Flight Path: “Tweezer Backside” or “Lifeless Cat Bounce”? | GoNoGo Charts

If you happen to’ve been away, actually away, and all you understand is that US Equities have been up ~1% final week, then you definately’ve been extraordinarily disciplined about your New 12 months’s digital detox decision! 

The S&P 500 started the holiday-shortened week with a 1% decline on Tuesday, which struck the alarms for monetary information anchors. The S&P was down greater than 10% from a document excessive it reached on January 3, which met their definitions of “a correction.” The definition is bigoted, however it marked essentially the most vital decline because the 2020 pandemic crash.

Then, early Thursday morning, Russia launched an invasion of Ukraine by land and air, the size of which shocked markets, triggering a spike in volatility and outsized declines in European equities. The occasions signify a significant escalation within the battle, marking the worst safety disaster Europe has witnessed in a long time. Whereas the world watches in terror because the state of affairs continues to unfold via this weekend, markets seem nonplussed. Danger belongings tumbled firstly of the Russian operation, however then miraculously recovered.

Markets hate uncertainty, and final week introduced an finish to hypothesis and the beginning of open battle towards Ukraine. The S&P 500 ended the week with a 0.8% acquire after being down as a lot as 5.4% from the shut of the prior week. The Nasdaq Composite (+1.1%) and Russell 2000 (+1.6%) every gained over 1.0% after being down as a lot 7.1% and 5.7%, respectively. The Dow Jones Industrial Common closed almost flat after being down 5.3% intraweek.

So… “Tweezer Backside” or “Lifeless Cat Bounce”?

At this time is the final day of the month and the massive query on everybody’s thoughts is whether or not this late February rally was a countertrend reflexive rebound inside a structural downtrend, or if markets have positioned a strategic backside towards which we are able to place new trades. On this week’s situation of Flight Path from GoNoGo Analysis, we are going to take a look at the load of the proof and think about a buying and selling plan for each potential outcomes.

“If it is apparent, its clearly fallacious.” – Joe Granville

Let’s begin with the notion that the underside is in and the bulls are again in cost. Liz Ann Sonders tweeted on Friday that AAII investor bearish sentiment rose to its highest stage since 2013. As Sam Stovall as soon as shared concerning the contrarian indicators of sentiment extremes: “If everyone’s optimistic, who’s left to purchase? If everyone’s pessimistic, who’s left to promote?”

Couple the extraordinarily bearish sentiment with the purported head-and-shoulders topping sample that was the topic of each dealer tweet for the previous a number of uneven weeks and it begins to really feel like everybody moved to the identical bearish aspect of the boat simply in time for Mr. Market to flip the opposite course and toss traders overboard.

Thursday’s hole down on the open despatched the S&P nicely under the help of January’s low (highlighted in white field). Whereas recording the weekly GoNoGo present for StockChartsTV on Thursday morning, the load of the proof was strongly to the draw back:

1. Robust “NoGo” development,
2. Oversold circumstances in a destructive GoNoGo Oscillator,
3. The breakdown via key help (white line at 420).

Now, in view of the rally Thursday afternoon and all via Friday’s session, this failed transfer might be a large Bear Lure. A bear lure, (or failed breakdown) is when worth breaks a significant help stage, solely to rapidly reclaim it. Bear traps usually result in sharp strikes greater, which is an arguably bullish setup for this week’s session.

Understanding once we are fallacious permits us to exit rapidly with a small loss. For anybody shorting the S&P, breaking again above the January lows of 4260 was the clear level to cowl. Alan Shaw and the technical workforce of Smith Barney (now Citi) have rightly noticed that from failed strikes come quick strikes. The “NoGo” development circumstances are in weak type on Friday’s pink bar. If GoNoGo Oscillator can break via the zero-line reaching optimistic momentum, we might see a reversal of development circumstances. The composite mix of development indicators shifting to aqua, or blue, would permit us to lean right into a “Go” development reversal for giant, outsized good points. And the identical 4250 stage will outline a transparent exit.

From a behavioral standpoint, the buying and selling exercise final week was an important case research. Candlestick charting fans have famous the “hammer” formation on weekly charts all weekend. What they’re referring to is the relative proximity of the open and shutting worth of the week despite the lengthy wick of the candle dropping to vital lows. Final week’s session closed on the highs of the week after retracing all the big losses on Thursday’s hole down. See the white field highlighting the inexperienced candle on the weekly chart under.

The Weight of the Proof

What is evident in regards to the US Fairness markets’ development is that they’re down. A sequence of decrease highs and decrease lows. GoNoGo Oscillator continues to be destructive, displaying bearish momentum, and whereas the development situation is in its weaker pink type, it’s nonetheless a “NoGo.” Think about the Nasdaq 100, which had essentially the most dramatic reversal final week. The chart under is maybe greatest thought-about responsible till confirmed harmless:

Probably essentially the most irritating end result of final week’s risky worth motion can be no decision. That means that — on the index stage — markets might proceed to grind out uneven weeks and gasoline additional rotation in what has already been a tough 12 months for traders. Outcomes are usually not at all times binary. To higher perceive that rotation, we are able to look to a sector warmth map that shows relative developments of every sector towards the efficiency of the benchmark index.

S&P 500 Sector Relative Power

On an absolute foundation, 8 of the 11 sectors closed greater, paced by the defensive-oriented well being care (+2.7%), actual property (+2.7%) and utilities (+2.0%) sectors. The buyer discretionary (-2.2%), client staples (-0.3%), and financials (-0.3%) sectors closed decrease. From a relative energy perspective, the GoNoGo Sector Relmap exhibits industrials and supplies have been indecisive, however cyclical sectors largely maintained their outperformance of the benchmark index, whereas progress sectors (tech, communications, and discretionary) underperformed.

Oil Touches $100

The value of U.S. crude oil briefly topped $100 per barrel on Thursday morning — the primary time that threshold has been reached since 2014. The spike got here within the hours after the Russia-Ukraine battle broke out, and the worth retreated later within the day earlier than ending the week little modified total. The retracement in commodity costs corroborated the hopes that inflation may not straight worsen within the wake of the Russian invasion. Notably, WTI crude futures settled the week greater by simply 0.4% at $91.59 per barrel. See the every day GoNoGo Chart under, which illustrates sturdy blue Go development circumstances, but the oscillator is driving the zero line and constructing the grid of GoNoGo Squeeze on heavy quantity:

Penalties & Sanctions

In response to the invasion of Ukraine, the U.S. and different Western international locations imposed sanctions, focusing on Russia’s main banks and limiting exports of expertise. But the sanctions stopped in need of eradicating Russia from the SWIFT fee system (the system by which international funds are made) and reducing off vitality purchases from Russia. As a result of oil and vitality merchandise weren’t included within the package deal of sanctions, oil costs eased some and Russia’s RTS Index tanked 33% — displayed on the weekly GoNoGo Chart under:

Invasion Inflation Relation

Simply because oil and vitality exports weren’t sanctioned, the market will not be miraculously within the clear concerning inflation. The direct financial influence to the US and allies might have been blunted, however inflation might keep greater for longer. The PCE Value Index, a measure of inflation that the U.S. Federal Reserve makes use of to assist set financial coverage, climbed on the highest month-to-month charge since 1983 — 0.6% m/m in January, leaving it up 6.1% on a year-over-year foundation. And, on Friday, the federal government shared that core private consumption expenditures worth index rose at an annual charge of 5.2% in January. The identical report confirmed that client spending rose 2.1%.

Commerce between the U.S. and Russia is comparatively insignificant; nonetheless, Russia is a significant commodities producer and exporter. Europe will get almost 40% of its pure fuel and 25% of its oil from Russia. Along with Ukraine, Russia accounts for a couple of quarter of worldwide wheat exports. Thus, the first threat is a disruption within the provide of vitality and different agricultural commodities, which might trigger costs to speed up greater and drive inflation greater for longer.

Beneath is a every day chart of Wheat Futures, which shot greater by 10.35% final week (almost 17% at Thursday’s excessive):

The Russia-Ukraine battle complicates central banks’ efforts to tame inflation as a result of it exacerbates the identical downside policymakers try to handle, at a time that they’d usually ease coverage to assist progress. Final week, the 2-yr yield rose 12 foundation factors to 1.59% on continued expectations for the Fed to hike charges not less than six instances within the close to time period. The ten-yr yield rose six foundation factors to 1.99%. See the $TNX every day chart under of 10-yr Yields:

The US Greenback had a powerful week, gaining considerably because the Ukraine state of affairs unfolded. Nevertheless, with risk-on circumstances coming again within the closing levels of the week, the Greenback gave a few of its good points again. The $DXY index lastly closed the week 0.5% greater at 96.541, however is already displaying renewed energy in premarket buying and selling:

Mining and Minerals

A number of developments to control this week are mining and industrial metals, particularly uranium and copper. See the chart under of $URNM. The North Shore World Uranium Mining ETF is made up of a basket of corporations which might be concerned within the mining, exploration, improvement and manufacturing of uranium, in addition to corporations that maintain bodily uranium, uranium royalties or different non-mining belongings. Value motion was sturdy to the upside on Thursday and Friday, which helped $URNM strike impartial development circumstances in a ultimate amber bar. Most notably, GoNoGo Oscillator broke optimistic on heavy quantity, ending a max squeeze including potential for a swift transfer greater.

And here’s a take a look at Freeport-McMoRan, Inc. ($FCX), which is in a powerful blue “Go” development, resolving a 10-month base with a weekly closing excessive that hasn’t been hit in a decade. The GoNoGo Oscillator is concurrently rallying optimistic off the zero-line on heavy quantity.

Freeport-McMoRan Inc. is a mining firm working geographical belongings in Phoenix with confirmed and possible reserves of copper, gold, and molybdenum, and a traded copper producer. The corporate’s segments embody refined copper merchandise, copper in focus, gold, molybdenum, oil and others.

In reality, the metals and mining trade is performing solidly on each an absolute and relative foundation. Beneath is a take a look at $XME/SPY – the relative ratio of the metals and mining ETF towards the S&P 500, displaying a powerful week of relative good points above prior resistance on sturdy blue “Go” development circumstances. The GoNoGo Oscillator has rallied optimistic after months of indecision on the zero-line:

Conclusions

The bearish narrative might have been overdone final week. Brief-sellers might have been caught in a grizzly bear lure and the risk-on circumstances have been pronounced late within the week. Nevertheless, rotation away from progress sectors, rising inflation, and an appreciating US greenback stay vital catalysts to this surroundings. GoNoGo Charts are designed to maintain traders centered on the development and, proper now, the options to passive indexing are compelling. Forecasting that the underside is in whereas the US Fairness Indexes are nonetheless in NoGo developments might develop into a worthwhile gamble… however because the legendary Merrill Lynch Chief strategist and first President of the Market Technicians Affiliation, Robert J. Farrell, as soon as mentioned:

“Being too far forward of your time is indistinguishable from being fallacious.”

Alex Cole & Tyler Wooden