Energy and Financials nearing temporary resistance, but both groups bullish-1H 2022
Technical Strategy Video:
Key Takeaways
- Bounce underway after having stabilized Monday, yet trends and momentum haven’t improved sufficiently after Tuesday to expect an immediate push to new highs. As outlined in recent days, additional weakness is possible into late January.
- Financials and Energy, the two main outperformers for 2022 thus far, are both nearing channel resistance, which makes keeping a close eye on these important.
- Energy’s outperformance has been impressive thus far. While near-term overdone, pullbacks in this group will create opportunities for buying dips into February.
S&P 500 hourly chart shows the bounce attempt Tuesday which should be nearing resistance in the next 24 hours. Overall, it looks premature to bet on a move back to new highs just yet, but this bounce should find resistance between 4726-28 or above near 4758 before stalling out and turning down into late January. While SPX looks to have a bit more upside on Wednesday, any decline back under 4638 would bring about a likely retest of Monday’s lows. This area at 4582 will be very important to hold on any backing and filling. Breaks of that level could bring about a decline that might surprise investors at a time when many are convinced the bottom is in. Overall, until SPX can regain 4758, it’s right to view this rally skeptically.
As the saying goes, it’s been a “Heckuva year for Energy.. in the last three weeks 😊 “
This group has gotten off to a stellar start for 2022, and its outperformance likely should continue for 2022. However, in the short-run, for those who wish to be more tactical, there are reasons to expect a slowdown of this torrid performance.
After all, Energy (XLE) 14% performance YTD for 2022 thus far is better than seven of its last 10 years as a whole !! (and in this case, we’re talking a mere 6-7 trading days (Since 12/20/21 close, (the last minor bottom for XLE) this ETF has risen 19.4% in a span of just 15 trading days, more than 1% per trading day) Kudos to Tom Lee on sticking with his bullish call, and I also join him in being optimistic on this group for 2022. However, the following concern me (Near-term basis)
- Energy has gotten near-term overbought with RSI on daily charts of XLE, RYE > 70
- Prices are nearing key channel resistance that have held on the last few retests
- DeMark exhaustion looks to be coming together this week for Daily and weekly charts on XLE, OIH, XOP, and USO
Thus, near-term (3-5 trading days) I am expecting a stalling out in this group along with WTI Crude (83.50 resistance) and some backing and filling into late January/early February. This should be a chance to buy into weakness for those looking, and looks like a better risk/reward technically (for those looking to initiate new positions)
Technically, there is reason for intermediate-term optimism when viewing the weekly ratio chart of Equal-weighted Energy ETF by Invesco (RYE) relative to SPX. As the bottom half of this Optuma chart shows below, when looking at equal-weighted Energy vs the SPX, this group has built nearly a two-year long base with a pattern of similar highs all at the same levels (Red Line) Once this area is exceeded in 2022, this should drive a much more meaningful period of outperformance for this group. Overall, it’s important to watch for a breakout in this relative chart of Energy vs SPX which will be the technical catalyst for this move.
Financials are the next biggest piece of the puzzle, and aside from Energy, are the only other group which is higher by more than 5% this year, and only one of three of the major SPDR Select S&P ETF’s to have a positive return thus far. The worry here concerns these driving forces for this year’s rally thus far both hitting resistance simultaneously between Wednesday-Friday of this week. A stalling out of this year’s best groups while Technology remains under pressure would likely postpone any further rally attempts until these sectors can consolidate this year’s movement. Bottom line, while both Energy and Financials look right to bet on for 1H 2022 outperformance, they both look to be close to slowing at resistance after a great start. One would look to position long in XLF near 39.68, which would represent the area of the open gap from 1/3/2022.
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