Technically Speaking, December 2023

Hello readers!

We are now in the 12th and final month of the year and it seems like we’re going out with a bang! Global indices are now clocking all-time highs as sector rotation continues to churn this market further. There were those who made money, those who lost money and those who learnt a lot from the markets this year regardless of the monetary gain/loss. And that needs to be our prime focus. As long as the learning is in place, you’ve gained in this market.

Everything is Relative Strength is everything

When I was studying for my CMT Level III exam, I came across this chapter by Julius de Kempenaer. I read the title over and over again. I was amazed by that statement and the validity that it holds universally. What we see, believe and feel is all relative. For the most part, we don’t deal with absolute perceptions or ideas. Everything is in relative terms based on the variables we’ve been exposed to in the past. Just as we choose a particular asset class based on its relative strength among other asset classes, we make choices in life based on the relative strength of those decisions over others. Similarly, there are numerous concepts that could be picked up from the market and incorporated in our lives because at the core of these concepts are basic human emotions and reactions.

As always we watched this year how sector rotation and intermarket relationships led to crucial moves in the markets and how the stance of the Fed can quite literally track behavioral patterns in price! For me, this year has reiterated the importance of basic concepts and understanding which often get clouded by over analysis and over thinking. As an analyst sometimes one’s judgement gets clouded by expectation rather than by reaction. We are not here to dictate or predict patterns and scenarios. We are here to react to the price to the best of our risk management abilities and move with the trend.

To all the aspirants who appeared for their exams this December, all the best and continue taking words from your books to your charts! There is no better learning than practicing what you’ve already studied!

Wishing everyone a delightful new year!

Until next time, Think Technical!

Rashmi Shastry, CMT
Editor, Technical Insights

What's Inside...

President's Letter

Robert Palladino, CMT

The finish line for 2023 is drawing near; I sincerely wish everyone a Happy Hanukah, Merry Christmas, Happy...

All That Glitters Isn't Gold

Ian Culley

Metals are beginning to shine.

Gold’s new all-time high has captivated the masses. But all that glitters isn’t gold.

In...

S&P 500 Analysis: Winning Streak Stretches to 7 Weeks – Why that Could Be a Bullish Sign

Matt Weller

S&P 500 Key Points

The S&P 500 is poised to close higher for the 7^th straight week, a streak that...

Dow Rallies to Record Highs

Adam Turnquist, CMT

Key Takeaways

The Dow Jones Industrial Average (INDU) has gone from correction to record highs in only 32 trading...

Risk-On Message Being Sent Out by the Market

My Risk-On and Risk-Off ratio has climbed to its highest level EVER.

This breakout to new all-time highs in my Risk-On / Risk-Off...

President's Letter

The finish line for 2023 is drawing near; I sincerely wish everyone a Happy Hanukah, Merry Christmas, Happy Kwanzaa, and a Happy New Year from the CMT Board of Directors! We would be unable to achieve many of our goals as an organization without the help of our members, volunteers, and CMT Association Staff that work tirelessly to advance the education and promotion of technical analysis. I hope the December chapter events were enjoyable and allowed for a good time to catch-up on the happenings in your area.

While the President’s Letter is not intended to be a market letter, I must chuckle at the YTD performance of the S&P 500 Index (~+25%) after its 20% decline in 2023 had many pundits calling for the end of the world in H1 2023. As skilled technicians, we are trained to “march to the beat” of what the market is telling us and the equity tape of H2 proved to be a very monetizable trade for trend-followers. As we head into 2024, I look forward to wiping the slate clean of any 2023 conviction biases, resetting my focus on potential market outcomes in 2024, and pre-planning price levels/risk setups that can generate the alpha I need to reach my 2024 trading goals.

As I review the 2023 calendar year for the CMT Association, I cannot help but be proud of reaching fifty years as an organization and celebrating in style at the 50th Symposium in NY. Enjoying time together with like-minded professionals on the NYSE trading floor (h/t Jay Woods) in April was an unforgettable collectible item that I will certainly treasure. Multiple individuals contributed so much time and effort to organizing this event, but I would single out Bill Kelleher and Tyler Wood for their continuously successful efforts in delivering an Annual Symposium that generates high-level content and member networking each year.

Calendar year 2024 opens with two events scheduled in February. The first event will be a one-day mid-winter retreat on February 1st held at The Tampa Club in Tampa, FL (check the CMT website and your email for more specific details). The second event will be held on February 29th in Dubai at the Museum of the Future with a kick-off event the evening prior. We hope that members can prioritize attending at least one of these events as we bring together members of our community to learn and see what we can collectively do to further our discipline and help each other out!

I will be back in this corner in January to discuss the 2024 year-ahead outlook for the Board of Directors as it pertains to key initiatives for the Association, but until that time, I wish you a wonderful Holiday season and good luck trading in 2024!

Contributor(s)

Robert Palladino, CMT

Robert Palladino, who holds a Chartered Market Technician (CMT) designation, is a senior foreign exchange trader for JPMorgan Chase with experience trading foreign exchange, commodities, and interest rate products, including derivatives. His foreign exchange career has allowed him to work in Hong...

All That Glitters Isn't Gold

Metals are beginning to shine.

Gold’s new all-time high has captivated the masses. But all that glitters isn’t gold.

In fact, base and industrial metals are also providing ample trading opportunities.

Check out ol’ Dr. Copper challenging near-term resistance:

A decisive close above 3.91 set the path of least resistance toward the year-to-date highs at approximately 4.25.

It’s difficult to imagine a more bullish scenario for global equities aside from a continued expansion in the new highs list.

As much as I enjoy trading futures, I can’t ignore the money flowing into stocks.

If the expansion in new highs isn’t enough, stocks outperforming commodities should grab your attention.

With that in mind, here’re three equity plays to capture the developing move in base metals:

First, Southern Copper $SCCO:

Southern Copper is forming an inverted head and shoulders with a neckline at approximately 84.

I like buying a decisive close above that level, targeting that hundred-dollar roll and beyond to 110.

If copper futures are trading above 4.00, you better believe SCCO is breaking out.

Next, the VanEck Steel ETF $SLX:

SLX has already taken out our risk level of 68.

I like it long toward 110 (there’s that hundred-dollar roll again.) But only if it holds above our breakout level.

Last but not least, the MSCI Canada ETF $EWC:

Yes, EWC is predominantly composed of Financials and Energy names. But its weighting almost constitutes 25% Industrials and Materials.

I imagine the latter’s influence will only grow if the current rotation out of energy and into base and industrial metals continues.

Regardless, it’s a great-looking base – the type of base I like buying.

I’m long EWC on a weekly close above 36.50 with an initial upside objective of 48.

That’s it for today – just a few trade ideas.

The main takeaway: Metals are catching a bid. And Gold and Silver aren’t the only rocks in the hot seat.

Stay tuned!

Contributor(s)

Ian Culley

Ian Culley is an investment analyst and Head of FICC at All Star Charts, focusing on Fixed income, Commodities, and Currencies. He began trading futures and forex in 2016, learning many hard lessons firsthand. In search of community and further study, he...

S&P 500 Analysis: Winning Streak Stretches to 7 Weeks – Why that Could Be a Bullish Sign

S&P 500 Key Points

The S&P 500 is poised to close higher for the 7^th straight week, a streak that has only occurred 40 times in the index’s 100-year history.
Historical returns for the S&P 500 have been generally strong following previous 7-week winning streaks.
S&P 500 bulls will remain in control as long as the index holds above previous-resistance-turned-support at 4600, with potential for a move up to the record highs near 4820.

Historical Analysis of 7-Week S&P 500 Winning Streaks

After a huge rally through the middle of the week, it’s a foregone conclusion that the S&P 500 will finish higher for the 7^th consecutive week, a relatively rare streak historically. Any time I see an unusual price action, I like to put it into historical context and analyze what it could mean about the future.

Going back to the inception of the S&P 500 in 1923, there have been just 40 7+ week winning streaks, or approximately 1 every 2.5 years. As the chart below shows, they’ve usually occurred in the middle of bull markets, with only rare appearances near significant tops and bottoms:

spx_sp_500_streak_analysis_1

Source: Tradingview, StoneX

The next obvious question surrounds how long the current winning streak may last. At least looking at the historical record, the odds suggest that the streak is likely to come to an end sooner rather than later. Roughly 80% of past 7-week winning streaks have failed to extend to 10 weeks, with only a handful stretching beyond that:

spx_sp_500_streak_analysis_2

Source: Tradingview, StoneX

For those who are interested, the longest S&P 500 winning streak was 14 weeks, set back in both 1927 and 1957.

Perhaps of most interest to readers, historical returns for the S&P 500 have been generally strong following previous 7-week winning streaks, with the index showing the following average returns over the next 4, 13, and 52 weeks:

4 weeks later: +1.5% (vs. 0.6% in all 4-week periods)
13 weeks later: +4.1% (vs. 2.1% in all 13-week periods)
52 weeks later: +13% (vs. 8.4% in all 52-week periods)

The S&P 500 has also seen positive moves at a higher-than-historical-average rate over the next month, quarter and year:

4 weeks later: Higher 73% of the time (vs. 60% in all 4-week periods)
13 weeks later: Higher 83% of the time (vs. 64% in all 13-week periods)
52 weeks later: Higher 83% of the time (vs. 69% in all 52-week periods)

spx_sp_500_streak_analysis_3

Source: Tradingview, StoneX

Time will tell how this current winning streak plays out, but historical 7+ week winning streaks in the index have been a generally bullish development for returns over the next month, quarter, and year.

S&P 500 Technical Analysis – SPX Daily Chart

SPX_SP_500_CHART_TECHNICAL_ANALYSIS12152023

Source: TradingView, StoneX

Looking at the S&P 500 chart, the index is consolidating this week’s impressive gains just above the 4700 area. While the trend is clearly higher across multiple timeframes, it is notable that the S&P 500 is well into overbought territory on its 14-day RSI, signaling the potential for a pullback or consolidation as we head into the lower-liquidity holiday period.

In the short term, S&P 500 bulls will remain in control as long as the index holds above previous-resistance-turned-support at 4600, with potential for a move up to the record highs near 4820. Only a break below 4600 would call the near-term bullish bias into question.

Contributor(s)

Matt Weller

Matt Weller is a Senior Technical Analyst on FOREX.com’s research team and has actively traded various financial instruments including stocks, options, and forex since 2005. Each day, Matt creates research reports focusing on technical analysis of the forex, equity, and commodity markets....

Dow Rallies to Record Highs

Key Takeaways

The Dow Jones Industrial Average (INDU) has gone from correction to record highs in only 32 trading days. Broadening participation predicated on falling interest rates and signs of a soft-landing scenario have underpinned the recovery.
What happens after a record high? Over the last 100 years, and filtering for record highs occurring at least three months apart, upside momentum has historically continued. The INDU has generated an average 12-month forward return of 11.1% after posting a new record high, with 71% of occurrences producing positive results.
And with the INDU already at record highs, all eyes are now on the Dow Jones Transportation Average (TRAN) to confirm the breakout, per Dow Theory.
LPL Research views the INDU’s recent record-high rally as another piece of evidence supporting the health and sustainability of the current bull market.

It only took 489 trading days, but the INDU climbed back into record-high territory this week. Broadening participation in the equity market recovery has lifted the index 15% above its recent October low and above the prior January 4, 2022 record high of 36,800.

From a Correction to Record-Highs in 32 Days

Source: LPL Research, Bloomberg 12/15/23
Disclosures: Past performance is no guarantee of future results.
All indexes are unmanaged and can’t be invested in directly.

While the INDU has become obsolete as a benchmark for portfolio managers due to its price-weighted methodology, its long history and blue-chip components still make it a relevant index to watch. Furthermore, the INDU is a little more balanced with sector weights than the tech-heavy S&P 500, as financials, health care, technology, and industrials each hold around a 15–20% weight within the index.

The INDU is also a key component of Dow Theory — a technical framework dating back to the early 1900s that is generally used to define market trends. Charles Dow, co-founder and editor of The Wall Street Journal, is credited with the original theory.

One of the tenets of Dow Theory is that the averages must confirm each other, simply meaning breakouts and breakdowns in the INDU and TRAN should happen in concert. Conceptually, Charles Dow observed in the late 1800s that raw materials would need to be transported via railroads before economic expansion could begin. Subsequently, robust rail activity would typically portend favorable economic conditions for industrial companies.

With the INDU already at record highs, all eyes are now on the TRAN to check the box for a Dow Theory buy signal (the averages must confirm each other).

Will Transports Confirm the Rally?

Source: LPL Research, Bloomberg 12/15/23
Disclosures: Past performance is no guarantee of future results.
All indexes are unmanaged and can’t be invested in directly.

What Happens After a Record High?

While record highs are great, the next question, of course, is what happens next, especially for those investors who may have missed the rally. Using history as a guide, we found that over the last 100 years, upside momentum continued after the INDU registered a meaningful record high, defined by record highs occurring at least three months apart. As illustrated in the table below, the INDU has generated an average 12-month forward return of 11.1% after posting a new record high, with 71% of occurrences yielding positive results.

Summary

While the INDU’s price-weighting methodology limits its use as a portfolio benchmark, the index’s long history and blue-chip components still make it a relevant benchmark to watch. LPL Research views the INDU’s recent record-high rally as another piece of evidence supporting the health and sustainability of the current bull market. A breakout on the TRAN index would further support the bull case and check the box for a Dow Theory buy signal. Finally, history suggests that record highs are typically followed by continued upward momentum. Or as veteran technician Stan Weinstein said, “Whenever a breakout occurs with a stock moving into virgin territory (it’s never traded there before), this is the most bullish situation you can buy. Think about it. There isn’t one person who is long and has a loss.”

Contributor(s)

Adam Turnquist, CMT

As Vice President and Chief Technical Strategist, Adam Turnquist is responsible for the management and development of the technical research product within LPL Research. In this role, he provides LPL Financial advisors and their clients with actionable market insight and technical strategy...

Risk-On Message Being Sent Out by the Market

My Risk-On and Risk-Off ratio has climbed to its highest level EVER.

This breakout to new all-time highs in my Risk-On / Risk-Off ratio is consistent with the improving uptrends, momentum and strong breadth backdrop being seen across the board:

Yes, You did hear me correctly… ALL-TIME HIGHS!

After breaking out of a two-year range in July this year, the ratio has continued to move higher.

Up and to the right!… That is the simplest way to identify an uptrend!

The improvement in the ratio has been fueled by both an upturn in the Risk-On index and continued deterioration in the Risk-Off index:

Confirmation of the strength in the Risk-On index comes from a broader look at the Risk-On and Risk-Off pairs. Looking at a range over the past 52 weeks, only a scattering of pairs are closer to the Risk-Off extreme than the Risk-On extreme:

Most of the Risk-On vs Risk-Off asset pairs (13 of 20) have seen more strength coming from the Risk-On component than the Risk-Off Component.

Over the past month, the average pair has continued moving higher, now sitting just below 75%.

This reflects a favourable backdrop for stocks overall.

When we aggregated these into a custom indicator, we can see the recent ascent back towards the January & July peaks of this year:

The message right now is clear…

We are seeing overwhelming strength out of Risk-On assets.

The Risk-On environment we have been in since the middle of the year remains intact.

So, as long as the Risk-On index and the Risk-On/Risk-Off ratio are showing improvement and that improvement is being confirmed with a healthy breadth environment, it is presumably advantageous to lean into this market strength.

Do you think the market is overbought?

Or there is more fuel in the tank for stocks?