The near-term technical structure has worsened a bit this week with the break of 4100. While I ultimately expect any further pullback to prove mild and not undercut 3885 before turning back up to 4250 and higher, one can’t rule out more weakness based on this week’s decline.
I expect this to prove to be minor rotation out of some of this year’s strongest outperformers thus far, like Communication Services, Consumer Discretionary, and REITS while Energy and Healthcare start to gain ground.
SPX structure looks to have carved out a simple Elliott-wave style ABC decline on hourly charts, as shown below. However, it’s still difficult to know whether a second ABC will now unfold which could create volatility into/after next week’s CPI report.
It’s thought that current weakness will be successful in reigning in some of the recent rise in short-term sentiment while also alleviating some of the short-term overbought conditions, both of which would be positive developments.
At present, it’s right to buy dips, but it’s hard to have conviction just yet that this week’s decline has run its course. Important support lies near 3980-4032 which should be attractive to buy dips on any further weakness before a push higher into March. In addition, rallies will need to eclipse 4176 to have real confidence that a move back to 4250 and higher is underway.
Overall, I do not view this weakness as the start of any meaningful decline, but merely a speedbump which often can occur as seasonal weakness in February following a big runup. Dips should continue to be used as chances to buy weakness for further gains.
XLE looks quite bullish on this week’s strength
Energy looks attractive as an overweight and I expect that this week’s strength marks a technical bottom in Energy which should propel this sector in the weeks and months ahead.
XLE has broken its minor downtrend from last month, as shown on the right hand side of this chart below. Furthermore, this choppiness in XLE since late last year has done little to no real damage in the intermediate-term pattern. Prices have managed to consolidate at/near the high end/upper quadrant of its larger range.
XLE could begin to lead OIH in the weeks ahead, and should be favored currently more than either OIH or XOP technically for outperformance in Energy. Stocks like $XOM are making very bullish breakouts back to new all-time high territory that bode well for this stock and XLE given XOM’s weighting in XLE which is currently 23.83%.
Overall, a rally back to the mid-$90’s looks likely for $XLE over the next 1-2 months. If/when $95 is exceeded, this will represent a breakout of a giant consolidation for XLE that has lasted since last Summer. Technically, I am expecting this can happen, but will require a successful breakout on good volume, which at this time cannot be immediately projected. Bottom line, XLE looks appealing here and I expect this could be one of the better ways to play Energy in the near-term.
Aerospace/Defense nears a large breakout of its base
Given the ongoing Russia/Ukraine war, Aerospace and Defense names have shown steady outperformance in recent months.
Many of the former leaders like $LMT and $RTX, $GD remain standouts within the space, while other stocks like $NOC and $LHX have weakened a bit in recent weeks and have underperformed.
Former laggards like Boeing ($BA) have shown some very good strength in recent months which represents a material comeback after a lengthy period of outperformance. Yet, BA still doesn’t measure up to the strength seen in some of the leaders which are at/near 52-week highs.
Overall, this weekly MarketSmith chart shows the Aerospace and Defense sub-industry group treading water near a meaningful area of multi-year resistance since this peaked at a similar area back in February 2020. This looks close to breaking out of this three-year base after two former failed attempts. I like overweighting Aerospace and Defense within Industrials, expecting this will happen.
My favorite technical names are $LMT, $RTX, $TDG, $GD, $HEI, and $TXT.
Alternatively, one can choose the ETF of the US Aerospace and Defense group which is $ITA which hit a new 52-week high this week. Rallies up to $120 look likely in the weeks ahead for $ITA.
Bitcoin decline should prove temporary and buyable
Following four straight weeks higher, Bitcoin has now begun some necessary consolidation over the last couple weeks which is helping to relieve its near-term overbought conditions. While the recent churning near 23k over the last couple weeks wasn’t too damaging technically, Thursday’s break to multi-week lows was considered a short-term technical negative.
While the 50-day moving average (m.a.) has recently crossed above the 200-day m.a. (Golden Cross) it’s important to recognize that these types of moving average crossovers speak more to the gradual recovery in structure, more than representing a true short-term trading signal. Many might agree when seeing former failures in this back in 2/20, 7/15, or 7/14 just to name a few.
Importantly, while a Golden Cross technically has occurred on a daily basis, weekly charts are close to seeing a “Death Cross” (50-week m.a. crossing below the 200-week m.a.) which speaks to the degree of the intermediate-term deterioration having been seen since last November 2021.
Overall, given the pickup in technical strength and momentum in recent months, pullbacks should represent buying opportunities, and one should consider 50-61.8% of the prior low to high range as offering some support on this recent pullback. ($19.8k-20.9k) Once $BTCUSD can regain the area of its recent breakdown at 22643, upward projections up to 25k and then 27-29k are possible.
