Indicators corrected much of the overbought condition present at the beginning of last week. While many are looking for growth to stage a comeback early in 2023, the charts do not seem to support this.
From a macro perspective, though, it looks as if the yearend rally scenario is intact and resuming. From a technical perspective, our forecast remains a divergence top in rates – which means a higher high in rates and a lower high in momentum.
Our big concern here is that some of our internal indicators have already started to deteriorate. Benchmark levels on the indexes are: DIA 323, SPY 377, QQQ 269, and IJR 91. Closes below those numbers would be a problem for our yearend rally scenario.
We came into the week a bit overbought, and to rally we need to work that off. For us, sharp drops are usually bullish – we will have to see, but this has held at the 390-area that we suggested could be tested. A close below 390 would be a concern but is unlikely here.
We have mentioned concerns that there is little accumulation on this rally so far. We ran models again, and still have this concern, but most indicators suggest this rally should continue for the next week or so. TLT has broken out above 105 and should head toward our next target of 110 or so over the next couple of weeks.
XLE is overbought so it is likely to be choppy and consolidate a bit longer, at least until the daily stochastics recycles. AAPL is a hold and we would buy the next daily stochastic recycle.
Models do not show strong accumulation on this rally. We ran accumulation models on TLT, and these are now suggesting that bonds have made a significant low that should last for the next quarter or so.
There has been continued improvement in internal indicators last week and this keeps the yearend rally thesis alive. The last time bullish sentiment was this low was 1999. After a rally, prices (and bullish sentiment) actually went lower, into a final low in January 2000!
Internal indicators have improved enough to suggest some more upside but are not acting as if the bear market is over. Indicators still suggest that this rally in bonds should be followed by lower lows.
On last Thursday’s call we discussed investing in RSP vs. SPY and QQQ. This continues to make sense to us, as Tech is weak, and also such a big weight in SPY. One thing interesting about last week is that it gave us a classic short-term buy pattern on TLT, suitable for traders to buy and hold for a week. As long as PGJ can stay above 21, and KWEB above 20, these two ETFs are giving strong bottoming indications.
It looks as if we will consolidate the recent gains, probably pull back a bit on the Federal Reserve (FED) announcement and press conference today but as long as SPY remains above 365 closing basis, the trend is turning up.
One thing that is happening is the movement away from Growth and into Value is continuing. Stocks are very close to trading targets in the 395 area on SPY. Traders should start to sell in this area, especially on an up open. There are definitely bottoming signs, but these would be improved by consolidation/pullback and not by further advance.
The stock indexes have showed enough follow through to suggest this rally should continue here, and SPY has targets of 390 to 400. QQQ has targets of 295 to 300.
More important to the health of the current rally attempt is how QQQ handles the resistance at 277 to 278. We would like to see some more backing and filling – a straight shot up would probably be a good short sale. Rates should now stabilize in this area as FVX tested 45 and has had a reversal bar on the short-term chart. If this area is exceeded soon, FVX should go immediately to 50. Indicators suggest that this 45 area will be exceeded but not right away.
We would like to see continued choppy action. We think TLT can test the 94 to 92 area on the downside and exceeding 101 on the upside would suggest an intermediate bottom is in place.
We would also suggest that the kind of action we are seeing is what we have been looking for – violent up and down action with virtually no net price change week over week.
Friday’s action was, on the surface, terrible but the internal indicators looked a bit better. The message here is to use risk management, especially if 357 on SPY is breached, as that would mean the false breakdown low formation has failed.
We mention that there is no buy pattern yet, but it feels close. We would like to see a period of sharp up and down movements without much progress in either direction – choppy action that wears people out.
A move above 45 on FVX, and below 98 on MUB would call this bottoming action into question. Breadth indicators remain oversold, so a short-term rally is possible later this week – but it would be best, in our view, to see choppy sideways action rather than an immediate rally.
