Issue #5 - Year End Review

Trend Of The Major Indices And Market Health

The S&P 500 was flat for the week for the second straight week in another low volume holiday shortened trading week. The most notable volume was again in TSLA which continues to selloff on huge volume in Stage 4 but may be starting to form a bottom here. TSLA was able to get to over -50% stretched to the downside from its 30-week EMA (Exponential Moving Average) which is the most stretched it ever has been to the downside indicating how severe this Stage 4 plunge has been.

Large cap tech continues to be the major headwind in this market. However TSLA, AMZN, and GOOG are all historically stretched to the downside from their 30-week EMA heading into January which in many cases is a month where oversold stocks tend to mean revert and rally. So this "stretched rubber band" to the downside could actually be bullish at least in the short term.

The Dow continues to be the most important index to watch since it has the least amount of tech exposure relative to its composition. The Dow continues to hold the 10-week EMA but it continues to test that key level and a breakdown would be bearish. All the other indices are in technical downtrends. So the overall market continues to be a headwind heading into 2023.

However breadth is at its strongest long term level heading into 2023 as well. The percentage of stocks above the 200 day moving average in the S&P 500 is right around 50% and if it can move higher into 2023 and stay above 55% the market can move back into a bull market. If the mean reversion does occur, this could be the push that is needed.

Heading into 2023 the key areas to watch are the Dow (DIA), China (KWEB), and Healthcare (XLV). If they hold the 10-week EMA and continue to trade above it then the market can continue to move in a positive direction. Conversely if they breakdown then yet another bear market downleg needs to complete before looking for a bottom in this bear market.

Sector Review

China (KWEB, FXI) - China has traded sideways for 4 weeks in a row now after moving above the 30-week EMA on volume. This is typically a bullish consolidation pattern and volume has decreased on the consolidation which is what you want to see. Most of the stocks in this group are also holding breakout levels. One negative was breakdowns in FUTU and TIGR at the end of the week on a negative news event. Unfortunately this situation is the case with this sector as they have biotech like risk with uncertainty from the government. However technical clues in many cases show up before the news event and in this case both FUTU and TIGR had failed to take significant volume as they moved above resistance so they had not completed a Stage 2 breakout. In particular TIGR showed extremely weak volume on its move higher. The bottom line is continue to observe and react to the action on the charts, the bullish consolidation continues into the new year in this sector.

Healthcare/Biotech (XLV, IBB) - both healthcare and biotech moved lower during this holiday week and biotech lost the 10-week EMA. However the powerful Stage 2 breakouts from last week VKTX, MDGL, and VRNA all continued higher on increased volume in a low volume week. Biotech continues to be the best new source of leading stocks besides China, and we will see if that continues into 2023.

Gold, Silver, Platinum And Mining Stocks (GLD, SLV, PPLT, GDX, SIL) - not much has changed with this sector except with the action in platinum which broke out of a consolidation higher. The stocks continue to trade sideways with a lack of volume but the metals continue to hold the 30-week EMA. With the dollar unable to catch a bid still looking for increased volume and a move higher in this sector into next year.

U.S. Dollar (UUP) - the U.S. dollar continues to not move higher when the S&P 500 and the markets are under significant pressure. This happened again multiple times during this past week. The dollar continues to trade below the 30-week EMA in Stage 3 and if it continues to stay below 104 it's going to transition into Stage 4. Also the Japanese Yen (FXY) has continued its move higher after a Stage 2 breakout last week and the Australian Dollar (FXA) is now setup for Stage 2 breakout.

Auto Manufacturers and Technology (CARZ, BATT, KARS, DRIV) - the CARZ, DRIV, and BATT ETFs are setup for a potential failed breakdown double bottom which is interesting because TSLA is one of the weakest stocks in the market and a major component. If you look across the auto sector there are divergences in some of the stocks where some of the stronger ones like RACE and TM are making higher lows while the weaker names like TSLA and CVNA are selling off on extreme volume at their lows (which is often a bottoming sign when extreme volume comes in at a spike low). CVNA in particular is interesting because this is essentially the worst stock in the market as it is down -98% for the year and is still a small cap stock. But it has now held support at its spike volume low from 2 weeks ago and closed with a significant gain this week towards the highs of the week. CVNA is one of the most heavily shorted stocks in the market and could be ripe for a significant short squeeze as we head into January. The auto sector as a whole could be in the same position with TSLA being ready for mean reversion as well after being historically stretched below its moving average. From a Stage Analysis perspective we aren't interested in trading mean reversion but this type of action would improve breadth and allow the best stocks and sectors to continue higher early next year.

Cybersecurity (BUG) - this cybersecurity ETF is also setup for a potential failed breakdown as it reversed higher on heavier than normal volume to end the week. This sector would be another prime candidate for mean reversion to start 2023. Stocks like CRWD are historically extended to the downside, and there's been some reversal activity off the bottom on heavy volume such as OKTA.

Bonds (MUB, HYG, JNK) - all 3 of these bond ETFs had a failed breakdown in late October/early November and reversed higher on stronger volume than on the breakdown. They've subsequently had another pullback lower again but are respecting the move higher still and closed off the lows for the end of the week. So it's possible bonds are setup for more mean reversion as well to start 2023. This would ease pressure on interest rates which could also potentially support stocks. This would also coincide with recent strength seen in the homebuilders (XHB, ITB).

Oil Services (XES, OIH) - this sector was highlighted in Issue #4 and continued to act well again this week with both XES and OIH closing at the highs for the week. The Stage 2 breakouts from last week also followed through this week NINE, WFRD, TDW. For the bullish case it's good to see another sector following through to new highs.

Stage 2 Breakouts

Volume was low this week due to 1) a shortened week and 2) a holiday week at the end of December. There was also volatility overall in the markets even though the end result was fairly flat activity for the week. As a result there were extremely sparse Stage 2 breakouts this week. Normally that should be taken as a warning sign that the market could be ready for a pullback or correction but in a holiday shortened week that's not necessarily the case.

TGTX was on the Watchlist in Issue #4 and broke out on extremely heavy volume for the week and is the Stage 2 breakout for the week. This will mark 3 weeks in a row (4 weeks in a row with ACLX being a strong breakout from Issue #2) where a Healthcare/Biotech related stock is the Stage 2 breakout of the week and again the activity in this sector is stronger than other sectors especially with strong volume.

The following are the Stage 2 breakouts from this past week:

Healthcare/Biotech stocks - TGTX, GLYC, PDSB

Watchlist

The Watchlist has many of the same stocks as some recent issues due to flat activity for the week. Notably there's still a number of tech stocks that are potential Stage 2 investor breakouts if the overall market turns around in January. Healthcare/Biotech and China are obviously the two most important sectors right now and there's multiple stocks on the Watchlist from each sector.

Healthcare/Biotech stocks - SNDX, HIMS, TEVA, CERE, TXG, PRTA

China stocks - BABA, BIDU, BZ, CD, GDS, NIU, TUYA, HCM

Tech stocks - DOCS, DOCU, SQSP, AMBA, CRCT, GTLB, MNDY, SMAR, FLYW, ALKT

Industrials stocks - GFL, FBIN

Consumer cyclical stocks - SIG, RENT

Reviewing The Best Performing Stocks Of 2022

With a bear market headwind in the S&P 500 during the entire year in 2022 it was a very difficult year for Stage 2 breakouts. Some of the notable items for 2022 on the long side include:

• Oil and gas was strong early in the year as the sector started a new bull market uptrend in 2021. But volume was weak on many of these stocks on their Stage 2 breakouts, and the bear market caused erratic choppy action during much of the year (especially the May-October timeframe) in many stocks.
• Overall volume was low on Stage 2 breakouts this year. This was clear evidence institutions where holding back due to the bear market and doing more selling than buying.
• Besides oil and gas very few other sector themes emerged. Clean energy/solar tried to breakout in August with FSLR being a leader but the sector never had other stocks join the breakout on strong volume.
• Healthcare/Biotech started to emerge as a theme at the end of the year with some powerful Stage 2 breakouts on volume. The bear market was so destructive in 2022 that all of these stocks (including VRNA, MDGL, VKTX) became some of the biggest winners of the year in a short period of time.
• The U.S. dollar was actually the strongest Stage 2 uptrend for the year as it was the safe haven during the bear market from January-October. But now the action in the U.S. dollar is totally different as it is not catching a bid when the market is down.
• China had some of the biggest volume as well and has cleared out more resistance than other sectors since it went into a bear market before most of the rest of the market. The long term case for China looks good as well as a sideways trend for 10 years now could lead to a massive multi-year bull market.
• As you can clearly see on the list below the best performers for the year came from 2 strong sectors: Oil and Gas and Healthcare/Biotech. This is why its critical to always put a strong sector at your back when trading stocks and this is the most important edge in Stage Analysis.

The following stocks were some of the best performing stocks of 2022:

Healthcare/Biotech stocks - AKRO, AMLX, AXSM, CPRX, IMVT, MDGL, PCVX, RXDX, SGFY

Coal stocks - ARCH, AMR, CEIX, BTU

Industrials stocks - ATI

Utilities stocks - CEG

Oil and Gas stocks - AR, CRK, CVI, HES, HP, MPC, NEX, OXY, PBF, PTEN, STNG, TRMD, WFRD, YPF

Solar stocks - FSLR

Materials stocks - SGML

Tech stocks - SMCI

Reviewing The Worst Performing Stocks Of 2022

The bear market headwind in 2022 led to some nice trending moves to the downside once the bear market really kicked into gear in January 2022. Some of the notable items for 2022 on the short side include:

• Tech was clearly the bear market loser in 2022 as many tech stocks were devastated by this bear market. Tech had been in a multi-year bull market before 2022 so finally a Stage 4 downtrend came into the sector and hit it hard.
• Large cap tech has held the market down during the tail end of 2022. The bear market has basically gone from the foot soldiers all the way up to the generals finally causing Stage 4 action in stocks like TSLA and AAPL.
• Some of the worst performing stocks in 2022 actually started their Stage 4 downtrends in 2021. This shows how long and destructive these downtrends can be. Many of these stocks are never going to recover to their highs and if they do its going to take multiple years to do so.
• Some of the biggest losers in 2022 were some of the best stocks to trade in 2021. Examples include AFRM, UPST, and LCID. This shows that stocks can change character rapidly and the "fundamental story" is not going to save a stock from a Stage 4 bear market. Cutting losses no matter what the "fundamental story" is in a stock is paramount to surviving in the markets during these destructive Stage 4 downtrends. The #1 rule in Stage Analysis is never hold a stock that is in Stage 4.

The following stocks were some of the worst performing stocks of 2022:

Tech stocks - AFRM, APP, ASAN, CFLT, COIN, LYFT, PTON, RBLX, RNG, ROKU, SHOP, SNAP, TWLO, U, W, XM

Auto manufacturers stocks - LCID, XPEV

Communication services stocks - AMC

Healthcare/Biotech stocks - BHC, DNA, GH, MRTX, TDOC, TNDM

Financials stocks - SOFI, UPST

Industrials stocks - GNRC

Consumer cyclical stocks - CVNA

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