I was bearish heading into 2022 - before the selling began - and I haven't changed my mind one bit, despite the recent rally. Counter trend rallies are normal and, quite honestly, I think the current one may have just run its course. First, the rally has reached a final Fibonacci retracement level at 61.8% as you can see below, while also printing a potential right shoulder in a bearish topping head & shoulders pattern:
Throw in a downtrend resistance line test and this short-term top appears complete to me.
Next, the 4-day rally started losing bullish steam almost as soon as it started. To sustain a rally, one ingredient necessary is for stock market participants to remain in a "risk-on" mode. In December, I wrote about the final top in the S&P 500 being led by the four defensive sectors - consumer staples (XLP), health care (XLV), real estate (XLRE), and utilities (XLU). Well, many times short-term counter trend rallies end the same way - led by defensive sectors. While communication services (XLC) was Wednesday's clear leader on the heels of an outstanding quarterly earnings report from Alphabet (GOOGL), check out the next 4 sectors on this leaderboard:
Investors were hardly in a "risk-on" mode. Meanwhile, on this 10-day, 10-minute chart, you can see that as the S&P 500 has been rising the past few days, both the XLK and XLY have struggled on a relative basis and my favorite intermarket relationship (XLY:XLP) has already turned much lower:
Sharp declines after earnings in names like Netflix (NFLX), PayPal (PYPL), and now Facebook (FB) will not help.
The January Effect
There's an old adage on Wall Street that says, "as January goes, so goes the year". Ummm, I don't know if you've looked at January or not, but it was one of the worst on record. This Saturday, at 10:00am ET, I will be hosting a FREE "January Effect" webinar, where I'll explain the correlation between stock market performance in January vs. the balance of the year. It is absolutely stunning and I'm sure you'll enjoy seeing the facts and the repercussions we'll likely feel for months to come as a result of this phenomenon.
To join this Saturday webinar, you only need to be a FREE EB Digest subscriber. You can subscribe HERE with your name and email address. There is no credit card required and you may unsubscribe at any time.
Happy trading!
Tom
