Key Takeaways
- Stabilization within a trend does not equal “Rally-time” Trends remain under pressure
- Energy remains the best performing group, and while stretched, still looks to offer alpha into mid-June; Exploration and Production sub-sector looks most promising
Minor stabilization does not equate to a bullish trend change SPX showed some minor degree of holding up post FOMC minutes and allowed for this recent churning to continue. This indecision has been frustrating to bulls and bears alike, but commonly represents a Wave Four type move from an Elliott-wave perspective. As discussed, momentum has begun to show readings that are not as negative as two weeks ago. However, US indices have shown no evidence of trend change, and recouping 4100-4114 resistance zone is thought to be the most important towards signaling a change in trend. (Even short-term levels like 4000 were not even exceeded on Wednesday) Defensive groups like Utilities and REITS have outperformed in recent days, the exact opposite kind of sector performance that would be thought likely ahead of a big rally. Near-term, the path of least resistance remains to the downside, and I’m expecting a test and brief undercut of 3810 into the end of May/early June which might usher in a more meaningful structural low than what we’ve seen this past week.
It’s “Oh so Tough” to fight Energy and Wednesday’s strength shows this to carry up a bit more ahead of June Peak
Energy continues to show stellar performance, and has barely given technically driven investors any signs to consider selling, despite just a few weeks of choppy behavior. Cyclically, and from a DeMark perspective, this evidence comes about in June, and likely marks a peak in Cyclicals while Technology and Growth bottom.
At present, while the Field Services stocks have resulted in some lagging in OIH -1.15% and SLB -0.04% , HAL -1.28% in particular, there hasn’t been the same degree of weakness in XLE -0.96% , nor XOP.
XLE has rallied largely for defensive reasons given ongoing market volatility, and XOM -1.13% and CVX 0.43% have been steady outperformers.
Meanwhile, XOP -1.67% (SPDR S&P Oil and Gas Exploration ETF) has just broken out of its triangle consolidation pattern of the last month. This is constructive, and should let this part of Energy show strong outperformance into mid-June near the FOMC meeting.
Overall, while I have discussed selling Energy as a trade, this was based on a 3-5 month view. For those with a shorter timeframe, this does still look to work, and XOP likely trends up to $155 or even $163 before peaking. This should constitute the final push up in this rally (for now) and I am expecting Crude likely backs off after a spike higher into June.
Natural Gas forms Bearish technical pattern
Interestingly enough, natural gas’ huge outperformance over the last few weeks might come to end given its formation of a technical pattern made familiar by Linda Bradford Raschke called “Three Little Indians” .
This occurs when three consecutive peaks or troughs in price occur that are quite similar and symmetrical. (in this case peaks). As seen below on daily charts, prices retraced much too far to keep technical structure constructive following the secondary peak into early May.
This deep retracement followed by a similar rally back to new highs which makes a marginal new high likely won’t prove to be a meaningful breakout that extends too meaningfully in my view. This sets up for a June selling opportunity in Natural Gas, and also lines up with bearish weekly cycles in “Natty” that suggest selling pressure could take prices all the way back down to challenge May lows and below in the months to come.
Overall, this should be watched carefully for any failure to follow through in the days/week ahead that then reverses back lower under $7.85, in front month Natural Gas Futures. This would be significant in my view of a bigger peak in price.
Equal-weighted Energy likely to push to highs of channel, then reverse
Given all this focus on Energy, it’s apparent that some groups are doing just fine, while others have been lagging and not keeping up. As mentioned, Energy remains the top performing group on most timeframes, whether it be 1 week, 1 month, 3 month, or Year-To-Date. Thus, while prices are overbought, it will be important to know when this is coming to an end.
Technically speaking, the chart I find most relevant towards helping pinpoint a possible peak before meaningful weakness occurs has to do with Invesco’s Equal-weighted Energy ETF (RYE).
Hourly charts are perfect for getting a bird’s eye view on how this sector appears, as it allows one to home in on the recent price action along with structural wave structure. This can allow us to more perfectly identify areas of key resistance and/or support that might be relevant. Furthermore, when swing highs are then undercut, one can glean a fair amount of information as to when this might be peaking.
Overall, RYE should trend higher up to meet the upper edge of this ongoing pattern, which intersects at/near $77 initially and overthrow move might enter 80’s. However, any evidence of this dropping back under $69.26 from May 19th would have importance as a bearish development that should signal the top.
Bottom line, this looks to be a final exhaustion wave up in Energy that likely will stall out and turn lower sometime in June. At present, for those with shorter time frames, this group is still working, but increasingly looks like a poor risk/reward on further strength over the next 1-2 weeks.
