The Equity decline over the last couple weeks has directly coincided with both US Dollar and TNX pushing higher. This looks close to reversing now as Treasury yields approached former peaks today and made a fairly prominent about-face.
Importantly, very little overall damage has taken place with trends in SPX and NASDAQ, and both are largely near areas hit in early February and remain trending up within uptrends from last October.
Interestingly enough, the narrative shift all of a sudden in markets this week seemed important from a sentiment perspective, as some of the near-term gauges had become a bit frothy. Furthermore, this shift from FOMC hiking 25 bps to now contemplating 50 bps should go a long ways towards eliminating some of the shorter-term bullish sentiment.
Any near-term pullback in Equities likely should help short-term sentiment to turn back to neutral or bearish which would be helpful for risk assets as the larger rally starts to kick in again, potentially next week.
It’s important to reiterate that short-term Elliott-wave structure remains quite positive for SPX. Hourly charts show a very pronounced three-wave decline from February 2nd into February 10th, which suggests that this entire “consolidation phase this month is corrective, and should turn back towards new monthly highs into March.
Furthermore, the back part of February remains weak seasonally, but should give way to a bottoming out in Index prices likely sometime next week, between Wednesday and Friday before turning back higher.
As discussed, weekly momentum and breadth remain quite positive, however, and cyclical composites are bullish for further gains into March. Meanwhile, intermediate-term sentiment remains quite negative. Thus, any backing and filling in Equities should translate into an appealing time to buy dips with the area at 3950-4000 proving to a very attractive area of support within the broader uptrend from last October. Bottom line, buying dips next week looks prudent. My overall bullish stance has not been shaken by this minor consolidation, and I do not expect pullbacks to be too damaging to the broader bullish technical structure.
Treasury yields look very close to reversing course
Friday brought about a very important reversal for yields, as $TNX along with 10-Year German Bund yields both reversed course after having tested prior monthly highs.
Given that equity losses in recent weeks, despite how minor, directly coincided with the US Dollar and US 10-Year yield rising, it should be bullish for Equities if yields start to roll back over given the recent correlation trends.
My cycle composite for Treasury yields, which was shown earlier this week, shows a peak in yields the final week of February followed by a sharp downturn into April.
While not as important as cycles, my DeMark interpretation suggests that the formation of the TD Sell Setup in TNX which also occurred back in December 2022 should coincide with yields turning back lower (after seeing evidence of a daily close back under the close of four trading days ago-(Has not happened yet)).
Bottom line, I expect that yield reversals will directly lead Equities back higher, and this begins sometime next week.
Energy has shown some near-term weakness to finish the week which likely postpones immediate outperformance
Energy remains a good sector to overweight for 2023, in my view.
However, the short-term technical situation given Friday’s (2/17) Energy decline suggests a bit of patience is required. Furthermore, it doesn’t look right for those who are short-term focused to immediately consider Friday’s dip buyable.
$XLE appears ready to test December lows near $82 which has importance. $ OIH looks like it might revisit $300, if not $296 before stabilizing. Finally, $XOP looks close to violating uptrends from last July. If this were to happen, then Exploration and Production stocks (E&P’s) would likely be the weakest part of Energy in the short run.
Furthermore, XOP might test early January 2023 lows near $125.
DeMark signals overlaid on Invesco’s Equal-weighted Energy ETF ($RYE) vs. $SPY show this week to be strongly negative in breaking below the last couple weeks’ lows. This should lead Energy lower, not higher right away, and the DeMark count might take another 2-weeks before bottoming.
Overall, this dip should be buyable, but it’s tough to do it right away for those looking, based on Friday’s close. I’m looking technically at 2-3 weeks from now, when Energy should begin to turn back higher sharply. At present, it looks a bit early for those with a trading perspective. I stand by comments of being bullish on Energy this year from an intermediate-term perspective.
Natural Gas plunges again. Longs require patience
It’s important to reiterate that it’s always difficult to buy something hitting new 52-week lows, particularly after a 50-70% or greater decline. These types of bottoms often are marked by repeated failure, and bounces are tactical at best before gradual stabilization.
Natural Gas longs have learned the hard way that stabilization after a downtrend doesn’t always equate to a great buying opportunity, and patience is required.
Following my recent bullish comments on $UNG in recent weeks, it’s proper to relay that Friday’s decline under $8 in UNG makes this definitely wrong, and that it’s difficult to consider this attractive again until it regains $8.
Traders should consider this to be a support violation, and it’s more appealing to hold off before immediately buying dips. Rather, another buying opportunity likely will resurface in the near future with its own appealing technical setup. Therefore, one should manage long positions given one’s own risk tolerance and time horizon.
At present, I won’t consider Natural Gas to be attractive again until UNG can regain $8. It’s up to individual investors to manage their respective positions.