Technical Strategy Video:
Key Takeaways
- Market bottom still elusive, but initial low expected this week.
- Energy relative breakout to SPX makes this a great sector near-term to overweight
- MSFT getting close to support and after-hours volatility could provide opportunity
US Equity markets should be close to trading lows, but as discussed, a bottoming process normally takes time, particularly after a 10% drop in just 14 trading sessions. Many bounces are prone to initial failure and retests. Overall, given factors such as oversold conditions, severe breadth contraction, and signs of bearish sentiment growing more extreme, I do expect a trading low to materialize this week and potentially after FOMC. Technically it appears right to position for a bounce, though still can’t rule out Monday’s lows being tested or even breached by a small amount. Structurally, Elliott-wave structure would show a completed 3rd wave under Monday’s lows before a sharp rally. However, to expect markets have a chance at moving back to new highs, prices need to recoup 4582, the 1/10/22 low which looks premature to speculate on just yet. Overall, hourly charts still show declining highs and poor technical structure, so the only points we have to focus on are the technical reasons above along with hoping Monday’s big reversal can hold. Bottom line, I’m willing to turn bullish for a bounce by end of week, either higher or lower as prices look close to downside exhaustion.
Energy showing more technical evidence that outperformance can continue
Energy looks to have broken out on Relative basis to SPX which looks important and bullish for this group to continue strengthening in the months ahead.
As shown below, the Equal-weighted Energy ETF from Invesco (RYE) vs the SPX in ratio form broke out this past to the highest levels since Spring of 2020 nearly two years ago. Interestingly enough, despite the massive energy outperformance last year, relative charts of Energy really hadn’t shown much evidence of outperformance until this recent breakout.
Given that this area had held no fewer than four previous times, a breakout should result in acceleration in Energy in relative terms to the SPX. Thus, further relative strength is expected in Energy and this group should outperform.
Exploration and Production looks to be favored as an area for gains in Energy in the months ahead and should outperform Integrated Oils or Oil Services as WTI Crude moves higher.
Overall, this is the quintessential question many wrestle with when investing in Energy, as sometimes markets experience periods where OIH can lag materially despite a soaring price of WTI Crude (and last year provided some of that divergence and sub-sector rotation)
Lately, we’ve seen XLE snap back and show much better signs of relative strength, and this makes perfect sense given the market taking on a much more defensive nature as volatility picks up. However, when looking at relative charts of SPDR Select Energy Sector ETF (XLE -0.08% ) vs SPDR S&P Oil and Gas Exploration and Production ETF (XOP), this gives some pause as to whether this will still be the right way to play Energy, as this ratio chart shows prices right up against serious resistance that has held over the last year. In the short run, this run-up to resistance calls for considering swapping XLE for XOP for those inclined to favor different sector ETF’s.
If WTI Crude begins its slow ascent up to the $115 level which I expect could happen into mid- 2023, XOP largely will show very good outperformance on this rise. Thus, stocks like DVN 0.27% , APA -0.91% , FANG 0.58% , MPC -0.37% , PSX -0.33% likely might outperform XOM and CVX 0.30% in the months ahead.
Meanwhile the post market volatility continues, as MSFT 0.51% earnings initially failed to halt a 5% slide in this stock. The stock then promptly reversed during its Earnings conference call as MSFT traded up to $293.50 (as of 7pm EST) from a 1/25/22 closing price of $288.49. Overall, this recent weakness looks to be nearly complete. My technicals suggest a 38.2% Fibonacci retracement area at $273 would also line up with the top of the Ichimoku Cloud, which should be excellent support to buy dips, if given the chance. Initially, this might prove premature as MSFT has managed to gain ground after hours. However, any additional weakness should find strong support in the 265-273 zone, and would be appealing to buy dips technically.
