SPX breaks support as Tech weakness spreads to broader market

Technical Strategy Video:

Key Takeaways

• SPX break to multi-day lows was accentuated by Technology’s decline
  
• Value continuing to make inroads vs Growth- While Large-Cap Growth was far better than Value into End of year 2021, Mid and Small-cap Growth had never really strengthened as much.  Recent days shows Value across all styles breaking out vs Growth
  
• Oil stocks up to near resistance after a strong start to 2022;  Meanwhile, Materials sector breaking back out to new all-time highs, largely ignoring Tech weakness thus far in 2022

Tuesday’s decline started off fairly innocuous, with positive breadth and seven sectors higher on the day, despite a -1% decline in Nasdaq.   However, this turned a bit more severe in the final hour of the day, and SPX broke former highs at 4713 on a close which turns near-term trends bearish.  Overall, technically speaking, a retest of December lows looks likely in January 2022.  This likely plays out as a three-wave move, with Wednesday/Thursday providing a short-term, low, then bounce, then further selling. 

The Technical reasons for a further decline in the weeks ahead are as follows:

• Wave structure has turned more negative, both for SPX along with IWV (Russell 3k)
• Inter-market divergence- NASDAQ, Dow Transports, Russell 3k never hit new all-time highs and have shown huge divergence in recent weeks
• Technology’s breakdown doesn’t seem complete (At 27% of SPX, this looks important)
• As mentioned yesterday, Financials and Energy, which have been the areas of strength thus far in 2022, are up against meaningful resistance
• Momentum’s negative divergence on weekly time frames
• Short-term cycles related to Gann’s Mass Pressure Index are negative for January
• DeMark “exhaustion” per TD 13 Countdown Sells on Russell 3k on weekly charts
• Defensive outperformance
• Signs of Mid and Small-cap indices turning down sharply
• Crypto-Currencies breaking down below support

Overall, the push into Value from Growth has been one of the largest seen in the last decade.  Large-Cap Growth had shown very strong performance from last Spring into end of year.  However, when looking at Mid-cap and Small-cap ratios of Growth vs Value (Mid-Cap Growth v Value shown below (IJK/IJJ)  (Ishares Mid-cap Growth ETF vs Ishares Mid-cap Value ETF)  Mid-Cap Growth achieved only a minor bounce from May 2021 lows and barely recouped 1/3 of the prior decline from Fall 2020.  Thus, Growth appears to have been largely concentrated on the Large-Cap side, NOT Mid-Cap, nor Small-Cap.  Now the entire style shift from Growth to Value is taking place sharply.   As seen below, Mid-cap Growth has seen a notable breakdown vs Mid-Cap Value.  Thus, in the very short-run, Value seems likely to show a bit better performance in the next few weeks, as today’s breakdown wouldn’t be something to fade or buy into right away. (The break of this support means that Growth is likely to lag Value further )

Not all things are falling- Materials for one, is attempting a major breakout

This daily chart of XLB shows Materials breaking out of a bullish eight-month base, and particularly one might label this a Cup-And-Handle pattern.  While prices fell to close nearly unchanged on the day after some earlier outperformance, this group is preferred over Technology in the near-term, for those looking at Non-Defensive areas which might outperform.

Preferred stocks which are appealing Technically are (TOP 10-  MLM, ECL, SEE, APD, VMC, PPG, CTVA, EMN, BLL, and CE)-  XLB-0.86%  shown below in its breakout attempt over last May’s peaks

Energy might need to consolidate recent gains after nearing resistance- 

While I’m a fan of Energy on an intermediate-term basis, this rally has run a bit too far too quickly.   As we discussed last month, for those looking at this pattern Technically as being a potential Head and Shoulders pattern, such a pattern can’t be verified without a break of the so-called “Neckline” or the area undercutting prior lows.  (This would take a break below 170 in OIH1.36% ) Many times these patterns are just consolidation formations and end up breaking back out to new highs.

Thus, while it was right to consider buying for trading near recent consolidation lows, I’m of the belief that OIH1.36% , and Energy should stall out in the short-run and backtrack.  For those that are new to this space, it’s better technicall to await consolidation before putting new money to work.  For those long, a rally over 220 is going to be required to expect immediate continuation, which might prove difficult after a 15% gain in OIH since 12/20/21’s 176.85 close. 

OIH- (VanEck Oil Services ETF)-

Bitcoin break of support should allow for further weakness in the short run. 

While many Cryptocurrencies had traded in consolidation over the last week, not unlike US stocks, Tuesday’s late day breakdown of support looked equally as negative for Bitcoin as it did for SPX. The area near $46k had largely held in BTCUSD since mid-December, and to be technical, I had highlighted $45,655 as being important.  This was violated on Tuesday, which in my view makes prices vulnerable to a decline down to test September 2021 lows near $39,573.  This looks to be the first real support given prior lows for Bitcoin.   If/when US stocks start to show more serious downside volatility, recent positive correlation trends might allow for a similar decline in Bitcoin.  (In recent months/years, history has taught us to hold off on being too aggressive buying dips if Equities are sliding.  We’ll update our cycle forecast for BTC in the days to come.