Similar to yesterday’s comments, I believe that the recent pullback for US Stocks is nearly complete. I had emphasized 3900-3930, but specifically 3925-3930 as having importance, and SPX hit that level Thursday and rallied well off early lows.
Price formed a technical “bullish engulfing pattern” on SPX and NDX, which normally can be helpful towards suggesting a reversal in trend following a pullback. DJIA, meanwhile rallied to hold prior lows from December 2022 which also looks important.
Yields however, failed to cooperate in reinforcing this stock rally. 30-year yields spiked over 4% to join the 2’s, 5’s and 10-year yields over 4% in an apparent breakout. While the late day buying in Treasuries resulted in yields pulling back somewhat, this still looks to be an important move in yields for Thursday.
For those interested, SPX 3920-30 was specifically based on the following: First, the October 13, 2022-Febraury 2, 2023 rally spanned 112 calendar days and showed a 38.2 Fibonacci retracement level right near Thursday’s 3925 low. Second, this level also lined up with a 61.8% price and time-based retracement of the December 22,2022-February 2, 2023 rally.
Thus, two different areas of Fibonacci support from two separate rallies overlapped near this key area. SPX hit that on Thursday morning and rallied well over 50 points off those lows. The 60-year pattern bottoms in early March, and was a part of the thinking as to why markets might be getting close to lows.
However, it’s thought to be essential for yields to rollover to confirm any equity rally, and heading into Friday, there is insufficient technical proof just yet that a low is at hand. Rallying over SPX 4060 would serve to confirm a major low in SPX.
TNX looks to have strong resistance near 4.25-4.35% while TYX could also move to 4.25% before any resistance. DeMark signals on both TNX and TYX are premature at this time by at least 3-5 trading days.
SPX did recoup its 200-day moving average by the close of trading. However, this was not instrumental in my analysis of being significant.
Emerging markets remain difficult to trust with DXY still trending higher
$EEM broke down in early February from a four month uptrend, which turned trends and momentum bearish. Despite the minor bounce in recent days, it’s still tough to trust that EEM will strengthen as the US Dollar has not yet peaked out.
Strong resistance lies near $41-$42.50. Until EEM can clear $42.50, it’s best to be patient and await more evidence of US Dollar weakness.
Daily momentum is negative while weekly momentum (per MACD) is still positive. However, the entire space remains quite weak since early February.
A more attractive area from a risk/reward standpoint to buy dips lies near $37 in EEM.
Mexico ($EWW) looks like one of the technical choices in the entire EM space, while China remains a work in progress after its recent pullback.
Emerging Markets vs. Developed markets shows a big breakdown
The ratio of $EEM (MSCI Emerging Markets ETF) vs. $IDEV (Ishares Core MSCI International Developed Markets ETF) has just moved back down to new lows for the last year in recent weeks.
Given the persistence of this US Dollar bounce and recent rolling over in many Emerging market (EM) Equity indices, it’s difficult to overweight EM at this time.
It’s expected that the US Dollar should be close to turning lower. However, until more evidence of DXY rolling over gets underway, it’s early to expect that EM will outperform developed indices.
Chinese Equity markets are starting to bounce again; More needed
While I prefer Equity markets like Mexico from Latin America for EM exposure, China remains a huge weighting within $EEM and important to always keep a close eye on.
FXI has nearly pulled back 50% of its prior rally. While some stabilization this week looks like a minor positive, it will require a move back over $30.50 to expect a possible retest of January peaks.
Above $33.38 would constitute a larger breakout suggesting an intermediate-term rally is underway which could reach $37.60 or $41.50.
Until $DXY undercuts $104 at a minimum, it’s wise to be patient. Under $103 helps to add conviction about a larger rally in EM getting underway. For now, it’s right to be selective, and more strength will be needed in China to trust this rally.
