Wednesday’s in-line CPI sparked a minor boost for US equities along with Treasuries, though despite QQQ finishing at the highest levels since mid-July, a bit more strength will be needed on a closing basis to claim a legitimate triangle breakout. The rotation beneath the surface continues to broaden in encouraging ways. South Korea’s surge and Memory’s relative turn higher round out a Technology rotation which had already seen Software pop in recent weeks, and despite AAPL, META, and AMZN weakness, this fresh participation should benefit QQQ in the near term as the major averages press back up toward former all-time highs. While an eventual push higher in both the US dollar and Treasury yields is likely in the back half of August, this doesn’t appear to have gotten underway just yet ahead of tomorrow’s 30-year auction. Overall, it remains right to lean bullish in the short run, expecting that both ^SPX and QQQ push up into end of week. Risks involve upward acceleration in the US dollar, yields, and WTI crude oil, with only the latter seeming to have started in recent days. Overall, not much progress in today’s trading, but similar to most days of late, some interesting sub-sector rotation “under the hood” which continues to favor Technology strengthening even more in the near term.
As discussed in recent notes, this rally might begin to mature once the major averages press back up to exceed former all-time highs, and consolidation likely gets underway in the back half of August. However, much of this looks dependent on rates starting to push back higher. If/when Technology can make progress like it did today without the help of AAPL, AMZN, and META participating while Memory now starts to break out, then I still suspect higher prices are likely in the short run. Thus, today’s setups — South Korea, Memory, and selectivity within Emerging Markets — look to be the right vehicles for near-term risk-on exposure while keeping a close eye on both WTI crude oil and long-term Treasury yields for evidence of the next cross-asset shift.
EWY’s breakout looks attractive for further gains to $182, potentially $190
The iShares MSCI South Korea ETF (EWY) has broken out given some strength out of SK Hynix and Samsung, surging +4.71% to 175.12 on Wednesday, and this looks attractive technically for further gains up to $182, with a likely maximum initial move to $190.
This also carried through to US markets as encouraging patterns developed today on a closing basis from MU, SNDK, and other names like CIEN, DELL, and LITE that bode well for Tech’s recent rally to continue.
As shown below, a minor reverse head-and-shoulders pattern was confirmed on today’s close, and today’s minor breakout to new monthly highs followed the recent strength above the downtrend line from June. The 50–61.8% Fibonacci retracement zone of the June–August decline at 182.06–191.30 frames the upside targets on this move, and this strength is spreading over to Memory within the US, making for a good near-term risk/reward for Memory stocks in the short run following a difficult couple of months.
iShares MSCI South Korea ETF (EWY, daily) — Wednesday’s +4.71% surge confirms a reverse head-and-shoulders pattern, with 182 the initial target
Memory’s relative breakout vs. equal-weight Technology signals short-term outperformance
Additional good news technically is seen in relative charts of Memory vs. Technology on an equal-weighted basis.
As shown below, the relative chart of the Roundhill DRAM ETF for Memory (DRAM) vs. RSPT, the equal-weighted Technology ETF, has finally broken out for the first time since June, and MACD is also about to cross back over into positive territory. This is a good sign in the short run for Memory within Technology, as it signals that Memory can start to outperform, at least in the short run.
This makes sense in the context of the broader rotation within Technology: AAPL has not been acting well lately and has pulled back to test July lows, while NVDA has perked up but should find strong resistance near May highs at approximately $236. Software has popped in recent weeks, so this leaves Memory stocks as one of the last groups within Tech that finally looks to be turning higher.
This should benefit QQQ in the near term, and the price action in SNDK and MU — not to mention South Korea’s EWY making an absolute breakout on SK Hynix and Samsung strength — is thought to be particularly positive for Memory stocks.
DRAM / RSPT (Roundhill DRAM ETF vs. equal-weight Technology, daily) — First relative breakout since June, with MACD about to cross back into positive territory
EEM can extend to 69 in the short run, but momentum and dollar headwinds argue against new highs right away
EEM is also benefiting given EWY’s strength, despite some of the weakness happening in Brazil given political headwinds. The minor downtrend from June was exceeded last week in the iShares MSCI Emerging Markets ETF (EEM) as part of the ongoing uptrend, and that should help this push higher up to 69 in the short run.
However, the deterioration since June took a toll on momentum gauges like MACD on weekly charts, which might signal that it could take time before EEM turns back up to new highs. Furthermore, DeMark-related exhaustion signals are within two weeks of possibly registering the first TD Sequential “13 Countdown” signal in months — and it’s worth keeping in mind that TD Combo weekly “sells” (13 Countdown exhaustion) happened right at the June peak.
Thus, while I’m bullish on EEM extending in the short run, I’m skeptical this rally will surpass 69 right away, and this very well could slow and face strong resistance if/when the US dollar starts to reassert its strength.
iShares MSCI Emerging Markets Index Fund (EEM, weekly) — Ongoing uptrend allows for a short-term push to 69, though weekly DeMark exhaustion could register within two weeks
US dollar looks poised to turn back higher now that CPI is out of the way, targeting 102.50
DXY is starting to stabilize at intermediate-term support, and my expectation is that a push back to monthly highs should happen now that CPI is out of the way. Given that DXY did not budge much on an in-line CPI, it could now start to push back higher following its recent stabilization at intermediate-term trendline support. Rate swaps markets seem to suggest the FOMC is turning more hawkish while peer-group central banks are turning less hawkish, and this might help to lift the US dollar.
My target is 102.50, and I expect that 100.35–100.50 initially will prove important; getting over this level should drive a move to 102.50, above the highs seen in recent months. This likely could happen as economic data and/or US-Iran war developments unfold, which might allow for upward pressure in long-term yields.
Thus far, economic data has proven quite benign for inflation, but my expectation is that rising crude prices and the intermediate-term trend for Treasury yields will eventually start to lift rates back higher, in combination with better-than-expected economic strength and a rise in term premiums, and the US dollar should also start to trend higher. As shown below, DXY is holding the uptrend from its January lows, which is where stabilization could start to give way to strength.
U.S. Dollar Index (DXY, daily) — Stabilization at intermediate-term trendline support should give way to a push back toward 102.50
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