Crude breakdown kicks off Nov decline and weakness possible until late month – Selectivity important
- Near-term risk/reward not as appealing following SPX, QQQ gains to near resistance
- US Dollar bounce likely proves short-lived for now
- Crude looks to weaken further into late November, lining up with cyclical projections
SPX and QQQ have surged on above-average breadth and have carved out impulsive rallies over the past week. This is likely a positive for gains to near early October highs into late this week. However, it’s likely that volatility is approaching for both Equities and Treasuries and Yields might begin to lift again starting around 11/13. While the extent of this initial lift off late October highs has been impressive, it should undergo consolidation into Thanksgiving holiday before rallies can continue.
Bottom line, the rally off the 10/27/23 lows should play out as a three-wave bounce and might find initial resistance late this week. While hourly momentum has neared overbought levels, DeMark signals aren’t yet in place on most intra-day timeframes that could suggest a short-term peak.
Similar to recent days, XLK 1.09% and large-cap Technology have helped to carry markets at a time when a few sectors have not participated. Tuesday showed weakness in Energy, Materials and REITS all to the tune of 1% or greater in Equal-weighted terms. While Tuesday’s rally proved to be a bit better in terms of market breadth than Monday, it should still be difficult to expect this rally can extend throughout November without consolidation.
To the bulls’ credit, Treasuries have continued their recent rally and yields pulled back more than 7 bps (TNX) to undercut Monday’s lows. This can lead to a bit more weakness into Wednesday/Thursday before a bottom. Overall, yields have not broken down enough to think the peak is in for 2023.
US Dollar bounce shouldn’t last too long before additional weakness into December into January
Last week’s break to multi-day lows in the US Dollar index (DXY) looked important and bearish on a 2-3 month timeframe.
While DXY bounced over the last couple days to recoup the prior October lows, this pattern looks broken and my thinking is that DXY will likely weaken into year-end.
This should be bearish for USDJPY and bullish for EURUSD and GBPUSD.
Once a larger breakdown happens in the TNX, this also likely will carry over to the Dollar given its prior correlation trends.
Crude Oil’s break makes selectivity important within the Energy sector; Decline to late November likely
The recent downturn is going according to the technical scenario laid out in recent weeks. This discussed WTI Crude beginning a selloff in this seasonally difficult time.
Tuesday’s technical breakdown is particularly bearish, as it has undercut lows going back since July as of 11/7/23’s close under $78.89 for front month futures.
At current levels, the Generic Crude oil futures contract has reached the 61.8% Fibonacci support area of the prior rally off June lows. Yet it’s difficult calling a low given that prices just undercut lows of the last four trading sessions to finish at multi-month lows.
Overall, cycles point to late November as potentially representing the lows for the entire WTI Crude decline. My initial target last month was just around $75.75-76.25 which would make the decline from late September equal to the more recent pullback from mid-October in dollar terms. This also lines up with a key 61.8% Fibonacci retracement zone of the May to September 2023 rally.
Yet, time factors make it seem early to buy Crude, or Energy just yet tactically. My cycle composite targets 11/22 as being a time when Crude oil might bottom out and turn higher.
Thus, the next two weeks should bring about further technical weakness, and should present better opportunity for those looking to buy dips.
When eyeing December Crude, my technical target is $77.75, and if this happens near December expiration for December crude it could create an attractive risk/reward to own Energy for a strong rally into year-end and into January.
XLE should be favored within Energy until WTI Crude can begin to stabilize within this downtrend
Crude’s recent breakdown makes it difficult to consider buying dips in either OIH -0.06% , nor XOP, which both look inferior to the S&P SPDR Sector Energy ETF (XLE -0.92% ).
Daily charts below highlight this recent minor breakout in the relative relationship of XLE vs XOP and XLE vs OIH has also strengthened to multi-day highs.
Overall, for those awaiting evidence of Energy starting to stabilize following recent weakness, XLE looks preferred as the ETF to favor within Energy. Upon nearing targets in price and time for WTI Crude’s correction over the next couple weeks, XOP and OIH might take on greater appeal.
The ratio chart of XLE/XOP below shows the one-month trendline breakout which could lead XLE to outperform in the near-term as Crude weakens further.
Overall, Energy should represent an excellent sector to consider for December and also into 2024. However, at present, prices remain in consolidation mode following the run-up into late September and it’s best to hold off on buying dips too aggressively just yet, technically speaking, during the weak seasonal month of November.
