Risk-reward for Shorts looks subpar with indices nearing June lows
- SPX approaching June lows and risk/reward growing poor for shorts.
- Crude oil and Copper breakdowns should create an opportunity for longs in 2-3 weeks.
- AAII survey showing highest bearish reading in years suggests lows approaching.
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Markets are now approaching price targets for this decline, and there’s a good likelihood of a trading low to this pullback likely early next week. For the second day in a row, markets are showing hugely negative Advance/decline readings and the percentage of SPX names above their 20-day moving average (m.a.) is in low single digits. Given this week’s AAII readings showing nearly the highest bearish readings in 35 years, risk/reward is growing poor for shorts, but timing trading lows is tricky given the above-average volatility. My own time targets focus on Oct 4-7 for trading lows, but we cannot rule out an initial low within the next couple trading days, then a bounce, followed by follow-through into early October which I feel technically should mark a good trading low to this decline from the most recent peak in Mid-August/Mid-September. Overall, there are no signs of reversals just yet to give confidence, but multiple negative breadth days combined with poor sentiment and upcoming cyclical turns suggests trading lows are near.
Copper breaking lows should create opportunity
Copper has just violated early September lows which is a negative technical development that likely takes Copper down to $3.25 or below to near $3.12.
Cycles turn positive for Copper from October into year-end, so this dip likely should translate into a buying opportunity in the next 2-3 weeks.
From an Elliott-wave standpoint, the rally from July to late August looked important and positive and this recent decline likely takes the form of a corrective A-B-C pattern with this week’s breakdown close to finalizing wave C. (i.e. this decline looks to be close to ending).
CFTC data shows Commercials net long Copper while Speculators are short. This should translate into a chance to buy Copper as this kind of positioning normally is bullish at extremes.
Stocks like FCX0.18% should be attractive to buy dips in October, and technically one should look to position long from $23-$24.50 when this is reached sometime in the next couple weeks, using stops of 5% and expecting a meaningful lift between October-December.
Breadth readings are yet again getting down to “It’s So bad, it’s Good”
- The percentage of SPX issues above their respective 50-day moving averages (m.a.) has now dropped under 6%, hitting the lowest levels since June 2022.
- Advance/Decline data has now shown multiple large readings of very high Declining to Advancing issues which normally starts to happen towards the end of highly volatile declines.
- Overall, while timing lows can prove difficult given the volatility, this is the first instance where breadth and sentiment are now aligning to suggest that trading lows are close. While confirmation of a low is certainly not in place, one should consider closing out shorts, technically between now and the first week of October, expecting that a meaningful reversal in trend is approaching.
AAII readings have turned extreme, and it’s time to pay attention
- AAII data has just come out for the last week showing Percentage of Bearish investors over 60%. This is one of the highest bearish readings seen since this poll was created in 1987.
- While other sentiment gauges like Equity Put/call ratio and/or Investors Intelligence data are getting close to extreme levels, this kind of extreme reading in AAII looks important to pay attention to, and likely translates into a chance to buy US Equities in early October for a meaningful bounce.
- Evidence of a failed bounce next week that turns back down to test June lows likely will bring about the much awaited VIX spike, and seeing meaningful backwardation readings should provide excellent buying opportunities for longs.
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