Technical Strategy Video:
Key Takeaways
- Wednesday’s about-face likely leads to a retest and minor breach of this week’s lows before a bottom is truly in.
- 2-Year Yields made near 2 standard deviation moves and yield curve flattened out
- USD broke out above consolidation, leading to a likely push back to new 2022 highs
- Growth looks to be getting close to Support vs. Value particularly on Large-Caps
The severity of Wednesday’s reversal in US stocks likely means a retest has begun, which should take SPX back down to test and even breach Monday 1/24/22’s lows by a small amount. Markets showed one of the more extreme reversals in years (In NASDAQ, a reversal of such a big gain hasn’t happened since 2015) which gives rise to the thought of this bounce needing to retest before markets can turn up. Overall, the technical roadmap for the next 4-6 weeks is higher, so the best strategy should be to consider buying dips in things one has conviction in. Key levels to watch carefully lie near 4287, which if breached, should lead down to 4222 and then under to 4180-4200. Markets should be near lows, but thus far, the strength of today’s reversal argues for a bit more short-term consolidation in all likelihood before stocks can move higher. Growth in particular likely bottoms out vs Value into early February.
Technical Developments which need to be resolved to have conviction
- Both Small and mid-Cap indices made only lackluster recoveries this week before rolling over to break minor 2-day trends from Monday’s lows. The lack of follow-through in these areas is a short-term concern for Bulls
- Elliott-wave structure on the first move up off Monday’s lows was very much three-waves in nature on intra-day charts, giving traction to the idea of a fourth-wave Flat pattern (which then should lead back down to a minor break of this week’s lows)
- DeMark indicators failed to show proper “TD Buy Setups” present on daily charts of QQQ, nor SPY, with only a “7 count” as of Monday. Thus, given my interpretation of this setup, it lacks in conviction towards thinking it’s a major low thus far
- DeMark ratio charts of both QQQ/SPY as well as Growth/Value charts are early by potentially one week towards showing downside exhaustion
- Short-term cycles based on prior highs and lows in the last year all point to first week in February towards having confluence for a turn. Thus, pullbacks into the first week of February should be buyable
- Sentiment would benefit by showing a bit more capitulation towards thinking a meaningful low is in place. While sentiment had grown more negative, it had not yet truly registered fear.
- US Dollar broke out of the consolidation of the last few weeks, indicating it likely will push higher to DXY resistance near $98. Thus, a sharp Dollar rally might serve as a headwind to immediate stock gains
Overall, the factors of momentum being sufficiently oversold, along with compressed breadth levels do likely point to an upcoming low which should take place this week, or early next. I had discussed that initial bounces might need to retest. I do favor a long stance between now and mid-March, but for those that are ultra short-term focused, a retest of lows would provide an even better risk/reward entry
US Dollar breakout likely leads to new 2022 highs into February
This daily chart of DXY shows a pretty pronounced breakout in the DXY, which likely is going to lead to a push up to 98 in DXY into February before any relief. If Yields start to follow suit on the long end, there could likely be downside volatility in precious metals and many commodities, which for now is still premature.
Emerging markets had shown their first evidence of trying to bottom out, and any pullback in the next 1-2 weeks on Dollar strength should be buying opportunities, technically, specifically for Chinese Technology and Brazil. (KWEB 3.30% and EWZ 0.20% .)
Growth looks close to bottoming out vs Value – When eyeing most charts of Growth vs Value across all Style spectrums, we see that growth has underperformed badly in recent weeks. The chart of IShares Small-cap Growth ETF (IJT 1.30% ) vs Ishares Small-cap Value ETF (IJS 1.20% ) shows that this ratio is right down near key trendline support to buy. Large-cap and Mid-cap ETF’s look similar in that these ratios have become either oversold, or lie near key intermediate-term trends that argue for an upcoming bounce. Thus, I expect Growth to outperform Value and should bottom out and lead higher in the month of February into March.
