Incredibly enough, SPX has now given up over 300 points just since Tuesday’s intra-day peak in S&P Futures following this week’s CPI report, or around 7% from those highs at 4180 just three days ago. This decline certainly has proven lightning fast for a normally bullish December. However, there were ample warnings regarding breadth deterioration, defensive trading that certainly discussed the possibility of yet another trading top just as the 80-day trading peak began to roll over. Overall, I do not suspect this will be a straight shot lower into year-end. Technically speaking, there is evidence as of Friday’s close that a bounce is approaching. However, given the nature of this week’s selloff, there still looks to be a further window of weakness into late next week before a final week rally. Targets for a decline could materialize near 3725 which would equate to a 61.8% Fibonacci retracement of the rally off October lows. One should consider that bounces early next week likely won’t recoup more than 50% of this week’s selloff before a bit more weakness. Yet, my short-term cycle composites still show a good chance for a late December rally. Overall, I feel that volatility will likely continue in the next week as this past week, similar to 2022 as a whole, has proven anything but normal.
SPX wave structure shows a 5-wave decline from Tuesday’s peak
I normally find it a huge value-added to study intra-day price action for clues of predictable patterns and wave structure which often can be helpful for projecting targets not to mention support and resistance.
In this case, the S&P 500 hourly chart certainly appears to have carved out five-waves lower from Tuesday’s peak earlier this week.
This is helpful for two reasons: First, it suggests the near-term pullback should be ending soon, and markets might bounce on Monday. Second, it alerts us that regardless of any bounce, that further weakness is likely in store for the S&P 500, as declines of five-waves from peaks typically bring about further weakness.
Overall, studying intra-day price action can prove difficult indeed. However, my analysis suggests a possible bounce early next week followed by additional weakness into late week. Filling the gap could carry SPX to 3978, but around 3950 at a 50% retracement of this week’s pullback would constitute an attractive exit for traders, in my view. Overall, despite some opportunity for a bounce, short-term trends are bearish, and very well could produce SPX weakness down to near 3725 before much meaningful support.
Crude’s resistance could have implications for Bulls and Bears
Energy proved to be an underperformer lately and the group has had difficulty in stabilizing much after its period of recent mean reversion.
WTI Crude charts show strong resistance up near $78, marking trendline resistance from early November. (For those who know my work, trendlines often mean far more than moving averages for support and resistance)
I suspect that this next week can likely bring about further weakness in Crude, along with Energy before this bottoms out.
Two areas look important to concentrate on, technically. One revolves around this week’s highs near $78 ($77.75 in Front month futures). Any move above that would translate into thinking that Crude has officially bottomed out, and that Energy will start to push back higher and begin outperforming again.
The other area is found just under December lows. Turning down this week to multi-day lows in WTI Crude could bring about a mild decline to new lows. However this area also would have importance as a level to buy. This lies near $68, and would complete a five-wave decline in Crude from early November, which should be important as a low.
Thus, the odds at this time suggest that Crude, and Energy as a sector, still weaken a bit more. Unfortunately the cycles for Crude did not work in showing a December rally. However, I suspect that a low is coming in the near future, and one would look to either buy weakness just under December lows, or wait for November peaks to be surpassed, as each of these look to be important spots to get long.
US Dollar index looks to be bottoming
One interesting development following this past week’s ECB meeting concerned the price action in the Euro and Pound Sterling both of which look to be peaking out after a big two-month bounce.
The US Dollar index, or $DXY, shown below, has given slow but sure signs of bottoming in recent days. Daily charts show momentum beginning to diverge positively with price while prices have just surpassed a minor downtrend from early November.
Additionally, DeMark counts look complete for EURUSD and GBPUSD, showing upside exhaustion on daily charts, and as I’ve discussed over the last couple weeks, I’ve suspected that both the US Dollar and US Treasury yields could bottom out and start to trend higher, coinciding with Equities turning down.
While the TNX price action in recent days doesn’t give lots of conviction on this front just yet, both DXY and TNX have stabilized and should begin to move higher in the days ahead.
