Technical Strategy Video:
Key Takeaways
- Additional downside follow-through has caused more meaningful weakness in Russell 3k, along with PHLX SOX index, while NASDAQ has violated uptrends since March 2020
- Trends still early to bottom, and momentum not yet oversold, while Fear levels haven’t reached capitulatory levels that would suggest any kind of meaningful low
- Latin America looks like a relative bright spot amidst ongoing US Equity weakness
No relief for the bulls thus far, as signs of this selloff accelerating are increasing, not dissipating. The Russell 3k index broke down under lows going back since last December, which should provide a clear path down to October 2021 lows. This is a very broad-based gauge for US Equities, so it remains difficult to think markets are bottoming when this index is hitting multi-month lows. Bottom line, this price deterioration is a new and bearish technical development and momentum is not really all that oversold on most time-frames to argue for any sort of low. Furthermore, as charts inside this report show, sentiment still needs to get a bit more negative before it’s appealing to buy dips. At present, holding off on being too aggressive looks right over the next week, before some opportunity arises. For now, it’s still right to be defensive.
Semiconductors look to be joining the weakness in Software near-term
This daily chart of the PHLX Semiconductor index just violated lows going back since last November 2021, which validates this pattern as a two-month Head and Shoulders formation. Near-term, further weakness in SOX looks likely to 3400. However, given the ongoing uptrend, it’s likely that further weakness over the next week will bring about attractive buying opportunities for this group as the larger uptrend remains very much in place. When this arrives near uptrend line support, I’ll discuss important Semi names that look interesting to consider buying from a technical perspective.
Latin America has begun to bottom out, and this area looks relatively attractive
Interestingly enough, just as the technical situation in the US has been deteriorating, other areas like Latin America are starting to perk up. The break of its intermediate-term downtrend from last Spring on popular ETF”s like ILF, the Ishares Latin American 40 ETF, suggests this area could start to work much better in the weeks/months to come.
Brazil looks quite similar to the ILF in having begun a breakout from oversold levels (EWZ), while Mexico had already taken the lead in showing strength and just looks to have completed a successful retest of last September 2021 peaks.
Overall, while this might take time, a rolling over in the US Dollar would provide some risk appetite to return to the Latin American space as Emerging markets begin to show more strength. At present, this is a work in progress, but a very favorable breakout in ILF which translates into this area starting to bottom out. Long positions look favorable technically in small size, looking to add on any pullback in the weeks to come into February.
Bearishness slowly returning, but still not at capitulatory levels. Despite some sentiment polls like AAII having gotten more bearish lately, other gauges of sentiment like the Equity Put/call ratio and CNN Money’s Fear and Greed Index remain well off bearish levels. The CBOE Equity Put/call chart remains in the low 50s, which looks odd given our recent pick-up in selling. At current levels this suggests that nearly 2 calls are being bought for every 1 Put option. To truly see some evidence of fear, this gauge needs to climb back and break last December’s peaks from 2021 near .74 at a minimum, and ideally should be over 1.00 before any compelling evidence is present about sentiment being fearful. Additionally, seeing some backwardation in the VIX curve and seeing the Arms Index (TRIN) climb above 2 would be additional signals that would give some confidence about a trading low being near.
