Sunday Post - Recap & Week Ahead 6/19/2022
The markets gapped down and sold off further this week making it the worst week since 2020. The ES market is now down over 23% from its all time highs and market sentiment continues to be very negative. The best performing sector, Energy, sold off hard as well due to fears of a recession. Furthermore, the crypto sector as a whole has now seen more than $2 trillion in losses since its November 2021 peak - the bubble has burst and this reminds me a lot of the dot.com bubble of the late 1990s. With respect to market breadth, 75% of SPX stocks are currently in a Bear market, down at least 20% from their 52-week highs - just under 43% of SPX stocks are down 30% from their highs, which shows the pain is quite widespread. See chart below from Tier1 Alpha:
I have updated the daily chart of the ES market now showing a steeper channel (orange dashed lines). Last week in my Sunday Post I added the downtrend line that connects the March high and the April 20 high and indicated how this line acted as resistance in early June. Now I added the support side for this downtrend line making it into a channel, since the original channel failed as shown in the chart below. In melt-downs and melt-ups, trends do become steeper from their original downtrends and uptrends, respectively. Notice the three touches so far on the support side of the new downward channel.
Inflation has clearly spooked Wall Street and investors now believe the Federal Reserve needs to keep raising interest rates. The 2-Year yield is currently at 3.2%, which is around 15-year highs. Note that the 2-Year yield is often seen as a proxy for the market’s opinion for where interest rates ought to be. With that said, I will do a quick recap of this week´s market action, followed by an analysis of the general markets and the different sectors, and finally write about the outlook for the week ahead.
Recap:
The ES market began the week with a big gap-down and took out the previous YTD low from May 20. In addition, it broke below the downward channel support (original) as shown in the daily ES chart above. All of my downside targets from last week´s Sunday Post were achieved. The following days the market attempted to recapture not only the previous YTD low but also the original downward channel support and the Sellers defended this area every single time. Even after the FOMC minutes on Wednesday, the Buyers simply had no traction to move the market back inside the original downward channel. The 3823 level and the 3840 level were strong resistance before the market sold off further lower on Thursday making yet another YTD low of 3642. On Friday, the ES market failed to move above the 3712 level after multiple attempts (including in the OVN session) and the sell-off resumed taking out the YTD low, but not as much. The market bottomed at 3639, slightly short of my 3635 target, and the Buyers stepped in moving the market back higher. This was a classic fake breakdown of the previous low and are usually great set-ups to initiate a counter trade. Couple this with divergences from the technical indicators on the lower times frames as well as the hourly chart, which then makes the counter trade, in this case a long trade much more convincing. However, the Buyers failed to break through the 3712/3720 resistance levels and the market settled around the 3681 level.
General Markets and Sectors:
Likewise, the general markets gapped down and sold off big this week. The Dow Jones, SPX and NDX are now down 19%, 24% and 33% from their all time record highs, respectively. The Small Caps (IWM) is down 32% and the IBD50 (FFTY) is down a whopping 47% from their all time highs. The $VIX moved higher this week making a high of 35, but still no new highs as the markets have made new lows - we are now at extreme volatility levels, however, it looks like it could move lower next week. The US 10-Year yield made new highs this week near the 3.6% resistance, but then moved lower to 3.2%, which is above the 3% support level. Crude Oil made a new high before selling off hard, down around 12% for the week - it broke below the $114 support, now resistance - next supports are $101 and $95. For now it has found support at the daily 50 MA, around $108, but could see further downside. Gold failed to move higher as it was unable to clear the 1865 resistance, for now it is moving sideways - supports are 1825 and 1790. USDJPY continues to move higher, but dipped briefly before ending the week at the 2002 highs. Bitcoin continued to move lower this week, broke below the 25000 support and the 19000-20000 support, but has now moved slightly above 19000 - this market looks pretty Bearish and next support is around 13880.
The Retail sector, XRT moved lower this week but did not make any new YTD low and is down 42% from its all time highs. Consumer Disc, XLY did make a new YTD low and is down 37% from its all time highs. Semis, SOX also made a new YTD low and is down 36% from its all time highs. The Tech sector, XLK is down 30% from its all time highs. Transports, IYT and the Financials sector, XLF are now down 26% from their all time highs. Industrials, XLI made a new YTD low and is down 20% from its all time highs. The Energy sector, XLE sold off hard this week, broke below the daily 50 MA and is now down 21% from its recent high on June 8 - starting to look Bearish unless it bounces back up. The Materials sector, XLB gapped down this week and has now broken below the support of its 1-Year long sideways channel - it is down 19% from its all time highs. Likewise, the Health sector, XLV gapped down and broke below the support of its sideways channel, the daily 50 MA has now crossed below the 200 MA and is down 16% from its all time highs. Utilities, XLU broke down this week moving below the daily 200 MA and has now broken its uptrend - it is down 16% from its all time highs. Consumer Staples, XLP sold off hard making a new YTD low and broke its uptrend - now down 15% from its all time highs. All sectors are now Bearish but most are quite oversold at key support levels.
Week of 6/20/2022:
After last week's sell-off in the equity markets, investors in the US will be paying attention to the several speeches by Fed officials including Fed Chair Powell's testimonies before the Senate Banking Panel and House Financial Services Committee. Also, flash PMI surveys for the US, UK, Eurozone, Japan, and Australia will be closely watched. Finally, CPI data for the UK, Canada, Singapore, Japan, and Malaysia is set to be released.
As per my analysis above, the markets and sectors are quite Bearish, sentiment is very negative and volatility is at extreme levels. However, markets are quite oversold now and attention must be directed towards Friday´s fake breakdown of the YTD low with divergences from the technical indicators. Next week, the ES market could consolidate and then move higher, possibly a relief rally is in the works or we could get more of the same, that is, moving further down. Note that the 50% retracement of the 2020 - 2022 uptrend is around 3506 for the ES market. For the Bullish case, the Buyers must defend the 3661 and 3650 levels and then break through and hold above the 3712/3720 resistance levels for more upside. The targets above are the 3734/3743 levels and then the 3752/3763 levels, which are all strong resistance. It would be very positive for the Bulls to stay above the 3734 level next week and once the 3763 level is cleared, then the next upside targets are the 3775/3784/3793 levels, which again are all strong resistance and the Sellers will be looking to defend these levels. See hourly ES chart below. Persistent Buyers are looking to bring the market back inside the original downward channel shown in the daily ES chart above, that is, they need to break strong resistance at the 3808/3823 levels. The next target is the FOMC day´s high at the 3840 level. On the other hand, for the Bearish case it is pretty self-explanatory, the Sellers want a continuation of the Imbalance phase and break below this week´s low of 3639 to target the 3624 level first. Below here, the downside targets are the 3601 level and then the 3584 level, which will be strong support. Once these levels are cleared, persistent Sellers are looking to target the 3540 level and then the 3500 area. Tomorrow is a holiday and the markets will be closed, so there will be no post until Tuesday before the market opens.