US Equities and Treasuries look to be near resistance, while the US Dollar index has begun to rally. A majority of the major sectors are also now right near meaningful intermediate-term downtrends. Until we can see proof of downtrends being convincingly broken across the board, I still view current levels as being a poor risk/reward for new investments without consolidation. Strength into next Monday technically should hit a resistance wall, and give way to a two-week pullback into 12/22 which should be led by a bounce in Yields.
Thursday’s close at new three-day high closing levels was actually a short-term positive for US Equities, and does suggest that the next 1-2 days might attempt to briefly push back to new highs, in my view. Wave structure, however, might allow for this rally attempt between now and next Monday/Tuesday to face resistance and stall out again.
This time however, I suspect that stocks will face greater consolidation into 12/22 and this should be driven by Bond yields. TLT along with TNX have perfected DeMark exhaustion based on their respective TD Setup counts, and Japanese Government bond yields turned back sharply higher today. I suspect that a bounce in German Bund Yields from oversold conditions along with US Treasury yields is imminent and might play out between 12/12 and 12/22.
However, given the extent of the decline in yields, I do not expect a push back to more than 50% of the recent drawdown in yields before a further rolling over in yields over the final week of December, which might start just ahead of the Christmas holiday.
What should be important is to watch Treasury yields carefully, as they could very well turn higher following Friday’s Non-Farm Payrolls and Hourly earnings data. If this happens, then I suspect the Equity rally should begin to dry up at marginally higher levels and any US Equity rally might occur on thin participation and potentially flat or negative breadth into next Monday. Thus, watch bond yield and watch market breadth between Friday and next Monday.
QQQ’s hourly chart gives some insight as to the recent wave structure which actually is short-term bullish based on Thursday’s gains. The extent of Thursday’s rally makes the three-wave decline appear complete.
Moreover, the resulting bounce has taken a much more impulsive pattern than what was the case a few days ago. Overall, the last two weeks have been difficult to discern or make “heads or tails” out of, technically speaking, given the relative unchanged levels in many US Stock indices.
I suspect that those who have shorter-term timeframes might potentially witness a QQQ bounce up to 398-400 which then should mark a temporary peak for QQQ. In this scenario it’s important for price to remain above Wednesday’s intra-day lows of $384.70, as breaching this would immediately invalidate rally possibilities, technically speaking.
The daily structure of the rally from late October (not shown) now clearly depicts an “open gap” wave 3 advance happening in mid-November, and it’s thought that the recent consolidation could represent a Wave 4.
In plain English, I do not expect that a move back to new monthly highs >394.14 (11/29/23 intra-day peaks) will prove to have too much longevity in the weeks ahead. However, keeping a close eye on market breadth and the structure of this wave pattern will be key. I’ll review this pattern in greater detail next Monday, specifically, if QQQ gets above $394.14.
QQQ 1.40%
What to make of the Small-cap Rally.. Can it Continue?
Small-caps have begun a much needed period of mean reversion after sharp underperformance over the last eight months.
In nearly six weeks, IWM 0.83% has rallied 14%, and the movement in late November has been strong enough to break out of the existing downtrend in ratio charts of the Russell 2000 Small-cap ETF (IWM 0.83% ) vs. the Russell 1000 Large-cap ETF (IWB 0.98% )
This is a meaningful short-term breakout, as seen below. While the rally off the November lows looks to be ongoing, I suspect any strength into next Monday likely could face strong resistance in relative terms near the prior lows from June/July 2023.
Overall, this has bullish implications on a 2-3 day basis, but likely will need to be consolidated if Treasury yields begin to show a counter-trend bounce of any sort.
IWM 0.83% / IWB 0.98%
IWM vs. IWB on a weekly basis shows why more progress is necessary to turn bullish, technically speaking
Despite the relative breakouts being seen on daily charts, the weekly ratio chart of IWM vs IWB remains in a sharp downtrend which has been ongoing since 2021 as part of a longer-term period of relative performance for Small-caps that began back in 2011 after a sharp decade-long period of outperformance between 1999 and 2011.
A few points are relevant here technically:
- This recent relative relationship between IWM and IWB has begun to stabilize in the last couple months. However, the former lows from 2020 (Former support should now become resistance) is important to overcome.
- The downtrend from 2021 in relative charts of IWM to IWB will also need to be broken technically to have faith in this group.
- Interest rate declines in 2024 might help the Small-cap sector begin to show better relative strength. However, sharp rate declines in 2018 into 2020 did not meaningfully help Small-caps outperform.
- DeMark-related exhaustion has produced its first monthly TD Combo “13 exhaustion” signal (Some refer to this as a “Buy”) At present, this will require a monthly close above the close from four months prior to confirm any “buy”. Furthermore, a TD Sequential signal has not yet formed and actually requires weakness potentially into March before another signal could appear. Bottom line, without confirmation, one cannot make any claim of DeMark monthly “buys”. However, this is the first time this signal has appeared on this monthly chart since the 2011 peak. If Tom Lee’s 2024 Outlook is correct for Small-caps, I expect this should be confirmed at some point next year.
Bottom line, a larger rolling over in rates might help Small-caps show better performance next year and follow suit on the recent push off the lows from October 2023. Barring relative charts confirming a trend breakout following such a lengthy decline in relative performance, it’s difficult turning bullish at the lows, technically speaking. More outperformance will be important in helping to have more conviction in Small-caps for 2024.
IWM 0.83% / IWB
IWM’s absolute chart also shows key areas of importance that will be important for the weeks/months ahead
Following a 14% rally off the late October’s weekly low close, Small-caps, as shown by Ishares Russell 2000 ETF, IWM 0.83% , lie just below important resistance.
As weekly charts illustrate going back sincce 2021, IWM has had an ongoing trading range channel which has been ongoing since Spring 2022 over 1.5 years ago.
Highs have been contained near resistance at $200 while lows have occurred near support levels at 161-163. One of these sides needs to be broken too have any kind of conviction in the absolute trend for IWM. At present, the recent rally has carried IWM back to mid-range.
Two areas of prominent resistance look important for IWM in the short run: $190 and then $200. I don’t suspect that a bounce in yields woould allow IWM to continue higher in the short run.
However, its absolute and relative strength have been commendable in recent weeks, and I do suspect this helps Small-caps to “turn the corner” in 2024 and begin a meaningful rally.
As discussed prior, a few things need to happen to have more conviction (and I’ll add to this list)
- In absolute terms, IWM requires a breakout above 190, but more importantly, above $200.
- IWM vs IWM requires a breakout back above its downtrend from 2021, and this would also allow it to recoup prior 2020 lows.
- DeMark monthly signal confirmation would be helpful, but not required to be bullish. However, this will happen on any month-end close above the close from four months prior which is likely on a bigger advance in 2024.
Overall, I am optimistic on Small-caps for next year. I respect the current rally in absolute and relative terms. However, more needs to happen to embrace Small-caps for the year as a whole. I’ll be watching this Style carefully into 2024.
Russell 2000
