Technical Strategy Video:
Key Takeaways
- A short-term trading low is near and should materialize in the next 2-3 trading days into next week. However, it remains unclear whether this is “the” low or just a bounce, and one final pullback happens into the final week of January/first week of February before a more meaningful low.
- Momentum is just entering daily oversold levels, while weekly is mid-range and monthly has just begun to pullback from overbought levels. The severity of an 8% decline in 13 trading sessions is causing technical damage in intermediate-term momentum.
- Sentiment is slowly turning bearish; Yet, both Equity Put/call ratio and also Fear and Greed Polls were both more negative in early December 2021.
The S&P has now gotten to within striking distance of 4361, a Fibonacci alternative retracement of the first leg down of this decline from January 3, 2022. This equates to a 1.618 multiplier of this initial five-wave selloff and should mark at least temporary support. However, the structure since January 3 all-time highs, just 13 trading days ago remains a three-wave move. Thus, until/unless 4582 is recaptured (1/10/22 intra-day lows), it’s hard to say for certain that any near-term low is “The Low”. Bottom line, a trading low looks close, and I feel a larger bottom for this decline should be in place by the first week of February.
Technical Developments over the last 48-72 trading hours
Financials have now been joined by energy in weakening. These were the top two groups of 2022 performance into this past week. Both groups had traded up to near trendline channel resistance and have backtracked. Bottom line, Energy should be bought on dips
Breakdown in Russell 3k, a very widespread gauge for the broader market, is now approaching October lows, while Value line is nearing last Summer’s support trendline. Both are important
Momentum has just entered oversold levels per RSI on daily charts undercutting 30. While this is the lowest level since March 2020, weekly and monthly momentum are nowhere near oversold. If anything, monthly momentum is just exiting overbought levels.
Sentiment is only slowly turning bearish and despite a >20 point difference in Bears > Bulls on AAII’s 1/20/22 poll, other gauges of Fear like Equity Put/call ratio or Fear and Greed poll by CNN/Money are not even as bearish as early December 2021. Thus, while close, we’re not there sentiment wise to indicate fear, much less capitulation.
My interpretation of DeMark indicators suggests on a daily basis that trading lows might materialize within three trading days on QQQ and SPY. Yet the weekly ratio of QQQ/SPY looks to potentially signal a bottom within two weeks.
Gann’s Mass Pressure Index also signals a possible trading low by 1/27/22, which lines up with DeMark indicators. Thus, a trading low is possible into the first week of February in my view, but any immediate bounce next week should still be looked upon skeptically until/unless 4582 is exceeded.
Bottom line, a trading low looks close, but not sufficient conviction to place big long bets just yet. It looks more apropos like an environment to consider closing out hedges/shorts and eyeing spots to get long. This could change quickly, but the key message here is that stabilization is truly what’s needed, and it’s always tough “being the hero” and trying to catch the exact bottom. Better to keep some “powder dry” and let the market tell us it’s bottomed. Any strong reversal day with strong positive breadth and broad participation would be a good initial sign given that SPX, IWV and Value line are now within striking distance of lows.
Value Line Geometric Average, the 1700 Equal-weighted stock gauge, has now gotten down to serious “make-or-Break” levels near lows that have held since last Spring. This level is at 630 which was hit back in July and tested again in September as well as November and December 2021. Violations of this level would postpone any major snapback higher, and suggest further downside acceleration. Bottom line, it’s right to keep a close eye on 630 in the next two weeks.
Energy finally has begun to consolidate after being the “Last Man Standing” for some time over the last few weeks of market volatility. Technically I spoke about this group likely requiring consolidation before gains could continue, as part of a longer-term bullish thesis, and I believe this will be a pullback to buy into. Key downside levels for OIH lie at 199-201, the latter part of that range representing a 50% retracement of the rally up from December 2021. Overall unless December 10, 2021 highs of 197.89 are violated, (which I don’t expect), pullbacks should be buyable. One should look at giving OIH some consideration for dip-buying into the end of January down at this support range.
The risk-off sentiment hasn’t just affected Equities and bonds, but also Cryptocurrencies as most who are involved are painfully aware. Looking at the daily chart below, Bitcoin’s break of 1/10/22 lows of 39,558 is a technical negative that keeps the recent two-month downtrend extending lower, and likely results in this testing last Summer’s lows around $29k.
While Bitcoin has shown some relative strength vs many Alt-coins in recent weeks, it still looks premature to expect trading lows right away from an absolute basis. Structurally speaking, this support violation goes back since last September so it has added weight as something that likely will allow for this decline to extend into next week.
DeMark indicators utilized for counter-trend exhaustion still look premature on both daily and weekly timeframes to suggest an imminent low. Daily RSI has just entered oversold territory, though weekly RSI remains at 40, suggesting this trend is not as oversold as many believe. Overall, this week’s technical damage looks to require a bit more downside before stabilization can occur.
