Charting the Course

The inaugural week of the 2024 investment year concluded with the Dow Jones Industrial Average (DOW), S&P 500, and Nasdaq reflecting losses of approximately -0.59%, -1.52%, and -3.09%, respectively. While this may not align with the optimistic expectations of long-bias investors, it marks a period of healthy market digestion following the impressive performance in the preceding two months. The previously 'overbought' market conditions have receded, approaching a more neutral stance across various indicators.

Presently, diverse theories circulate from both bullish and bearish perspectives. Sellers are assertively highlighting the perceived failure of the Santa Claus Rally, seeking to imprint their expectations for 2024. Conversely, bullish participants entered the week well-prepared, attributing the typical weakness in the S&P 500 at the year's commencement to historical norms, further amplified by the fact that it is an Election Year.

The market has retraced to levels of the December 13 FOMC meeting. Notably, buyers alongside short covering activity was observed on Friday, indicating a potential carryover of upside momentum into this week. A rebound at these levels would not be uncommon, instilling confidence in the prospect of early week buying being a positive for most stocks and sectors.

Weekly sector performance ranked as follows:

• Healthcare - 1.45%

• Utilities - 1.11%

• Energy - 0.93%

• Consumer Defensive - (0.17%)

• Financial - (0.42%)

• Communication Services - (1.99%)

• Industrials - (2.59%)

• Basic Materials - (3.09%)

• Real Estate - (3.30%)

• Consumer Cyclical - (3.94%)

• Technology - (4.78%)

As previously noted, early week momentum can offer more favorable trading opportunities within the underperforming sectors of last week, namely Technology, Cyclicals, and Real Estate.  Moving into Thursday, January 11, 2024, the market will be all eyes and ears for the CPI report which is set to be divulged at 0730 hours. It is Bankfluence’s opinion that locking in some gains prior to this data may be warranted as some are exploring the possibility of an unfavorable reading. The data could be supportive of continued upward momentum, but staying vigilant is never a bad idea. 

The chart of the S&P 500 ($SPY) displayed above demonstrates the formation of an incipient head and shoulders pattern. Utilizing the December FOMC burst and Friday's rebound as the neckline, buyers may set their target for this week within the 0.382 and 0.236 Fibonacci retracement levels. Currently, the market appears to be in a state of satisfaction with the observed bounce. Introducing time as a variable in the trading equation, the target zone aligns with the conclusion of the CPI report on Thursday, poised to serve as the subsequent significant catalyst for the market.

On Friday, amidst the tumultuous technology sector, semiconductors exhibited the most robust momentum, offering a strategic avenue for potential mean reversion plays early in the week. Examining the AMD chart below reveals that semiconductors are currently finalizing a smaller 'corrective wave' (abc) within a larger pullback sequence (1,2, 3, etc). Analogous to the head and shoulders pattern observed in the SPY, buyers are advised to target the 0.382 Fibonacci retracement for the completion of wave 2. While not all charts may be as discernible as the AMD chart, a prudent approach to semiconductor analysis this week involves aiming for retracement targets of 0.382 and 0.236 from the most recently recorded highs and lows, spanning from mid-December to last week.

Currently, there is uncertainty surrounding the completion of the pullback for January, necessitating a cautious approach wherein retaining potential runners at the specified targets may prove advantageous. At this juncture, it is our perspective that the implementation of stop losses or other forms of gain protection is prudent. The inherent unpredictability of market movements underscores the importance of risk mitigation strategies, as our analysis does not offer precise insights into whether the market will undergo further selling pressure or ascend higher.

Under normal circumstances, we would exercise caution in exploring ‘spicy’ ideas. However, an unfortunate incident unfolded over the weekend involving an Alaska Airlines 737 plane experiencing structural integrity malfunctions, leading to a mid-flight window blowout and necessitating an emergency grounding. Fortunately, no injuries were reported which is why we are willing to discuss these ideas. For those positioned early enough, there may be an opportunity for a strategic short sale in the airline industry come Monday morning. $ALK, $DAL, $LUV, or $JETS.