Technically I feel that Thursday’s intra-day reversal was important in marking at least a temporary bottom to this recent decline. Volume expanded on the reversal and prices managed to close up sharply on many indices and Sector ETF’s, forming a signature “Hammer” pattern, which often signifies a short-term bottom. While many might feel entering a seasonally bearish month like September makes buying dips risky, I’m expecting that the next week or two could actually help SPX recoup at least half or more of the recent damage since 8/16. The already bearish sentiment is growing more negative at a time when markets have entered an important area of price/time support, which can help this pullback to reverse course. S&P, as shown below, has now extended to the 1.382 multiple of the initial decline which has significance. Short-term charts show a completed five-wave decline and DeMark indicators are signaling exhaustion on several intra-day timeframes. Finally, my cycle composite turns higher from 9/2 into 9/15 and should have an upward bias over the next 1-2 weeks. Bottom line, buying this dip looks correct.
S&P gave ample evidence Thursday of a possible failed breakdown
While many might not care to study intra-day patterns for technical guidance on SPX direction,S&P’s break of a very well-defined triangle reversed course right on time Thursday. The subsequent move back above this upper range helped to drive short covering and technical buying that ended up sparking a more than 40-point additional rally into the close. The key takeaway here is to always be wary when breakouts or breakdowns don’t go as planned, as the reversal can often be stronger than the breakout itself.
China holding up despite additional Lockdown announcement
China’s announcement of an additional lockdown in the city of Chengdu on Thursday (21 million residents) coincided with Equity markets showing further pressure early on, and particular weakness in Semiconductor names, which might have been anticipated.
However, much of the damage in Chinese equities looks to be overblown following its steep decline since February 2021. As shown below, the China Large-Cap ETF (FXI) has actually positively diverged from US equities, having made its lows for the year back in March, three months ahead of SPX.
While more strength is required to truly be bullish on Chinese equities, this stabilization of late looks constructive, and the act of holding up despite bearish news is thought to be a positive.
As daily charts of $FXI show below the high-volume minor breakout from 8/24 coincided with a move back to new weekly lows. While Thursday’s news was thought by some to be bearish, prices remain above levels seen last week and seem to be forming a constructive base.
Movement up above $33 would break this downtrend which has been intact from February 2021, allowing for a very good bounce up to $37, then $40. Buying into Thursday’s minor dip might be prudent with stops at 28.80 and targets back near $33 into mid-September.
Semiconductor stocks look to be at/near support- Bounce likely
While further China lockdowns might seem to be a source of worry for many Semiconductor stocks, it’s worthwhile showing that prices have already given back quite a bit of ground lately.
Recent weakness has erased nearly a perfect 78.6% (Fibonacci) of the prior July-August advance before reversing course to close the day positive. This candle pattern on daily charts is similar to what was seen in $SPX and $QQQ Thursday. These often mark temporary bottoms to ongoing declines, and rallies look likely over the next couple weeks in $SOX and Semiconductor names.
Upside targets come in initially near $SOX 2833, but movement above this could allow for a rally up to 2975-3000. Overall, it looks right to expect a good rally in Semiconductor names at precisely a time when many might be too concerned about the impact of a Chengdu lockdown.
Additional non-technical news: Broadcom earnings post close might also be grounds for celebration for those buying dips in Semis. $AVGO announced 4Q revenue above expectations, and Broadcom’s CEO expects “solid demand to continue” in Q4.
