The near-term stalling out in stocks likely results in an eventual pullback between now and August expiration for US benchmark indices, though we’ll need to see a close under 4100 to think this is getting underway. At present, two weeks of sideways consolidation has served as a source of frustration for Bulls and Bears alike. The real key for S&P will be a break of 8/5 lows, (SPX-4107, ES_F-4103) to have conviction that a selloff is getting underway. Wave structure cannot completely rule out one final push higher post CPI, though this should prove short-lived and reverse course. Key catalysts for this decline outside of the technical factors we’ve discussed in recent days involve Treasury yields starting to turn back higher along with the US Dollar. These rallies could make Technology fall a bit further in the short run; However, I’m expecting any decline proves short-lived and minor, followed by a further rally into late August/early September. At present, 4100-7 is an important support zone, while resistance lies at 4200-5 on the upside. One should look at selling strength Wednesday, while holding off on buying dips on any decline under 4100.
Technology looks to face near-term headwinds
While Technology proved to be one of the better performing sectors over the last month, charts of Equal-weighted Technology vs SPX looks to face some resistance after this bounce, which can be seen below.
The relative bounce in Technology remains under its three-year uptrend (red) while also being below the green trend connecting former highs. Semiconductor stocks have certainly taken the lead in weakening and it’s expected that Software and “FAANG” stocks might also show some minor rolling over (I presented charts in the last week showing $AAPL, $MSFT up to near-term trendline resistance).
To the Bulls credit, Tech has worked phenomenally well as rates have pulled back, and I expect after a minor bounce in yields that further Treasury strength (Yield weakness) likely happens from October into end of year. Overall, given the momentum improvement in Technology and the resilience of many top Tech names like $AAPL and $MSFT (which are extraordinarily important) I’m expecting that dips prove minor, and provide excellent buying opportunities.
Crude looks to be in the final stages of its decline from June peaks
WTI Crude looks to have a “final” pullback down under August lows, which should take prices down to $81-$84 before bottoming
Elliott-wave structure shows WTI Crude to be nearing a low; Yet one final decline looks to be starting which should allow for weakness in Crude and Energy stocks
It’s likely that mid-to-late August turns out to be an excellent entry point for those seeking long exposure in Energy.
At present, $XOP, $OIH, $XLE and WTI Crude all likely pull back over the next couple weeks. I’ll comment again on this situation once this move looks close to reaching conclusion.
Commodity weakness relative to Equities still likely to continue a bit longer
Relative charts of Equal-weighted Commodities vs SPX turned down sharply in June, breaking meaningful uptrends. While many commodities have attempted to stabilize and bounce in the last couple weeks, this hasn’t done much to improve this relative chart of Commodities vs SPX (GSCI Select Equal-weighted Commodity index).
I’m expecting that a rally in the US Dollar back to monthly highs along with a sharp bounce in yields coincides with many commodities rolling back over in the weeks to come.
Energy, Precious metals and many “Softs” still look to weaken in absolute terms, and also in relative terms over the next few weeks. Weekly ratio charts show this decline to be ongoing and not really showing much evidence of stabilization, nor positive momentum divergence that might suggest a bounce.
If/when this decline meets the intersection of these two trendlines shown below, I anticipate the commodity decline likely will be nearing its end and should present opportunities to buy dips which might come about in mid-to-late August. At present, avoiding Commodities still seems correct along with exposure to the Materials and Energy sectors for the weeks ahead. As discussed in the prior chart, Energy likely presents an opportunity to buy on any move back under August lows over the next few weeks. For now, this remains premature.