SPX’s technical trend, breadth, and momentum suffered a sharp 1-day drop following the DeepSeek AI-related selloff, yet given the degree of containment inside Technology, there hasn’t been any serious deterioration to the broader technical structure. Given that indices looked to be in need of some backing and filling after the sharp runup to test all-time highs in SPX last week, Monday’s decline looks important toward providing a better risk/reward framework for those who missed the rally. Simply put, this pullback was exactly what was needed to help paint a more bullish picture between now and the next couple of months. Equal-weighted SPX has been outperforming over the last couple of weeks, but this looks to prove short-lived and should eventually lead to Technology regaining its footing after dismal performance from AAPL and NVDA. Meanwhile, both US Dollar and TNX look to be starting more serious pullbacks, and could translate into gains for US Equities if recent positive correlation trends between US Treasuries and Equities continue.
Quite a few short-term warning signs were apparent last week, and some of the abnormal disparities between SPX, QQQ, and the broader market were observed. While market breadth had expanded sharply from 1/13 lows, the last week proved to be more difficult for various Technology components.
Additionally, many broader-based US indices had failed to reach new all-time highs and had only retraced 62% of the prior decline from December.
Furthermore, Elliott-wave patterns on hourly charts had shown SPX having carved out five waves higher from 1/13 lows, which looked important.
Finally, DeMark-based exhaustion had signaled some confluence when eyeing 60-minute, 120-minute, and 240-minute TD Sell Setups all in unison back on 1/22.
The bottom line is that it was thought that SPX might retrace 38-50% of the prior run-up, and Monday has now accomplished this (and more) in just one trading day. (SPX has now retraced 61.8% of the prior rally.)
This is good news for those who are looking for an ideal risk-reward situation, in my view, as it’s doubtful structurally that SPX should undercut 5773 (1/13 lows). Market breadth was positive on Monday, with more volume in Advancing than Declining names. More than half the major sectors were positive on the session.
However, for those who are tactical, it’s also unusual that the first “big gap-down” day signals a major low when many key Technology stocks have found it difficult to stabilize, specifically within the Semiconductor space.
Overall, I don’t think it’s wrong for investors to consider the SPX an appealing risk-reward at 5900-5950 for a pushback to new highs. Unfortunately, I cannot say with confidence, technically speaking, that a bit more weakness cannot happen over the next couple of days.
Ideally, this pullback should unfold as a three-wave decline, meaning that minor bounce attempts during Tuesday’s session might initially fail. However, with SPX within 100 points of a likely low, while the upside over the next 1-2 months could allow for a push up to 6300, the risk/reward has gotten much better at current levels. More evidence of SOX hitting support and seeing both NVDA and AAPL carve out more realistic technical lows would help to add conviction.
S&P 500 Index
NVDA breaks two-year uptrend on heavy volume
NVDA’s sudden decline of -16.86% on 300% higher volume was thought unusual given the lack of structural weakness beforehand. Its ~17% decline erased over $589 billion from its market capitalization in Monday’s trading, proving to be the largest in stock market history.
However, NVDA had shown some slowing momentum over the last nine months as it had largely been drifting sideways since last Summer. To its credit, NVDA was trading much closer to 52-week highs than many within the Semiconductor space, as SOX remained around 15% off its all-time highs from last July.
Technically, the break of a lengthy trend on higher volume for NVDA Monday typically necessitates some stabilization before expecting an immediate rally back.
However, the stock is attractive in the short run, in my view, and is thought to likely bottom this week near $114-$115 before a sharp bounce into February.
If/when NVDA fails to regain $142 on any sharp rally in the Semiconductor sector over the next month and begins to turn back down, then one can make a case for a further decline to attempt to test last Summer’s lows. At this point, that’s technically not the preferred scenario, and it’s thought that NVDA should try to bottom out this week ahead of FOMC.
NVDA
SOX decline will need to stabilize quickly after breaking support
SOX violation of the trend from last August might temporarily hold back Semiconductors from pushing back higher this week.
This does appear like a downside break of an existing triangle pattern after a failed break to the upside and might take another 2-3 days before this finds meaningful support.
Overall, it’s hard to call for a test of the lower area of trendline support, but the area down near 4400 is certainly important.
Bottom line, potentially 4600 could be tested before some stabilization and attempt to push higher. Until SOX can regain the lower boundary that was broken on Monday, it might be wise to look to favor other areas within Technology, such as Software, or Tech Hardware.
Philadelphia Semiconductor Index
Software still looks preferred over Semiconductors within Technology
Monday’s plunge in SOX made it right to revisit this relative chart of the Ishares Expanded Tech-Software ETF (IGV 1.61% ) vs. the Ishares Semiconductor ETF (SOXX 1.65% ), which broke out initially last Fall.
As shown below, for those who are first seeing this, the relative chart highlights IGV vs. SOXX or a ratio chart of Software to Semiconductor stocks.
Given that this downtrend from 2019 persisted for five years before giving way to a breakout, the recent pullback from December into January in this ratio failed to do much damage.
Simply stated, this means that Software remains favored over Semiconductor stocks within Technology. The SOX’s decline on Monday resulted in a sharp gain in the ratio of IGV to SOXX.
I suspect this continues in the short run, which means that Software names are preferred over the Semiconductor space.
IGV/SOXX
USDJPY looks to be just breaking down and should begin a meaningful correction
Given the hawkish BOJ rhetoric last week, it’s likely that the Yen should be on the verge of a very big rally in the months to come.
Said differently, USDJPY, as shown below, arguably should begin to weaken materially as the Japanese Yen gains ground on the US Dollar.
The break of the prior month’s lows effectively broke the intermediate-term uptrend for USDJPY on Monday. From a structural perspective, this looks quite negative for the Dollar vs the Yen and should result in a pullback which very well could retrace the entire rally from last Fall.
Initially, I expect a move down to 149-150. However, this arguably should just be the start of this move, and it might persist into this summer.
I don’t see large gains in the Yen being too negative for US stocks in a way this relationship worked in recent years with the Carry trade. Declines in both the US Dollar as well as Treasury yields are thought to be helpful towards US stocks, given the recent correlation.
ETFs that coincide with the Japanese Yen include Proshares Ultra Yen, which I expect to rise to $23.75-$24 initially from Monday’s close at $20.91.
U.S. Dollar / Japanese Yen
