Pullback should provide buying opportunity next week

Friday’s About-face looks like a temporary negative and could result in weakness early next week down to SPX 4000-25 area before stabilizing and pushing back up to test and exceed August highs.  Thursday’s strong surge came within three points of the 4220 target, and the early day reversal post Powell’s hawkish speech was a very noticeable technical breakdown which affected stock indices globally along with Cryptocurrencies and most bond markets.  Despite the urge to rush out and sell stocks, it’s important to relay two important facts:  First, cycles remain positive into September for further upside.  Second, sentiment is quickly turning very negative again, and should provide some cushion to this recent pullback. A possible third point revolves around Elliott-wave structure which is suggestive of a corrective decline, not one which should show meaningful weakness and test June lows.  Therefore, with this latest weakness in SPX providing an alternate wave projection which would equal the initial selloff from mid-August around SPX 4000, the best course of action into next week looks to be buying weakness not selling. While this downturn might cause daily momentum to roll over even more sharply, the opportunity to consider selling tactically likely doesn’t materialize until mid-September, not now.

Equities still likely to trend up into mid-September ahead of seasonal weakness

One big factor which should keep us all alert to the possibility of a market bottom is the fact that my Cycle composite remains positively sloped into September.

This has proven accurate thus far nearly all year along with Gann’s Mass Pressure index, and both temporarily peak in September, not August.   While volatility is expected to rise in the next 6-8 weeks, there could be upside as well as downside volatility.

If S&P can hold 3980 which is the 50% retracement of the July-August rally next week and show some evidence of reversing back higher to start the new month, I’ll have some added confidence that the first couple weeks of September should be positive, not negative.

While opportunities to sell for tactical reasons might materialize into mid-September and allow for some seasonal weakness into October, I want to reiterate that I’m not expecting June lows to be broken, and this weakness should prove buyable into October for a 4^th quarter rally.

Positive Technical factors to reiterate

1. Breadth and momentum expanded dramatically in July
2. Percentage of stocks above 50-day moving average rose above 90%
3. Technology provided a larger than expected rally off the lows
4. Financials and Industrials showed some meaningful technical improvement to join the move in Technology and Discretionary over the last few months
5. SPX managed to exceed the 50% retracement of its January-June decline
6. Cycle composites are positive into September and following a short-term decline into October, rally into year-end
7. Sentiment remains quite negative and Institutions positioning is quite underweight Equities
8. Cash levels remain the highest in nearly two years (Ties in with Sentiment)
9. Weekly momentum turned bullish in late July (based on MACD) and not overbought
10. DeMark exhaustion was never present at 8/16 peaks on daily nor weekly charts
11. Mid-term election year peak to trough weakness fell largely in line with what has happened in 2022, and this weakness directly lined up with -22 to -25% declines in years with similar harmonic relation to 2022 such as 1962 or 2002
12. US Dollar rally looks to be on its “last legs” and should pull back sharply from October to December which should fuel a stock market rally
13. US Treasury yield cycles are negative into early next year, so this backing up in rates also likely proves temporary, even if June peaks are tested briefly.  A downturn in rates should be beneficial to Growth stocks, particularly Technology

Bearish Technical developments to keep in mind

Alas, all is not positive and important to also keep these negatives on the back burner, despite my not expecting them to prove meaningful technically for the market for the next few weeks

1. Short-term momentum gauges have rolled over to negative along with Breadth breaking down
2. Healthcare has violated one-year relative uptrends to SPX.  This is an important sector for SPX given its weight, and important to reiterate its significance
3. At least some short-covering has definitely been involved in stoking some of the rally (and if earnings don’t recover, what will be the catalyst for this rally to continue?)
4. Seasonally, markets are entering a tough time with September ranking as the worst month of the year in mid-Term election years.
5. SPX rallied right to downtrend extending from January before being repelled.  The Equal-weighted Value Line Composite also hasn’t recovered enough to expect a move back to new highs just yet.  Thus, despite some good technical bounce, there remains more to do.
6. Our US Equity selloff into June never quite reached the length of the average bear market, despite its percentage drop, so at some point there could be an eventual test of lows, even if not until early 2023

Biotech breaking down following recent Healthcare erosion

Friday’s weakness in Biotech was evident with the SPDR S&P Biotech ETF, $XBI violating its uptrend of the last few months as it pushed down to new lows for the week.

$XBI cycles look to weaken into October before a sharp rally into year-end. Near-term, those owning Biotech need to be selective in what to own.  Those stocks breaking multi-month uptrends have a higher than likely chance of weakening in the next 6-8 weeks before bottoming.

Overall, while weakness won’t be a straight shot down, I do expect XBI to decline to the mid-70’s into October and will provide some opportunity to buy dips, for those looking

I’ll comment on this group again when it’s time to buy dips and list the relevant stocks, as the intermediate-term cycles for Biotech are quite bullish over the next couple years, and this group should provide some good alpha for those inclined to buy and hold..

Cryptocurrency weakness directly coinciding with the breakdown in Equities-  Areas to watch for Bitcoin

It’s important to reiterate how closely Bitcoin and many other altcoins have followed the Equity market in recent months. The Spring 2022 weakness directly correlated with what was being seen in Equities.

The June 2022 bottom for Bitcoin happened within two days of the US Equity bottom along with the bottom in US Treasuries.  Moreover, both SPX and $BTCUSD peaked out back on August 15.  

Unfortunately the bounce off the lows proved to be far more benign than that which occurred in the SPX.  BTCUSD managed to retrace just 23.6% of the March-June decline, an important initial Fibonacci target.  However, this underperformed the SPX and NDX which both retraced nearly 61.8%, and 50% respectively, of the prior pullback.

Looking back, the August 19^th decline could have been a harbinger for what was to follow late this week, as volume expanded sharply on this decline late last week.  Moreover, Friday’s decline left no doubt following a material break of this week’s tight trading range.

Technically speaking, this is a short-term negative and volume expanded sharply on this decline, not unlike what also happened back on August 19. I’ll include the excerpt below which I wrote for today’s Cryptocurrency report:

“The violation of 21,000, which marked support of $BTCUSD’s week-long trading range, is a technical negative and suggests that prices likely trade lower over the next 3-5 days into next week. Importantly, one can use the prior drawdown from 8/15 and measure projections based on Friday’s early peak at $21870 to arrive at possible downside targets.

The area at $19,700 would equate to a 50% alternate projection of the prior decline and looks initially important along with the area near $19.1k which is a 61.8% Fibonacci alternate projection and lines up near July lows. However, the real area of importance is found near June lows, or near $17,500. This would allow for a 100% alternate wave projection of the most recent decline from mid-August and looks most important of all.

Overall, Friday’s break looks important and negative in the short run but should line up with buying opportunities into early September as cycles remain bullish and project higher prices into November 2022.”