Reviewing the Positives and Negatives after Thursday's reversal

Note: We sincerely apologize. Due to a technical error, Mark’s note was not sent out last night. This is Mark’s note meant for the trading day: 10/13/2022. Thank you for your understanding.

The sudden about-face caught most off-guard Thursday, but SPX fell to an exact 61.8% alternate Fibonacci retracement of the 9/14-10/3 decline at 3485, and this was nearly an exact direct hit of the 50% retracement of the entire 2020-2022 rally.  I felt Thursday’s reversal was important given the ongoing positive momentum divergences, and the surge happened on above-average volume and nearly 4/1 volume into Advancing vs Declining issues.  While breadth proved not to be as strong as desired, one could trace out an intraday five-wave advance from Thursday’s lows which gives some confidence that markets might be able to build upon this over the next week.  While it’s always difficult to immediately extend following an intra-day 200-point low-to-high rally, a long bias still seems correct, and pullbacks should be buyable for further strength up to near 3800.  Markets remain in a volatile time in October which will extend into end of month and into early November, so it’s difficult having too much conviction of sharp rallies extending within a sharply down-trending tape, but I’ll discuss within this report some of the key positives and negatives as I see them in the pages to come.  Overall, I am encouraged that this week’s rally was nearly right on schedule and maintain a short-term positive bias.  I’ll monitor closely the risks to a further upswing, or rewards if and when upside targets are exceeded early.

Key Positives to consider

• Reversal happened in a key time zone for potential trend change and might extend into October expiration before late October weakness.
• Huge upside volume into Advancing vs Declining stocks was a definite positive Thursday.
• Thursday’s enormous low to high range was a technical positive following the recent churning, and makes Thursday’s early pullback attempt and successful reversal look important and bullish
• Momentum and breadth had failed to follow prices down under September lows in recent days.  This positive divergence was an important short-term bullish technical sign.  Daily and weekly divergence in momentum indicators like RSI and MACD are present.
• Sentiment had recently been getting worse and worse, with Equity Put/call ratio reaching extremes while VIX showed backwardation after trading up near the highs of its range
• DeMark signals have “started” to be confirmed on various Equity indices, but both daily and weekly (and in some cases, Monthly) exhaustion signals using TD Sequential and TD Combo are in place on many Equity indices along with Treasuries and major currencies.
• Sector performance over the last week had shown Technology to have disguised some of the strength shown by sectors such as Industrials (Transports in particular) along with Healthcare, Discretionary, and Energy.  All of these sectors heading into Thursday were down 400 basis points less than Technology in the prior week.  (SPX, QQQ looked far worse than broader market was given the outsized presence of Technology).
• Cycles start to turn higher in October based on Mass Pressure index into mid-December while my cycle composite from the Foundation of the Study of Cycles bottoms the last week of October and is positive into December.   Both show October to be a turning point for stocks
• High Yield corporates have largely diverged positively lately and did not decline to new lows despite recent pullback in Equity indices like SPX and QQQ 1.55%  under September lows.
• Mid-term seasonality favors strong performance of 1.0% in October, much stronger than normal Octobers of +0.3% and October often lives up to its billing as a “Bear Killer” where bear markets can reverse downtrends. 
• Defensive groups like Utilities and REITS have underperformed dramatically in recent weeks and remain the worst performing sectors over the last month.   This can be seen as a positive, as these groups have actually underperformed Technology, and historical huge underperformance in these groups has occurred near former lows in 2008 and other bear market lows.

Takeaway– Given our hugely pessimistic environment and seemingly non-stop decline into oversold levels in October, I feel Thursday’s reversal is an important first step. It’s now important to see follow-through in breadth and momentum and make some structural progress to help prices confirm some of the bullish divergences and other technical positives that have been listed above.  While a positive one-day move, it remains within a weekly bearish downtrend and more will need to happen to truly garner confidence of a meaningful low at hand.  I am optimistic, but it’s important not to “swing at the fences” given one day’s reversal.  A tactical shorter-term view remains prudent until markets can build on Thursday’s success.

S&P Futures hourly chart below reversed course to gain nearly 200 points from low to high in Thursday’s session-  Finishing at new multi-day highs after a failed breakdown on above-average volume and breadth is typically a positive sign.

Elliott-wise, SPX seemed to carve out five waves higher on intra-day charts Thursday which are visible on shorter-term intra-day timeframes of 1 and 5 minute bars.   This looked positive as something which has the potential to be built on over the next week, even if consolidation might be required on a 1-2 day basis.

Key Negatives to Consider

• Daily, weekly, and monthly momentum remain negative sloping and most major indices remain within downtrends from last November/this past January’s peak.  Most trend following models remain quite negative and will be slow to turn positive barring meaningful structural improvement.
• October remains a volatile month, and one cannot rule out further volatility into end of October or even early November ahead of the FOMC meeting and mid-term Elections.  Key cycles like 40-year cycles and 90-year cycles have prominent turns this year.  Some of these focus on October/November so getting some clarity as to whether markets are truly bottoming yet is key.
• Technology has been the worst performing sector over the last week and has lagged sharply over the last month.  Given that this remains the #1 ranked sector by capitalization within SPX, we’ll need to see some stabilization and evidence of relative strength in Technology to have any real conviction on a meaningful SPX and QQQ 1.55%  rally.
• DeMark exhaustion signals on weekly charts of TNX and TYX have not yet been confirmed, nor on DXY and it’s thought that given the negative correlation to SPX, showing some real evidence of these breaking down is critical to the thinking of SPX rallying with any kind of duration.
• Elliott counts took on a more negative intermediate-term view with (what appears to be) a five-wave decline at or near completion under September 2022 lows.  While a counter-trend bounce is certainly likely between now and December, it’s tough making the case for a move back to highs given these counts.   The most likely outcome is a sharp three-wave bounce followed by a possible five wave decline back to lows before any serious market low, i.e. a bear market low, is at hand.
• No meaningful capitulation happened regarding excessive TRIN readings (ARMS Index) at Thursday’s lows.  While sentiment was quite bearish, normally more capitulation in volume or Advance/Decline typically happens near major lows.
• Weekly cycles show the potential to bottom out in Q2 of 2023, so while the near-term cycles show strength from late October into December, this might require a retest of lows into 2023.  In other words, short-term strength might be sellable on any material bounce.

Takeaway:  Intermediate-term cycles and technical structure along with momentum remain negative.  Tactical bounces being called for in daily notes will need to show substantial improvement to change the intermediate-term structure back to positive in a way that will allow for upside projections back to new highs.  At present, short-term bounces are expected to fail in December and likely give way to weakness into early 2023. 

SPX Elliott-wave count could be in a giant corrective wave.  Could the January-June decline need to be equaled in price and time before this is over? 

January to February decline did not seem impulsive and January to June larger decline also seemed corrective in nature.  While the pullback from August seemed to unfold as five waves, this might mean that any bounce likely does not take out 4325 right away.

If this count is correct, any rally off October/November lows might only prove to be three waves up before a “final” five waves lower into 2023.    (Alternatively, a minor three wave bounce into late October turns down swiftly and makes the lows of the entire bear market in November).

AAPL -0.41%  cycle looks to be turning up sharply now into mid-November

While DeMark counts would have been ideal to bottom at 131-2 on further weakness into early next week, I feel that Thursday’s reversal (10/13) was important and positive.  Any further test of this week’s lows should put in a solid low in AAPL before a larger rally.

Rallies in Technology “should” happen with a bigger breakdown in Treasury yields and something I’ll be watching carefully.

Upside targets in AAPL -0.41%  lie near 150, with an outsized chance of $155 before this stalls and turns lower.  Given that this stock continues to have an outsized presence in Technology and SPX and QQQ 1.55%  and cycle projections seem to turn up sharply from here, I’m willing to give this cycle composite the benefit of the doubt and expect strength in AAPL -0.41%  in the weeks ahead.

Bottom line, with regards to broader Equity markets, I am near-term constructive given Thursday’s sharp reversal.  It came on time, and satisfied lots of price and time-based targets during a time of hugely negative pessimism into a seasonally important time for trend reversals.   However, bounces will likely prove short-lived and might not exceed 3850 before a pullback back down to lows gets underway.  Any breach of 3450 argues for a flush to 3250-3200 (which is not an immediate base case, but a realistic projection on further weakness) Upside strength needs to exceed 3850 before I’ll be able to start focusing on SPX 4200, which represents a 50% retracement of the January-June decline and also lies near a major downtrend from January.  This is truly important resistance and should prove important initially when tested.  While cycles do start to give reasons for optimism next month for rallies up to mid-December, it’s truly difficult to turn bullish at the lows and forecast movement back to highs.  Rallies will be “works in progress” until serious technical improvement starts to get underway.