The rollercoaster of price action into and after the FOMC’s rate decision proved to be dizzying for many market participants, and the specific act of Treasury yields firming after Powell’s comments proved to be detrimental to US equity markets. Specifically, the 2-year yield along with 10-Year yield both showed whipsaws that caused rates to turn back sharply higher following earlier plunges. Importantly, this $SPX pullback has now given back 38.2% of the prior rally and is thought to have a maximum move lower to its 50% retracement of the October bounce, and the area at 3712 directly lines up with some key support near the former intra-day highs from 10/14. Overall, both Equities and Treasuries look to be nearing support from a price perspective, and this early November volatility should be nearing its end by Friday.
Whipsaw in rates should find maximum yield gains to near 4.20 before turning back lower
Incredibly we saw $TNX reverse and gain nearly 13 bps in about 30 minutes during Powell’s testimony Wednesday. The earlier pullback to new multi-day lows that coincided with equities bouncing ended up spiking up to multi-day highs, which coincided with Equities turning down.
Overall, it’s tough to say how much longer this correlation can last. However, for now, keeping a close eye on the bond market is extraordinarily important for those that care on near-term Equity market direction.
Importantly, this move in rates seems very counter-trend when eyeing this from a wave perspective. This is one important reason why it’s still right to think Wednesday’s equity pullback could prove short-lived and not last past Friday’s Jobs number before turning back higher as yields peak.
Bottom line, TNX does look to push up to likely a maximum near 4.25% but could very well peak in the next 48 hours. Meanwhile, SPX should have maximum downside to remain bullish at 3700, with violations of that level changing the direction and favor further downside likely into 11/10. Thus, the former comments about 11/10 proving important very well could turn out to be a market low, not a high if/when SPX gets under 3700. That’s not my base case scenario, however, and I’m expecting that this rate spike proves short-lived and rolls over into next week.
US Dollar reversed sharply back higher, and still could test or briefly exceed Fall highs before a peak
Similar to rates reversing course, we also saw the US Dollar index ($DXY) pullback to multi-day lows, lower by 0.70% before making its own About-face and closing sharply higher.
Traditional technical would describe this recent consolidation as a probable triangle pattern that should result in a “final” move back to new high territory before peaking.
Uptrends remain very much intact and fading DXY this year has proven difficult. In the bigger scheme of things the combination of DeMark indicators and wave structure suggests that DXY should start to peak and turn back lower into year-end.
However, a move back to new highs into 2023 looks likely before any long-term peak. At present, Wednesday’s reversal looks bullish near-term and movement over 113 should lead up to 115.50-116.
European Financials deserve a second look
Directly following a time when market sentiment towards Europe seems to have reached peak pessimism, European banks have started to act better. As shown below, recent strength in the IShares MSCI Europe Financials ETF, or $EUFN, has broken out of its lengthy 2022 downtrend which has been ongoing over the last nine months. The rate of decline in EUFN has been slowly growing “less bad’ in recent months, and has been showing positive momentum divergence since this past Summer.
While beginning a new intermediate-term uptrend might seem like a monumental task for an ETF that’s just trying to claw back from multi-month lows, I feel like the combination of positive momentum divergence coinciding with DeMark exhaustion on many European bank names (EUFN itself recently recorded a TD Buy Setup on weekly charts along with rampant bearishness likely presents an attractive risk/reward at a time when many aren’t paying attention.
Rallies up to the high Teens looks initially likely, with pullbacks likely providing attractive buying opportunities for a push higher into year-end.
Importantly, for those scanning stocks like Credit Suisse ($CS) Deutsche Bank $DB, or Barclay’s $BCS, they all show evidence of weekly and monthly downside exhaustion at present using DeMark’s TD Combo and/or TD Sequential indicators. Given that stocks like CS used to trade in the high $70’s and now trades for single digits, along with CS, DB, and BCS, all of these look interesting as long-term buy and hold candidates from an extreme oversold position now technically.
If/when the US Dollar starts to show more evidence of peaking out and turning lower (EURUSD starts to bottom out) these likely could experience a meaningful bottom and show intermediate-term reversals of trend, from bearish to bullish. At present, it’s difficult to put “too many eggs in one basket” of this group, but it has appeal for those wishing to diversify away from US Bank stocks after their recent run-ups.
