Transports nearing 50% retracement of 2020-2021 rally
- SPX weekly chart’s bearish engulfing pattern should lead to weakness into October.
- Transports breakdown might find support near its 50% retracement area in 3 weeks.
- Natural Gas has neared its “Do or Die” area and important for this support to hold.
September’s Triple Witching Friday close at multi-week lows is particularly negative for the prospects of a rally, and further selling still looks likely over the next couple weeks to likely undercut 3700 before a relief rally can get underway in October. While intra-day volatility was very present during Friday’s session as volume expanded and prices attempted to claw back to halve losses by the close, weekly charts still showed prices making new weekly lows on DJIA, SPX, NASDAQ at the lowest levels since July, and DJ Transports have now joined the weakness in selling off down to multi-month lows. As discussed, markets remain in one of the most negative seasonal times of the year, and price action turned down on schedule earlier this week to confirm this bearish seasonality. While one cannot rule out a 1-2 day bounce attempt given this week’s decline, I do not expect much strength until prices have reached support under 3700 in October. Tactically, “cash remains king” and one should be patient until markets reach downside targets, and begin to show either volume and breadth divergences, or capitulation to buy.
DJ Transports breaking down to near its 50% retracement
Fed-Ex’s withdrawal of its Earnings forecast resulted in more than a 20% single-day decline on Friday, bringing prices within striking distance of its 50% retracement level.
I’ll forego the debate on whether FDX1.16% issues are idiosyncratic or pose greater worries about the world economy and simply look at the price of the Dow Jones Transportation Average. Friday’s break of $12868 brings prices to the lowest levels since early 2022.
Interestingly enough, prices are also hovering just above its 50% retracement of the 2020-2021 rally, a level that’s thought to offer some support on further selling in the next couple weeks.
Momentum on weekly charts below shows MACD holding up at much higher levels despite this breakdown, owing largely to the bounce from this past July. While many might speculate that a drop to new multi-month lows is bearish and lead to further declines, it’s always wise to watch when momentum is diverging significantly as prices are nearing a key area of possible support.
Back in November 2021, we saw the opposite case, where a push to new highs failed to coincide with MACD nor RSI reaching the same levels as May 2022 peaks. This proved to be an effective Top. In similar fashion, I’m expecting that Transports likely should bottom out in the month of October within the next few weeks. Key to watch for will be when prices pull back and then rally to recapture the prior lows from June of this year at that 12868 level. This will be an important signal for the Transports that can allow a larger bounce into Year-end. At present, further weakness is likely and possible over the next couple weeks.
If forced to invest in the Industrials sector right now, my favorite top 10 Industrials within the XLI are : RSG0.19% , NOC0.53% , GD1.00% , WM, HII0.55% , PWR1.97% , GWW1.54% , CHRW0.06% , TDG2.21% , and LMT-0.21% .
Natural Gas has fallen to “Do-or-Die” support
Recent selling pressure in Natural Gas would seem to be opposite of what many investors expected would happen given Russia’s recent efforts to indefinitely halt gas supplies to Europe.
Prices on both European Natural Gas along with Henry Hub (NG5.16% _F) have dropped sharply since mid-August, when many charts suggested prices might be on the verge of a large breakout.
This breakout has proven false for now and the extent of the selling pressure down under $8 MMBtu into early September was the first warning sign. Next, the bounce attempts over the last week now look to have failed, and Natural Gas has dropped back down under $8 again just in the last few days.
Importantly, Natural Gas needs to hold early September lows to keep its rally hopes alive. Any break of $7.55 would argue for a much larger decline over the next few months which could test early July lows just above $5.30.
From a fundamental standpoint, we’ve heard that inventory levels are now 90% full, so the success in storing inventory ahead of this Winter along with its rationing efforts looks to have been successful.
Overall, UNG has important support near $26 and most should use this as a stop for longs. Those who wish to speculate on Gas falling could favor KOLD-0.38% over BOIL0.42% on a breakdown. However, both of these are quite volatile and not recommended for most investors without a very high tolerance for risk and long investment timeframe.
Silver CFTC data has begun to favor long positioning
While I’ve opined that the metals are getting close to bottoming, most charts still show a good likelihood of another couple weeks of selling pressure.
However, Silver has begun to diverge positively from Gold and has not broken down to new monthly lows, so this is the first instance of some meaningful positive divergence.
Furthermore, for the first time in over three years, Commercial traders are now long Silver for the first time since 2019 while Large Speculators are net short Silver.
When these paths cross, as seen in the 2nd part of the graph below (Red line (Commercial Hedgers) crossing above the light green line (Large Speculators) it shows that sentiment is now suggesting from a contrarian standpoint that longs should be favored.
One should look to accumulate Silver on a 3-4 month trade on any drop back under $18, and I feel that its not wrong to own it in small amounts here and simply add on weakness. Early October should be a compelling time to buy dips if/when Silver and Gold move further to downside over the next couple weeks. Stay tuned.
