Markets have ground higher in a way that seems perplexing to most investors who don’t utilize technical analysis. While many are concentrating on earnings, or the endgame for Fed rate hikes, or studying 200-day moving averages (m.a.), Equity indices have successfully rallied above meaningful downtrend lines while many sector ETFs like Financials, Discretionary, Materials and naturally Communication Services have pushed to the highest level in months (Energy is not too far behind in this regard).
While I doubt US equity indices will be able to extend straight up into and through the FOMC meeting without any consolidation, it does look likely that a rally into next week can happen, with most dips being immediately buyable.
Interestingly enough, Treasury yields have undergone consolidation over the last two weeks while Equities have pressed higher. At Thursday’s close of 3.498%, this level was higher than this time two weeks ago on 1/12 when $TNX closed at 3.445%. The recent strong negative correlation between Yields and Equities has not resulted in Equities selling off on a bit of bounce in yields. Overall, though, this represents just a minor bounce and nothing too serious technically.
Sector-wise, Defensives proved to be laggards yet again, while Energy, Technology and Materials logged the best gains for Thursday. Natural gas plunged down under $3 which was thought unlikely. However, DeMark indicators show the potential for trading bottoms by early next week (I’ll comment upon evidence of a trend reversal).
Bottom line, momentum and breadth have steadily improved lately, and most importantly, technical structure has made some meaningful positive strides that bode well for this rally to continue.
Upside targets for SPX lie initially near 4100, and dips are likely to find strong support near 3993-4006 on any Friday weakness.
Financials continuing to press higher after having broken out above monthly highs
Financials remain an important part of the market given their percentage within SPX, only 3rd behind Technology and Healthcare at 11.74%.
As daily charts of Invesco’s Equal-weighted Financials ETF show below, prices have pushed up to the highest levels since last Spring.
This looks to be a very constructive development, and bodes well for further gains in the short run. Given Financials weight within SPX, this should serve as a meaningful tailwind in the short run. Other sectors like Materials, Energy, Discretionary and most importantly, Technology, are making similar breakouts to new multi-month highs.
Consumer Discretionary’s breakout above consolidation resistance relative to Consumer Staples is a good bullish breakout
Just since early January we’ve seen an important move out of the Equal-weighed Consumer Discretionary ETF ($RCD) in its relationship to the Equal-weighted Consumer Staples ETF ($RHS).
Technically, following a lengthy period of underperformance in 2022, which directly correlated with last year’s bear market, this ratio of Discretionary to Staples began to change last Summer.
This was thought important, and always something to keep a close eye on with regards to whether we are entering or emerging from a risk-on, or risk-off environment.
This recent breakout has largely been led by many of the casino and cruiseliner stocks, and Travel has been an area of momentum for Discretionary in recent weeks with some stocks rallying between 20-40% just since the beginning of the year.
I expect some rotation into other areas of Discretionary, as some of these names have gotten stretched. Yet, it’s still likely that Discretionary leads over the first couple quarters of 2023 and outperforms Consumer Staples (which has dropped to new weekly lows relative to SPX, making selectivity quite important for this group).
Bitcoin still likely to trend up to test last August’s peaks
Bitcoin took the early lead among Cryptocurrencies in forging higher in early January, but has stalled out a bit over the last week, as many others have rallied to play “catch-up.”
This doesn’t suggest a selloff is in store, however, as TD Sequential “13 Exhaustion” signals (Sells) remain premature when using TD Sequential.
Ideally, this count could finalize within 3-5 trading days, but will necessitate further rising prices before coming to completion. Overall, I expect a technical rally up to $25.2k into next week, and this would represent the first area of likely resistance to this initial rise.
As discussed in my 2023 Technical outlook webinar this past Tuesday, 1/24, cycles and price trends do support the idea that $BTCUSD can have a moderately successful year. However, this could take the form of an initial push higher into April before pulling back through the early 3rd quarter.
I’ll shed some further light in the days to come on the weekly charts and cycles in a bit more detail. At present, it looks right to be bullish technically speaking, and little resistance likely occurs ahead of $25.2k into next week.