Last couple weeks of January likely difficult before a trading low materializes

Technical Strategy Video:

Key Takeaways

• Minor stabilization on Friday doesn’t take away from the short-term negative case given momentum, structural issues & weakness expected the last two weeks before a low
• Treasury yields and the US Dollar both strengthened on Friday; Yields in particular likely push back to new yearly highs (TNX) and could make Friday’s weakness in Financials buyable into February
• Energy intermediate-term bullish, but near-term stretched as WTI nears Oct 2021 peaks

Friday’s recovery looks to have happened directly following an Elliott five-wave decline from mid-Week.  Thus, while many might feel emboldened that markets were able to stabilize, it’s likely that 4665-88 could contain any bounce before turning back lower to test this past week’s lows.   My list of concerns is highlighted on the following page, but it’s worth pointing out that momentum, structure, and cycles are three factors that could result in a difficult final two weeks of January before any relief.   Bottom line, a defensive stance is preferred for now, with Staples, Utilities, REITS and Healthcare likely continuing to outperform Technology near-term.

Key Technical reasons for ongoing concern 

Overall, it’s been a challenging start to 2022.  Major benchmark indices like SPX are lower by over 2% in the first two official weeks of the year, while the NASDAQ Composite is lower by more than double that amount, at -4.8% through 1/14/22.   As has been discussed over the last couple months, Equal-weighted US benchmarks have shown far more deterioration than the Capitalization weighted SPX, and much of this underperformance and waning began last Summer. 

At present, many are wondering whether markets can ignore all the concern regarding the huge FOMC pivot approaching in the months ahead along with the Omicron variant having postponed the waning in Supply side shocks.  My technical answer is that market trends have grown more negative in the short run, but then again, so has sentiment. Yet prices now lie on the precipice of what seems to be important levels that will prove important if breached in the trading days to come.

Overall, my Technical concerns are as follows:

1. Momentum has rolled over to negative back in January on daily charts using MACD (Weekly MACD remains negatively sloped)
2. Technology has broken down on an Equal-weighted basis (Invesco’s Equal-weighted Technology ETF vs SPX of a 1-year uptrend) Intermediate-term trends for Technology relatively speaking remain bullish
3. Huge sector dispersion where only Energy and Financials have largely driven positive returns for the major SPDR S&P ETF Sectors for 2022.   Now both groups are nearing resistance given prior trend channels which should cause a stalling out near-term and consolidation
4. Treasury yields remain pointed higher, despite some minor backing and filling in TNX, though 1/14/22 strength in yields should carry TNX back to new yearly highs in the weeks to come.
5. Elliott wave analysis shows the ongoing pullback from late December 2021 to be bearish structurally, and this past week’s early bounce now looks to have given way.  Thus, a retest of December 2021 lows looks likely for SPX and of October 2021 lows for NASDAQ.
6. US Dollar down to support and good likelihood this pushes back to new all-time highs into February (Prior occasions like September and November lows in US Dollar and rallies higher have been negative for Equities
7. Cycles still show a good likelihood of weakening into late January (Based on 2 different Cycle studies) Gann’s Mass Pressure Index along with my own Cycle Composite
8. Market overall has flattened out since last JUNE- (1700 Equal-weighted Value line Geometric which has gone nowhere in 7 months)
9. US Equity markets are not oversold, despite the 2% decline in SPX and -4.8% declines in NASDAQ (If anything, the weekly momentum is neutral while monthly is just pulling back from overbought territory)
10. Sentiment has turned more negative in recent weeks, though not extremely bearish yet, and no evidence of capitulation

Treasury yields look to be turning back higher, per Friday’s close- This looks to be something to pay close attention to in the weeks to come, as the quickness with which yields spiked over the last few weeks seems to have directly coincided with weakness in Technology.  While the absolute levels of Treasury yields is not important at this juncture, the pace of the movement does look to be more of a concern.  If/when yields break back out above last March’s peaks in yield, most in the media likely could begin discussing yields pushing up to new 12-month + highs, and this breakout could cause some near-term acceleration. Overall, this might prove beneficial to Financials, which had a difficult trading day on Friday 1/14/22.  Bottom line, yields look to be moving higher, and I expect TNX to reach 1.90 or even 2.00% which is a psychologically (more than technically) important level in the weeks/month to come.

Energy nearing key short-term levels with WTI Crude up to last October 2021 peaks – Near-term, Energy has grown overbought technically and now prices in WTI Crude lie right near last Fall’s peaks.  This is thought to potentially bring about at least a short-term stalling out in Crude.   While the intermediate-term bullish case for Energy is growing more positive by the day, technically, the short-term looks stretched.

Technically, as discussed earlier in the week, it looks right to own Energy, but for those who are more tactical, this might show some evidence of reversing course lower into February, which should prove to be a buying opportunity.   Defensive ETFs like XLE have shown some excellent strength in the last few months vs the former outperformer XOP.   Moreover, OIH has been even more impressive, and similar to WTI Crude, has risen to challenge 3-month peaks from October 2021.  Following a pullback in this group, it will be right to revisit and discuss the best stocks to favor going forward.   At present, names like CVX, COP, APA, FANG, DVN have done phenomenally well of late and are technical names to buy dips in, when given the chance.