The last few days aren’t terribly encouraging given the degree of erosion in momentum and breadth in short order. While SPX 3906 has not yet been broken, the structure of this week’s pullback has been clearly impulsive from an Elliott standpoint while short-term cycles look to be turning down which has resulted in a break of the uptrend from October lows. Overall, a counter-trend snapback rally looks likely into early next week, which should get underway Thursday/Friday and help to recoup at least 38% if not 50% of the recent weakness. However, if Treasury yields start to reassert themselves, this equity bounce could prove short-lived and confirm a new decline with a break of 3906 on a close. I am more worried now about the possibility of downside volatility in December than I was a week ago. Near-term support should materialize at either 3890-1 or a maximum of 3860-7 before a bounce gets underway.
6 Reasons for concern about a December selloff after FOMC
- Dominant 81-day trading day cycle looks to be turning back down
- Gann’s Mass Pressure index also shows market peak this week
- Uptrend from October lows was broken on Tuesday’s weakness
- Yields have reached support with TNX down at 3.42%
- Elliott-wave structure looks to be “impulsive” on this decline
- Breadth and momentum have begun to turn back down sharply
This week’s decline has shown an uptick of excessive downside breadth after SPX successfully hit 4100 into late last week. While there were a plethora of targets from 4100 into 4120, this looked to be an important area of resistance.
The percentage of SPX issues above their 20-day moving average had exceeded 85% in late November for the fifth occasion since the January 3, 2022 SPX peak earlier this year. Three of those prior times resulted in pullbacks: March, May, and August, with the evidence now suggesting this late November peak reading might also be important.
Overall, the most likely scenario for near-term price action is a short-term low Thursday or Friday of this week with maximum downside at 3860 before turning higher to 3990-4015. However, movement into early next week’s CPI and FOMC meeting likely should find resistance again before likely turning lower into 12/21-23. That looks to be the most likely area of support before a bigger bounce into early January. Overall, the last four days have been a net-negative for US equity indices, and it’s essential for SPX to hold up and not break 3860 (though any decline under 3906 on a close would also confirm that a two-week decline is underway.)
SPX cycle composite shows dominant cycle peaking on Dec 5
I had highlighted this daily SPX cycle in the past which appeared to show daily price action strong into year-end.
However, the daily dominant cycle, shown on the bottom half of this composite, starts to turn back lower this week and remains lower into early January.
This 81 day dominant cycle pinpointed the peak in late December 2021 right ahead of the 1/3/22 top. Furthermore, it also turned lower right near late March and mid-August. Thus the two prior major swing highs for this year were successfully caught by this cycle and it looks to be turning lower yet again.
Importantly, this Decembers dominant cycle downturn goes against the broader composite being higher (shown in pink) This happened twice before this year in March and also August and the dominant cycle won the battle between it being more successful than the actual composite.
Furthermore, times when both align tend to show sharper price moves, such as the downside in January, the downside in April into June, and the upside from October lows. The next time when they’ll both align will be January into February before turning down (likely into Mid-March, or mid-May)
Overall, I suspect that December has the potential to be a choppier month given this downturn in the dominant 81-day trading day cycle which has “called’ the last three tops this year and looks to be turning down again.
Yields likely to turn back higher after next week’s FOMC meeting
The correlation between Treasuries and Equities has wavered a bit this week, as the rally in Treasuries (yields moving lower) has not produced a stock market rally. US Equities have fallen for four straight sessions and it’s worth keeping a close eye on this correlation and recent divergence.
Importantly, the US 10-Year yield ($TNX) has now reached initial support to this pullback, having retraced 50% of the prior rally in yields from mid-August.
DeMark counts look to reach a TD Buy Setup potentially by Tuesday of next week, coincidentally, right near the CPI and FOMC meeting for December.
Overall, it’s thought that this Treasury rally (pullback in yields) likely halts into next week and starts to turn back higher. 3.69 is the near-term area of resistance, while a move over 3.91 will signal a push back to new highs for 2022. I expect this likely does happen into 2023 before a more meaningful top in Treasury yields occurs.
The key takeaway here is that yields likely stabilize and turn higher starting next week.
