Both US Equities and Bitcoin near temporary Support

Key Takeaways

• SPX and QQQ look to be nearing initial support after recent weakness.
• Some of this week’s biggest areas of weakness- Transports and Semiconductor issues, are now closing in on “Make-or-Break” support which looks likely to hold on this retest.
• Implied volatility looks attractive to own on a 2-3 month basis after its sharp decline.

The near-term market pullback intensified on Wednesday, though now lies near initial levels of support identified in yesterday’s report. Overall, I am not confident that markets need to decline right away to test February lows and I expect this will continue to be a choppy, volatile tape.  Two reasons stand out why markets might make short-term trading lows over the next 2-3 days:  First, Elliott-structure shows recent weakness having taken the form of a possible ABC correction, which has successfully held early March peaks (which now should be support for indices). Second, both S&P and QQQ have reached their respective 38.2% Fibonacci retracement areas which often can be important. Third, hourly RSI has gotten oversold, while the outsized laggards in recent days (Transports and Semis) are now nearing important support. Overall, more needs to happen to think trading lows are in, but its right to use prior lows from 4/1/22 as a guide.  Over 4507.57 in SPX and QQQ-358.59 on a close would suggest a brief rally into April expiration could be underway.  

Key Technical Developments

S&P, NASDAQ and DJIA have broken early April lows to retrace 38.2% of the advance from mid-March.  This area lies near initial support for SPX and QQQ, yet more proof is needed to think a trading low is imminent. 350 is key for QQQ and 4400 for SPX.

Daily momentum indicators like MACD are close to crossing back to negative territory under the signal line on broader US indices, while not oversold.  Meanwhile both weekly and monthly MACD are now negative

Markets remain in worse technical shape than the SPX and QQQ would imply given their respective 9% rallies in late March to within 3-4% of all-time highs.  At present, less than 50% of all SPX issues lie above their respective 200-day moving averages (m.a.).

Sector rotation continues to suggest a defensive bent, which I agree with technically between now and late June. Utilities, Healthcare and REITS are strong outperformers while Technology and Discretionary remain under pressure.

Technology remains technically “broken” having violated three-year uptrend line support vs. SPX in Equal-weighted terms.  Until this can be recouped, it’s difficult putting too much stock in Tech being a sector to favor in bottoming without much proof.

Recent deterioration in leading groups like Transports and Semiconductor stocks are a minor concern, but both of these groups are nearing initial levels of support near prior lows which likely holds on this first retest.

Treasury yields have continued to new monthly highs, but were largely unchanged after Wednesday’s FOMC minutes turned out to be a bit more hawkish then planned with nearly 100 billion a month in Asset runoff planned starting in May (higher than expectations).

Implied volatility looks attractive to consider owning following VIX dropping in half in about 3-4 weeks’ time.  Both SPY and QQQ implied vol levels are roughly half of mid-March peaks.

Small-caps and Mid-caps have both weakened far more than Large-caps and remain in relative downtrends vs S&P.

Sentiment readings turned up sharply ahead of the minor stock market peak made last Tuesday, one week ago, with Equity Put/call readings falling to the lowest levels of the year and AAII showing the most extreme decline in bearish sentiment in two weeks’ time in over a decade.

DeMark indicators like TD Sequential and TD Combo have aligned to show “60-minute” 13 countdown “Buys” yet are early on 120-minute charts along with Daily charts in showing any kind of TD Buy Setup.  Thus, no conclusive evidence of a meaningful low, and rallies into April expiration likely still give way to weakness into May given weak breadth and momentum readings.

Market cycles based on my Cycle composite along with the Mass Pressure Index show above-average volatility from April expiration into June.  Thus, even if April does turn briefly higher, I fully expect late month weakness into May to unfold given the bearish nature of some of the key cycles.

Bottom line, correlations remain at low levels and plenty of stocks among various non-Tech sectors are showing good strength and look attractive to own.  Thus, diversification into Healthcare, Utilities, REITS, Energy looks proper along with considering buying Treasuries after recent weakness.  Finally, having some commodities exposure looks prudent.

DJ Transportation Average now nearing key Make-or-Break levels

Some of the biggest laggard groups in recent weeks are now nearing key support levels which I feel should hold on this first retest.  As many know, the deterioration in Trucking led the Transports down sharply in recent days, with the DJ Transportation Avg dropping nearly 2% on average per day for the last six trading days.  This move has caused momentum to reach oversold levels right as prices are nearing support.  Thus, one can consider buying with risk levels very well defined at March lows and expect some kind of stabilization in the next 3-5 trading days.

Important to note:  If bounces fail to regain 50% of this decline from late March and then weakens to break March lows, this would represent a larger technical sell signal.  Thus, one should only consider trading longs which one has the ability to sell if/when things go wrong into late April/May.  Otherwise, it’s proper to await much better evidence of this group strengthening.

Bitcoin could be nearing initial trading support, similar to SPX

Interestingly enough, Bitcoin’s recent technical damage has occurred at the same time as US Equity indices and the positive correlation continues.  Additionally, the shape of this short-term pattern is also similar with prices now nearing early March peaks (which should be support). Thus, traders might consider buying dips in the next 2-3 days, considering 42591 as a very key support level.  If this is broken, whenever that might occur, this would be a larger negative.  However, one can use this level for trading purposes as a well-defined risk level for longs which would allow one to limit losses for those who are trading oriented and more tactical in nature.  Key levels look to be tested in the next 2-3 days and will expect this will provide some answers as to whether this can hold and allow for a rally after BTCUSD has declined over 10% from its peaks over $48k in late March.

Implied Volatility is attractive to buy for a 2-3 month basis given “VOL” having been nearly cut in half within the last three weeks.

Finally, it’s worth pointing out that implied volatility levels are nearly half of where they peaked out in mid-March despite relatively little changing that would serve to alleviate uncertainty.   Russell 2000 implied volatility (shown in light blue) fell from 37 down to just above 20 and remains at relatively low levels.  Thus, buying “Vol” here for a 2-3 month basis looks appealing given the recent pullback, as I expect realized volatility to be very much present in US Stocks into the end of the 2^nd Quarter.