Trend still bullish- Expecting upcoming push up to SPX-4250-4325 into 5/27-28
Friday’s reversal isn’t too meaningful and generally the SPX breakout should extend higher into next week into 5/27-28. This is a time where Elliott-wave, DeMark, and two different cycles come together to show a high likelihood of a turn, which I expect could be a high.
SPX likely rallies into next week up to 4250 and higher to 4275-4325 which will be a time where Technology might finally stall out after its recent surge.
While Friday’s minor stalling out in Technology is interesting, it’s still a bit early for Tech to peak out, and relative ratios of SPY/QQQ still show it early to favor fading the $QQQ bounce in favor of SPY.
Energy has made some progress Friday and along with Healthcare, should be favored for gains into late next week. As I’ll discuss in this report, $XOP and $OIH are both better than $XLE in the short run.
Overall, I suspect that SPX eclipsing 4200 will make many investors throw in the towel on shorts and sentiment might start to lift at a time when this would prove not ideal for initiating new longs. While 4200 certainly is a minor level of importance, the increasing amount of divergences and sub-par breadth will start to be an issue as May comes to a close.
Overall, keeping a close eye on sentiment, sector rotation, and trends will prove to be far more useful than analyzing the likelihood for 0 or 25 bps hikes by FOMC in my view. Earnings analysis and the threat of a debt ceiling default are important, but ultimately, next week has more to do with cycles coming together.
As shown below, Elliott-wave structure gave us an early heads-up that trends had turned more positive in early May, despite the range-bound situation. (To recap: the three-wave ABC pattern (shown in green) was followed by a strong push up back near 4150 on good breadth and technical structure. This suggested a likely breakout above SPX 4200 could occur) Overall, the resulting rally is unfolding according to plan and might reach fruition late next week above SPX 4250 but under last August’s peaks at 4325.
At present, I don’t find much to be too concerned about on Friday’s minor early reversal into next week unless SPX 4150 is breached, which I feel is unlikely. (if that were to happen, this would breach the former highs of wave 1)
Rallies back to new weekly highs should occur which I take to mean that Debt-ceiling debate process should progress for at least a bit longer and give investors some comfort of steady negotiation(Sunday night, 5/21). I won’t pretend to have any insight as to the result but expect that rallies into next week likely hit strong resistance, and then might consolidate into June. Hourly SPX shown below with its current wave count.
Value Line’s breakout should provide some Catch-up in the next week as Energy, Healthcare advance
Value Lines Equal-weighted 1700 stock index (Both Arithmetic and Geometric look similar) has just exceeded a downtrend from February highs. This had lagged sharply in recent months, and directly shows why keeping indices besides the SPX and NDX into plain view makes sense.
While Technology’s comeback this week was impressive, the broader market certainly has some work to do, in order to restore confidence, which will require more than just a bounce out of Regional Banks, and Energy.
Value-Line remains well off its February peaks but this week’s breakout is constructive for a rally into next week. The key, in my mind, revolves around a rally back over 580 in Value-Line, which might be unlikely over the next month.
The act of reclaiming February highs in a broad-based manner where multiple sectors are participating, will be important. At present, it’s largely been large-Cap Technology along with Communication services and Large-Cap Discretionary.
Energy rally should be led by XOP as Exploration and Production stocks outperform as Crude oil rises
The one-month trend breakout in WTI Crude earlier this week has not been given back and should lead Crude back up to $76 if not $79 in short order.
Many Energy-based ETF’s like XLE, OIH and XOP had pulled back over the last month to test important levels of support and are now stabilizing.
I expect that the recent relative strength seen out of XOP is bullish and this area within Energy should continue to make progress higher as Crude moves up.
$XOP would be my pick on the right way to play Energy in the weeks to come, while OIH will prove to be “second-best” potentially. If my thinking is correct, XLE should turn out to be a laggard to the other two.
Ratio charts below of XOP vs OIH shows some strong outperformance in the last month that is ongoing. This looks to be most bullish (Being long XOP vs OIH) However, XOP also looks to be bottoming vs XLE and should outperform.
XLK still requires about 3-5 days before any peak
Recent strength in $XLK has exceeded expectations, as big-cap Technology has surged to come back sharply and dominate index performance in recent weeks.
$XLK has gotten overbought, and TD Sequential exhaustion is now present (“13 Countdown).
However, importantly, the key piece of the puzzle, with how I interpret and utilize DeMark indicators has to do with lining up of both Combo and Sequential exhaustion just as TD Sell Setups appear.
This daily chart shows the current countdown which could help TD Combo along with the TD Sell Setup line up potentially within 3-5 days.
Note, this doesn’t have to happen, of course. However, the formation of this would create a very good risk/reward opportunity to exit $XLK at a time when multiple signs of exhaustion are all coming together.
I suspect this might materialize near $163.50-$165 near March 2022 highs into late next week. Thus, while XLK is certainly overbought, there’s no current evidence that price needs to retreat right away.
Overall, I like being long Technology into mid-to-late next week. Upon rallies over the next 3-5 days, there will be sufficient reasoning towards expecting a stalling out in large-cap Technology.
This also has the potential to line up with a couple other cycles I’m watching and some important Fibonacci relationships, which I’ll detail in notes next week. Have a nice weekend.