Key Takeaways
- Monday’s bounce looks similar to the bounce from early May, and insufficient evidence of trend improvement is present which would suggest a meaningful low is in place.
- China, and specifically, Chinese Tech might offer relative outperformance vs US Tech between now and July.
- WTI Crude looks to be nearing channel resistance which likely holds this week at 114.
Monday’s bounce started to stall out by mid-afternoon and groups like Technology are already beginning to wane before SPX or NDX have even broken their respective downtrends. While prices could push a bit higher, it’s doubtful SPX eclipses 4155 and very well could be closer to resistance to this bounce at 4065-4100 into Tuesday/Wednesday. Unfortunately, the combined factors of 1) Elliott-Wave structure 2) Lack of Counter-trend exhaustion at last week’s lows, and 3) Ongoing bearish cycles are factors which keep trends pointed lower. Furthermore, the first sign of trend improvement would certainly be welcomed with open arms, but frankly, has not occurred just yet. Thus, until there is evidence of either trend improvement, or evidence of downside capitulation on pullbacks into early-to-mid June, it’s still proper to be defensive.
Could “Peak-bearishness” for China offer Buy opportunity?
China’s lockdown strategy, according to FSinsight’s own Tom Lee, has affected 160 million citizens, or about 10x the number who were impacted by the 2020 Wuhan lockdown.
Sentiment certainly seems understandably negative and economic news has painted a bit of a grim picture, with Industrial Output for April -2.9% and Consumer Spending -11.1%.
Yet, China seems to have already weathered much of the storm, and index ETF’s like FXI (China Large-Cap ETF) remain lower by 50% off peaks seen just 15 months ago in February 2021.
Interestingly enough, despite the news continuing to come in negative, ETF’s like FXI or KWEB (KraneShares CSI China Internet ETF) haven’t shown much further damage than the lows put in back in March of this year, two months ago. While absolute charts remain in poor shape and in need of some strength, the relative charts vs SPX and/or US Technology have begun to improve.
The chart below highlights a ratio of KWEB 6.49% to RYT (Invesco’s Equal-weighted Technology ETF) As this chart shows below, we’ve seen a definite flattening out in relative performance and arguably a minor breakout of the ratio chart going back since last Winter. Overall, I like owning FXI as well as KWEB in small size, expecting these to improve and likely turn higher as more and more Chinese cities put an end to their lockdowns.
Bottom line, I don’t mind owning KWEB here with stops at 24 and upside targets in the mid-to-high $30’s initially. Furthermore, FXI also looks actionable, and this can be held long with stops at $28 with targets in the mid-$30’s. Most of China arguably has already borne the brunt of this decline and should now be starting to stabilize.
Implied Volatility has dropped 15% over last week, while trends haven’t changed.
Interestingly enough, implied volatility has dropped more than 15% in the last week as Equity indices have attempted a mild rally. The Bloomberg chart below shows realized volatility still at a very high level (in White) while implied volatility (in blue) remains far lower than realized volatility and has gotten compressed in the last week after just a couple days of bounce.
Given that US equity markets have not broken existing downtrends while the VIX dropped back under 29 in the last week (and far below January or March peaks in the high $30’s), I find it’s probable that buying implied volatility is the right move for a push back to monthly highs.
Movement back to the high 30’s or even low $40’s seems correct for VIX, (>40%+ higher ) as investors seem to be convinced that last week’s lows might be quite important despite no evidence of trend change.
Overall, given my defensive stance, it still looks right to consider buying dips in implied volatility, expecting a retest of last month’s highs. See the chart below:
Crude oil’s rally nearing channel resistance, & likely reverses in the week ahead
Crude oil is nearing areas of upside resistance which should prove important in causing some slowdown and reversal to this recent four-day bounce.
As daily WTI Crude chart shows below, prices have risen to just below the upper channel resistance that’s marked highs for this recent trading activity over the last month.
Moreover, Elliott-wave structure suggests this move likely stalls out and should turn back lower, while intra-day charts show DeMark exhaustion on multiple timeframes that could result in an upcoming About-face.
Overall, this range extends from $98 up to $114 and is nearing its upside target. Prices should likely reverse to pull back and challenge $98 which could be broken as the month of May comes to a close into June.
Under $98 on a close has little support until near $85-88, an area of support which is quite appealing to start nibbling again at Crude and Energy stocks over the next month. Bottom line, while this Energy weakness might prove short-lived and tactical, it likely is a good buying opportunity for a move back to new highs for WTI Crude.
At present, OIH, XLE and XOP are likely to stall out in May and start to weaken into June. OIH bounce likely fails technically before 287 is exceeded and should drop to test/break 240 on its way to 229. XOP is unlikely to surpass resistance at $145 right away and $123.47 is a stop for longs. XLE, to its credit, is the strongest of the three choices and longs still look attractive here technically. However, stops would be placed on XLE at $75.13 for those who are tactical in nature.
