“Backing and Filling” has begun following first runup off Oct lows

US Equity markets technically look to have bottomed and are slowly progressing off early October lows.  Both US Dollar along with Treasury yields have backed off in recent days following last weekend’s attack on Israel.  The expansion in breadth and broad-based nature of many lagging sectors turning higher to break out of 1-3 month downtrends in recent days looks constructive technically, and lends support to a further October rally. 

The combination of today’s hot CPI print along with the lousy 30-Year Bond Auction results caused yields to spike higher on Thursday morning, and yet again, Equities responded negatively. 

Bottom line, despite Thursday’s selloff, the rally from early October remains intact in my view and should not erase the positives from earlier this week.  However, there could be further consolidation until yields can begin to turn back down.   For those with an ultra-short, tactical timeframe, I expect this might last into early next week, with ideal support found near 4300, but difficult to rule out 4280-5.

As shown below, early morning weakness in SPX resulted in pullbacks to right near the first 38.2% Fibonacci area of the rally from early October, and this is important into next week along with 4300-5, the latter lining up with an important 50% retracement level. In the event this is breached, SPX might have a brief “touch” of 4280-5, but I’m skeptical that a pullback under October lows occurs for SPX as well as QQQ.  My bullish thesis for October remains intact, and US Equities are likely to be attractive from a risk/reward standpoint on further weakness into next week.

The key positive continues to revolve around the degree of Technology’s outperformance, in my view, as this sector has become a consensus area for investors where Large-Cap Technology has certainly not wavered and has continued to deliver better relative strength than many other areas within SPX. 

Conversely, the underperformance in Defensives has proven staggering, and this sector has certainly disappointed investors who were hoping that Defensive sectors might provide safety after having gotten quickly oversold.  Overall, I continue to view the Defensive groups as underperformers technically and not attractive, even for short-term tactical bounce opportunities.

Finally, it’s important to mention that the numerous breakouts which happened across many laggard sectors this past week shouldn’t be completely erased.  While it’s often quite difficult to go from “Low to High” and buying dips in laggard sectors, even when minor evidence of improvement begins, typically proves difficult in my view.   Buying into severe weakness, expecting immediate mean reversion, whether it be from a traditional valuation standpoint, and/or technically speaking on breakouts from deeply oversold positions, often is very tricky.  In my experience, this is far more difficult than owning stocks trading at/near 52-week highs. 

In this case, while minor weakness happened in Russell 2k (IWM -0.71% ), DJ Transportation Average, China’s Large-cap ETF (FXI 2.79% ), and Regional Banks (KRE -0.45% ) I still anticipate these sectors and benchmark index ETF”s should work well into late October.  Thus, dips into next week should make all of these more attractive from a risk/reward standpoint.

QQQ looks to be stalling near resistance

To its credit, QQQ successfully rose above the area mentioned earlier this week at $369.15.  however, this now has arrived at its first meaningful area of trendline resistance, extending from late July highs.

I expect that Thursday’s stallout just under $374 was an important area, and that consolidation might occur until $374 can be exceeded on a daily close.

Pullbacks in QQQ likely make this technically attractive to consider into next week, with the key area being 363-365.75 as technical support.

Value Line Composite shows a realistic way of viewing US Equity markets

This equally-weighted composite for US Equities shows a more bearish view of the current Equity market than might be gleaned after having viewed existing uptrends from last October’s lows and/or March 2023 lows.

When stripping out the effects of large-cap technology behemoths like AAPL 0.06% , GOOGL 0.89% , and/or MSFT -0.52% , and concentrating solely on this composite in absolute terms, we see that markets largely were weak enough from late July to completely retrace the rally from March lows, and are hovering directly above those levels.

However, this area does look to be solid technical support, and I’m skeptical that Value line breaks below prior lows from December 2022, March 2023 in the weeks to come.

Conversely, while the Elliott-wave structure shows a completed three-wave decline from July, one can look at this in a positive light based on two methods.

First, this pullback is complete and should rally higher to test former August lows, which would be initial resistance.

Second, one final move under early October lows is necessary which would complete a five-wave decline from July.

In either scenario, given evidence of fear having returned to risk assets while breadth has improved this week, I expect that drawdowns from here should prove minimal and provide opportunities for gains into late October/early November.

Breadth improvement this week remains a positive to concentrate on

10-day Advances vs. Declines in ratio form for SPX typically can alert investors when SPX might be bottoming when this gauge crosses back above the 0 line after having declined beneath it.  (See below)

My view is this uptick in Breadth, which largely occurred Tuesday of this week, is important in signaling that lows likely were made in early October.

The bottom oscillator on this daily chart below shows this week’s cross back above 0, and suggests to me (along with other breadth improvement like Bullish Percentage index rising back above 30%) that markets should be in a bottoming process.

Given the breadth improvement coinciding with an uptick in fear, I feel more confident technically that US equities are an attractive risk/reward to consider on weakness following the gains from earlier this week.