Monday’s Equity decline doesn’t look likely to extend too dramatically ahead of Jackson Hole late this week, and it’s thought that this pullback is initially buyable for a push back to minor new highs up to 4350-60 into early to mid-September. While near-term wave structure and intra-day overbought conditions along with some Defensive outperformance gave some clues last week that a decline was approaching, the resulting selloff hasn’t really accomplished too much to expect this is the start of a larger move lower. Elliott patterns still look corrective on this decline and intra-day oversold conditions are now in place which might limit this initial selloff. Overall, my tactical view favors a bottoming out this week ahead of FOMC’s Jackson Hole meeting, and a rally back to challenge and exceed recent mid-August peaks.
Following a move up to 4350, it will be right to bet on additional downside volatility into early October. Yet, given cycles are leaning towards early to mid-September peaks, I’m expecting that $SPX should not undercut 4000 on this initial pullback. The area at 4100 is initially important for traders, lining up near the 38.2% Fibonacci retracement. Under that could lead down to 4025 which should be the maximum drawdown on a selloff, lining up with the 50% retracement of the rally up from July.
Treasury yield bounce nearing initial resistance
As we’ve been discussing in recent weeks, it’s ALL about the yields.
Treasury yields broke out very close to when Equities peaked in mid-August as can be seen below, exceeding the recent two-month downtrend. This follows a period of very strong negative correlation with Equities where yields peaked in mid-June as Equities bottomed.
Now $TNX is nearing its initial resistance to this rise, which lies between 3.03-3.08%.
I expect we could see a reversal from here back lower in yields, which also should coincide with Equity markets snapping back. Movement directly over 3.10% is not expected right away but would be a factor that likely would result in Equities continuing the recent decline.
For now, I like betting on a yield snapback and also on an Equity bounce this week. For those involved with $TBT, or $TMV, those likely could peak out near-term, and one might consider $TLT as a short-term trade into early to mid-September.
Natural Gas has moved back to new highs, in Europe and also US
Below is the daily chart for Dutch Transfer Facility ($TTF) which is one of the most liquid Natural Gas contracts for Europe, traded through the Dutch Ice Endex in the Netherlands.
Russia’s move to shut down a major pipeline has stoked some speculation that demand for American exports of heating and power-plant fuel could surge. This contract just rose Monday to the highest levels of the year.
Further gains look likely despite how stretched this has become of late. Rallies into September up near 3.25-3.50 are quite possible before this reaches resistance and starts to pull back.
US Natural Gas (Henry Hub) also breaking out
This strength is not just limited to Europe, but we see that the Henry Hub contract in US is also starting to accelerate higher. Front-month Futures prices as of Monday 8/22 pushed back to new 14-year highs for the year on a daily close.
This was thought to be nearing and necessitated a long stance on Natural Gas and/or within the various ETF’s that track closely to Natural Gas. At present, this breakout looks to be happening at the same time for Henry Hub Natural Gas as it is with the Dutch TTF contract.
This pattern is quite attractive for projecting higher prices given that this formation has just now given way in the last 24 hours. Overall, movement up to $12 is possible for front-month Natural Gas futures contracts, and this supports owning $UNG, $BOIL or stocks that correlate well to Natural Gas. Additionally, stocks like $EQT, $RRC, $SWN, $LNG which were mentioned last week, are also attractive ways to participate in Natural gas’s rise continuing.
Coal still attractive, despite some churning in June/July
Charts via Investor Business Daily’s (IBD) Marketsmith software shows how explosive the rally in Coal stocks has been over the last year, and this group quickly went from nearly worst position among the 197 sectors that IBD ranks in 2020 to the # 1 rank back in June 2022.
Stocks like $BTU, $CEIX, $ARLP, and $ARCH are some of the more highly liquid, largest capitalization names to consider. While the intermediate-term momentum waned a bit given June-July’s selloff, this caused little to no real deterioration in the broader trend.
The long-term breakout of a 10-year downtrend weakened only slightly but should still make a push back to new highs for 2022. Overall, it’s right to favor continued strength in Coal stocks, and the stocks listed here are favored for additional relative strength on an absolute basis and relative to the broader Energy space.