Breadth remains in poor shape, despite Tuesday’s big surge
What’s interesting about the recent drawdown that has so many unsettled, is how little of this has affected SPX, or NDX thus far. As of Tuesday’s 12/21 close, S&P remains less than 2% off all-time highs made literally seven trading days ago. Yet, breadth statistics on the S&P alone suggest a much more severe pullback than what the major US benchmark indices are telegraphing. Only roughly 1/3 of all stocks (as of 12/20 close) are trading above their 20-day moving average(m.a.) while 38% are above their 50-day m.a. Finally, the percentage of SPX stocks above their 200-day m.a. is just 58% as of 12/20/21 close.
That’s an astoundingly low number considering that the S&P is so close to new high territory. This directly explains how the broader market has indeed suffered a bit more damage when excluding the Large-Cap Technology stocks since mid-November. Furthermore, many who are involved with Industrials, Financials, Energy, Comm. Svcs, or Discretionary of late have suffered much greater underperformance if they haven’t been involved with AAPL, MSFT, GOOGL and other large-cap Technology and Discretionary names.
The chart below on Small-cap IWM illustrates precisely the point I was trying to make technically above. While many are convinced this “breaks out” without much reason except it’s December, prices have not yet shown meaningful enough improvement. Furthermore, Mid-Cap Sector ETF’s look identical in having filled gaps, but now have rallied up to resistance. Thus, a bit more is necessary before jumping onboard, technically speaking.
