Energy still strengthening, while Natural Gas has finally broken out

Markets have entered a window for potential low which likely happens between now and early next week.  US Dollar and US Treasury yields look to be on the verge of a larger decline in August which should aid Emerging markets, and Commodities.

The roller coaster in US equities continues over the last few days as part of the existing downtrend from 7/27.  While my work suggests a low is near, there hasn’t been sufficient proof to think this is at hand just yet.

Additionally, my analysis was based on multiple factors, and not related to Thursday’s CPI report.  While this could produce volatility, it’s important that technical progress happens which gives technical conviction that a low is at hand.  A few factors remain technical concerns:

• QQQ/SPY broke down from a near-term Head and Shoulders pattern
• Two+ month uptrends from late May lows broke on 8/2 and near-term momentum based on RSI has not reached oversold levels
• DeMark signals aren’t yet in alignment for trading lows and both QQQ and SPY show 2-3 days at a minimum before the possibility of daily exhaustion
• Window for Short-term cycle extends into next week but no signs of bottom yet
• Seasonality remains weak for August and September in Pre-election years

To the bulls credit, very little underlying weakness has occurred, despite markets having trended down for nearly two weeks from the 7/27 intra-day peak.  A few positives are as follows:

• SPX is lower by less than 3% off the peak, and uptrends from March remain intact.  Recent churning has happened at the 50% retracement level of the May-July rally.
• Sentiment has retreated a bit from bullish levels reached in late July
• QQQ has lessened its overbought state, while other indices like SPX, never truly got overbought, particularly on an Equal-weighted basis on weekly charts
• Broad-based strength remains intact and healthy sector strength, despite a few days of defensive trading
• Seasonality intra-month in August turns more positive heading into next week
• Short-term technical patterns have been choppy and overlapping over the last week, not impulsive, high volume selling.
• Both US Dollar and Treasury yields (across the curve) look to have reached resistance;  Cycles, sentiment and seasonality bode well for pullbacks in August
• Weekly momentum remains positively sloped and no material negative divergence such a the case in Spring 2021, or heading into late 2021 ahead of the 2022 bear market
• Intra-market divergences have largely been alleviated in recent months, as Transports and DJ Industrials joined the rally in QQQ and SPX.
• DeMark signals have not shown exhaustion signals on QQQ on monthly basis, nor have signals appeared on weekly SPY charts to give conviction of  a peak

Overall, I’ll respect strength if/when I see it, but the technical plan is to wait until more of the negatives have been alleviated combined with evidence of technical strength.  While it’s always tempting to try to “make a big call” ahead of a key economic piece of data, the technical aren’t yet in alignment.  However, trends have not gotten bad enough to think this extends throughout August, either.  I suspect a low is right around the corner.  However, proof is needed.

QQQ breakdown vs SPY suggests that a low still could take a bit more time

Simply put, recent sector activity has favored Value over Growth since mid-July, and this hasn’t turned back to Growth’s favor just yet. (Though I expect this will happen this month)

This daily relative chart highlights the relative relationship of QQQ vs. SPY which highlights Wednesday’s breakdown of QQQ vs. SPY from a Head and Shoulders pattern which began back in June (Confirmed today 8/9)

While this doesn’t portend substantial long-term underperformance, the breakdown is thought to be a short-term technical negative until recouped.  My technical thoughts are that an additional 2-3 days of weakness are possible into Friday 8/11, or Monday 8/14 before this pattern finds support.

Interestingly enough, 8/16 aligns with last year’s minor peak in SPX, which gives this time-based importance as another date to concentrate on next week.  Importantly, the failure of markets to turn higher today does NOT imply the cycle for late this week has not worked.  However, one should always consider price action to be the most important evidence for confirmation.  Until this happens, the near-term trend is negative for QQQ/SPY.

Bottom line, it’s thought that any meaningful market rebound “should” be led by QQQ given Technology’s influence.  Thus, the chart below signals the opposite in the short run.  QQQ breaking down vs SPY indicates that stocks like AAPL -0.41%  and MSFT 1.80%  might have a bit more weakness before they can bottom out.  Stay tuned.

Energy’s strength has now continued for its seventh week

Energy’s recent dominance has continued since it bottomed out in June. Integrated Energy has slowly but surely caught up with the performance in Services and Exploration and Production names (E&P) as performance is now nearly equal over the last month between Equal-weighted Energy ETF by Invesco (RSPG -0.46% ) and the top-heavy SPDR Energy Select sector fund ETF (XLE -0.92% ) which are up +10.36% to +8.24% respectively.

However, over the last three months, Equal-weighted Energy has proven far more dominant, outperforming XLE by more than 600 basis points (b.p.)

In the short run, the move to the highest levels of the year in WTI and Brent Crude has coincided with a breakout in the triangle pattern in RSPG -0.46% , both of which are positives.

This likely leads to further Energy outperformance in the month of August.  However, three factors suggest prices might stall out and possibly begin consolidation starting within 2-3 weeks’ time.

• Prices are growing stretched on daily charts of XLE, OIH and XOP along with RSPG.
• DeMark weekly exhaustion looks to be possibly two weeks away from exhaustion.
• Prices on RSPG are nearing former peaks from last Fall. 
• Seasonality concerns.  XLE’s worst months of the year over the last 20 are August and September, with average returns of -1.14% and -0.67% respectively.

The combination of these four factors above suggests that Energy likely won’t continue to go straight up throughout the Fall.   Yet for now, additional strength looks likely in Energy and it looks premature to avoid Energy based on its recent runup.  This remains the strongest area near-term in the US Equity market.  

Overall, Energy remains a technical overweight for me.  However, I expect that within two weeks, Energy strength likely could stall out, and the Value trade might give way to a rebound in Growth, led by Technology and Industrials.  For now, this is premature, but I expect that RSPG likely finds strong resistance initially near late 2022 peaks.

Natural Gas breakout bodes well for upside follow-through into September

Natural Gas has finally broken out in a manner which likely allows for upside acceleration in the days and weeks ahead.  (Many attribute Wednesday’s surge to a combination of the threat of possible Australian worker strikes along with delays in Norway’s seasonal maintenance, and drop in LNG imports to Europe)

Technically speaking this has proven to be a lackluster investment in recent months following several failed rally attempts.  However, prices largely have trended sideways, not lower in recent months, and Wednesday’s (8/9) breakout looked to certainly be a positive.

I’ll review cyclical times for a Fall peak when the time arrives.  However, this week’s strength looks positive towards further follow-through in front month Natural Gas futures to initial resistance levels near $3.75-$4.00, with $4.75 having importance as an area near former lows from October 2022.

UNG looks attractive, despite its 14% rise in Wednesday’s trading.  A rally up to $10 looks certainly possible technically and over could lead to $11-12 ahead of a seasonal peak.  Overall, I do not suspect that a move back to highs is possible this year.  Thus, strength should prove short-term oriented and tactical only.  Yet, this looks to be underway this week.