Bottom line, the correction this week did cause some technical damage in trends, as both $SPX and $DJIA broke down to new monthly lows on the worst week since last September. Financials weakness continued into Friday, and has spread to European Financials, which showed meaningful reversals after a very steep uptrend from last Fall.
It’s important to reiterate that despite the breakdown in Financials and broader index gauges, the Equal-weighted indices like Value Line’s Arithmetic Average along with the NASDAQ 100 index have both held up much better. Furthermore, many of the best performing sectors for 2023 have also held up and not broken down.
The more important development concerned the degree that yields plummeted across the curve, which likely jumpstarts a large decline in yields over the next 4-6 weeks.
Overall, I expect that Equity indices can bottom out next week for a few important reasons:
First, two different cycles show confluence next week, with an ideal data of Wednesday, March 15th. The weakness into this period suggests this pullback should be making a cyclical low, not a high.
Second, momentum is now nearing oversold levels, and while not quite there, could be in place by next week.
Third, bearish sentiment has ratcheted up dramatically in the last week. CNN’s Fear and Greed Index has plunged back to the lowest levels since October 2022, registering “Extreme Fear” after 3/9/23’s decline. Other polls like AAII now reversed back to negative with a -17-percentage point spread between Bears to bulls.
Fourth, the ongoing positive correlation between Treasuries and Equities has diverged this past week, but generally has been quite strong over the last six months. Given that this week’s breakdown in yields looks to persist, I’m skeptical that Equities will continue falling and ignore a meaningful drop in yields.
Finally, Technology and Industrials sector along with Discretionary all show uptrends which haven’t been violated. This looks particularly relevant towards showing that this index disintegration isn’t systemic to all sectors, but merely concentrated in Financials.
Overall, SPX has now reached the 50% retracement level of the prior October 2022-February 2023 rally. Additionally, when measuring the last few days of decline compared to the first leg down from early February, these two waves would be equal near 3828 which is just fractionally below current levels.
From a time perspective, next week lines up with a 38.2% time retracement of the Oct-February rally, so an interesting price/time confluence will happen next week. SPX will have corrected 50% and could potentially reach the 61.8% retracement area while at the same time doing so during an important Fibonacci retracement in time of the prior rally.
As discussed, while a break of 3928 has resulted in some downward acceleration in recent days, this doesn’t seem to be the area to abandon longs, technically speaking. SPX should be bottoming next week and follow suit on Treasuries turning back higher.
Bottom line, this weakness looks temporary, and has an excellent chance, I believe, of reversing next week coinciding with cycles bottoming during a time of elevated bearish sentiment.
Treasury rally looks underway- Yields to test January lows
Friday’s Jobs report resulted in a very sharp pullback in Treasury yields across the curve. This looks to have jumpstarted the Treasury rally that looked likely technically following some recent stalling out and waning in momentum after the sharp lift in yields into February.
The 2s/10’s curve steepened after 2-year yields fell at a sharper rate than what was seen on the long end.
Overall, I suspect that despite the minor unwinding of the prior correlation between Treasuries and Equities, this is not likely to prove long lasting given signs of sentiment reaching fearful levels. Treasuries look to be turning up (Yields down) and Equities are likely to follow suit next week.
The most meaningful initial support for $TNX lies near prior lows from December 2022 into February 2023 which line up near 3.32-3.33%.
$TLT looks attractive for further upward progress in the days/weeks ahead with initial resistance found at 107.79-108. Movement up above 109.35, or January highs, should drive this higher to 114.50.
Gold and Silver stocks are attractive to buy after weakness
Technically, Gold and Silver might not have too much more downside if this rally in Treasuries continues, which looks likely. I suspect that Gold and Silver stocks are a very good risk/reward for a 2-3 month or longer timeframe following their steep correction from late January.
$XAU, or the PHLX Gold/Silver Index, has produced both TD Sequential and TD Combo counter-trend exhaustion signals following its drop from $140 to 111.59 over the last six weeks.
While the wave structure can allow for a final pullback to $105-106 on weakness, the risk/reward looks compelling to at least consider buying in small size at current levels.
$GDX, $GLD, $SLV all look attractive at current levels to buy for a rally up into mid-year. When further evidence of the US Dollar and/or Yields making a larger decline is apparent, then further rallies might be possible.
In both Gold and Silver, I suspect that a move back to new all-time highs is very possible once real yields start to show more technical deterioration.
European Banks look unattractive, and similar to US Banks, have begun to break down
Interestingly enough, the $SIVB saga certainly hasn’t been limited to US Bank stocks alone. Charts of the Europe Financials Ishares MSCI ETF ($EUFN) broke down sharply to new monthly lows this week after giving initial warnings of a stallout back in mid-February.
Following a lift from $13 to $20 into January of this year, this break under$19.42 violated its uptrend line from October following a TD Sequential “13 Countdown” exhaustion signal signaled an official “Sell” early in the week.
Pullbacks to $17.71 look likely initially which represents a 38.2% Fibonacci retracement of the prior rally. Additional support lies just below $17.
Weekly EUFN charts help shed some light why $20 proved to be so important
Taking a longer-term look at past history of EUFN is insightful towards showing why EUFN peaked when it did over the last week.
When examining this trend going back since 2018 peaks, the area just above $20 intersected the downtrend connecting 2018 highs with early 2022 peaks.
Weekly counter-trend exhaustion per DeMark signals lined up in confluence with the daily signals, showing why this area was so important towards producing a stalling out.
Overall, many might be inclined to try to buy dips given the extreme nature of the selloff in recent days. However, with regards to the banking sector in US and Europe, arguably this looks premature. One should hold off on trying to time lows until EUFN has achieved at least a 38% correction of the prior range, with optimal areas to consider found near the 50% retracement level.
