Crude should begin to lift, while TNX nears support after big decline

Near-term trends for US Equities are bullish and should require consolidation in the weeks to come following their sharp rallies from October lows.  Treasury yields and US Dollar should be close to bottoming.   Equity indices might temporarily peak this week and pullback ahead of a rally into 2024.   At present, precious metals, Crude oil, and Cryptocurrencies are more attractive than Equities over the next few weeks.

As with recent days, I find myself with far less to discuss on equities vs Metals and crypto which have both begun to show stellar signs of pushing higher during a seasonally bullish time.  Equity indices, however, have shown increasing signs of stalling out in recent days.

With regards to equities, it’s important to reiterate a few key things:

• My reticence in attempting to stick with this uptrend while SPX is near 4600 has less to do with intermediate-term concerns, and is primarily short-term focused.

• Equities are up 10% in 5 weeks’ time, and Elliott-wave structure, cycles and DeMark exhaustion signals all point to the possibility of consolidation in December. 

• While I respect and admire the strength of Technology in having led the charge in recent months, this has begun to stall out, as evidenced by stocks like AAPL, GOOGL, and other large-cap Tech names over the past week.

• The broader market is certainly did not rebound nearly as sharply as Technology did off the October 2023 lows.  Thus, “the market” in Equal-weighted terms has some definite “wood to chop”.  This is certainly evident when eyeing the technical charts of many of the Regional Banks, and Healthcare stocks, not to mention Consumer Discretionary.

• I expect that SPX and QQQ should retrace at least 50% of the rally from October before any push back up above SPX-4600 and QQQ-409 can occur.  While fighting seasonal bullish trends this time of year is normally difficult, the risk/reward for investors to initiate new longs with indices right at key resistance looks challenging. 

Hourly TNX charts show the US Treasury Yield having plunged to the lowest levels on Tuesday since last Spring.  This directly led Equities higher, but the yield move along with equity advanced proved short-lived following the poor 7-year Treasury Auction.

Bottom line, yields look to be nearing support.  I am not expecting an immediate break of 4.25% to decline under 4.00% until 2024.   Furthermore, Yields along with the US Dollar should be close to bottoming which could happen over the next week.

(Note, if yields and Dollar both turn up sharply, this might temporarily derail the precious metals move, just as Gold challenges May 2023 peaks.  Overall, I suspect any backing and filling in Metals to represent a buying opportunity along with the broader Equity market on weakness, which could be complete by 12/21/23.

At present, Equities have gotten stretched as yields have gotten stretched in the opposite direction.  Both should be close to turning down, for corrective purposes only.  Thereafter, a rally back to new highs likely can commence.

10Y Yield (%)

Crude should be bottoming following having made lows on schedule into November expiration

Technically speaking, Crude’s pullback makes this attractive to favor for a bounce in December after two difficult months.

Elliott-wave patterns look complete for (at a minimum) a short-term ABC pattern into late November. 

Furthermore, cycles showed the possibility of bottoming in late November. 

Additionally, generic WTI Crude futures weekly Ichimoku Cloud patterns have successfully contained the peaks of Crude this past Summer.  Now they look to be serving as support after recent weakness. 

Finally, recent stabilization over the past two weeks looks constructive on a risk/reward basis technically speaking.  Tuesday’s closing price made a new three-day high close, and suggests that upside follow-through could be quite likely into mid-December.

While weekly momentum remains bearish on Crude and on the Energy sector at present, this looks like an appealing risk/reward for buying this rip from late September following its recent decline.

Going forward, a few points seem important to highlight:

• Price could begin to move higher sharply in the days to come and movement over $79.50 in generic Crude Futures would argue for a lift to the low $80’s.

• This rally might play out as a three-wave advance (and that will be apparent potentially in a few weeks’ time.    If this proves to be the case, then another drawdown could be likely into late December and/or January before a more meaningful bottom.  However, I don’t expect Spring 2023 lows are undercut.

• Firm support lies at these Spring 2023 lows, creating an appealing risk/reward to buy Crude and overweight Energy as a sector into 2024, in my view.
• I expect XOP to likely outperform both OIH -0.06%  and also XLE -0.92%  in the weeks and months to come.  Thus, the Exploration and Production names have the most appeal at this time.

Bottom line, this weekly chart below shows why prices lie near key support.  I expect a rally from Crude and also from Energy into early to mid-December, and this sector should be able to show some mean reversion higher after a difficult couple months.

I’ll share further thoughts in my 2024 Technical Outlook on 12/14/23 (register here).

Crude Oil Futures

S&P Metals and Mining ETF looks to have broken out

XME, the SPDR S&P Metals and Mining ETF, looks to have exceeded a meaningful downtrend following its push to the highest weekly close in four weeks’ time.

This weekly chart shows this week’s breakout, which looks appealing on longer-term charts as well given that this formed an intermediate-term peak (that initiated its current triangle pattern) back in April 2022.

Near-term, this push in Gold and Silver back towards all-time highs has finally begun to result in metals and mining stocks starting to work.

Given my expectations of Interest rates (and more importantly Real Rates)  beginning a more meaningful decline next year (following a snapback rally) I expect that the 1^st half of 2024 could allow for some meaningful outperformance from Metals, and for Metals stocks.

Overall, I like XME here technically, which has gradually begun to strengthen.  This week’s move creates an appealing risk/reward for intermediate-term gains, in my view.

While $54-$56 might contain the initial push off the October lows, I do not expect that retracements will violate $50 before a larger rally to challenge March 2023 highs near $59.04 followed by April 2022 peaks at $66.18.

S&P Metals & Mining

VIX unlikely to reach Single digits after having plunged to 3.5 year lows

Near-term, I am of the technical opinioin that any decline under last Friday’s lows of $12.45 should be a buying opportunity for implied volatlity for investors with a 3-5 week timeframe or longer.

VIX has plummeted in recent weeks despite elevated cross-asset volatility and despite evidene of credit spreads having widened out along with bankruptcy filings still elevated (Per Bloomberg)

Support for the VIX index should materialize near lows from 2018-early 2020 which largely were contained between 11-12. 

Put skew has been rising in recent weeks as downside protection becomes more expensive.  However, call skew has also risen, and the subsequent “dealer hedging” of positive gamma could be argued to actually keep the underlying VIX at lower levels than normally might make sense given historical volatility.  (Source: Bloomberg)

Overall, implied volatility has “gotten cheap” again in my view, and despite VIX being notoriously difficult to trade, I am skeptical that VIX undercuts 2018-2019 lows right away.

Thus, this pullback down under 12.45 likely faces support between 11-12.45 this week into early December.

VIX Index