Key Takeaways
- Monday’s SPX drop back below Sept 20 lows to kick off the week should allow for a bit more weakness in the days ahead; Yet technically this decline likely is buyable mid-to-late week
- Support targets look close, in both price and time based on Fibonacci extensions of the first September decline, combined with upcoming DeMark exhaustion (4226 up to 4244)
- Energy remains a sector to favor and overweight given WTI Crude’s breakout back to new seven-year highs.
SPX Breakdown back under Sept 20 lows has taken prices down to the lowest closing levels since July, breaking back down under the 100-day moving average. Momentum and breadth remain negative and not oversold and should result in further weakness down to 4226-4244.
This represents a 61.8% Fibonacci retracement of the low-to-high range from March lows, near July lows. Maximum downside is thought to project to 4135, though seen as a good risk/reward to buy dips.
New Technical Developments
- S&P moving back under Sept 20 lows could allow this most recent downdraft to be a percentage of the first move lower in price and time. An Equal-wave extension would arrive at 4226-SPX
- DeMark Exhaustion based on TD Buy Setups (Nine consecutive daily closes under the close from four days prior) could be complete by Thursday/Friday of this week. Further decline into late week represents the first real area of price/time confluence where dips look buyable, technically speaking given this most recent breakdown
- Sentiment measures continue to show negativity ahead of the bi-partisan struggle to deal with the Debt ceiling issue, not unlike 2011 which also proved to be a difficult time for equities.
As seen below, this SPX breakdown under prior lows after just a one-day bounce attempt keeps near-term trends negative, and technically speaking, it’s right to await 1) Support where this latest downdraft could be a key Fibonacci percentage of the prior decline 2) Area where DeMark exhaustion is complete technically (Still early now) 3) Evidence of true oversold levels (RSI under 30 and starting to diverge positively (also premature). 4) Evidence of this recent pessimism turning into more “fear” where we see elevated Arms index (TRIN) readings, or Equity put/call over 1, or VIX backwardation, all of which are now premature.
Energy remains “THE PLACE” to favor technically given little to no evidence of deterioration
- WTI Crude’s prior week stalling out near Summer highs proved temporary and Crude moved to seven year highs on OPEC’s agreement to restore output gradually
- While WTI Crude remains stretched, there was no evidence of any decline, and Elliott-wave and cycles still show the possibility of further price gains into mid-to-late October.
- Energy was the sole positive sector of the major S&P GICS Level 1 groups both last week and also over the rolling 1-month period. Until there’s more evidence of tiring, Energy remains an area to overweight.
Energy ETF’s like XOP, the S&P Oil and Gas Exploration and Production have advanced over this Summer’s highs, and still look probable to advance up to 108-110 in the weeks ahead. Thus, positioning long in this group, particularly given Fundamental bullish news aligning with Technical positives, remains prudent.
