Key Takeaways
- Wednesday’s about-face looks serious and likely leads prices down to 3800 initially
- Treasury yields look to be rolling over and should continue down into June
- DJ Transportation Avg has broken down to new yearly lows
Wednesday’s decline was severe enough to suggest that a move back to lows to test and undercut is now underway. While daily charts showed 4100 as being quite strong resistance, and other Gann-related measures suggested a bit lower, i.e. 4084 for SPX cash, Wednesday’s pullback strongly suggests our three-day bounce has come to conclusion. Looking back, we’ve seen three separate rally attempts since late March, each spanning three days in duration. Each has failed, taking indices back to new lows, and this time should be no exception. Momentum indicators like RSI lifted on the early week bounce, making RSI not really oversold on any timeframe, and prices likely should breach May lows on their way to near 3800-3815 which would be a 38.2% Fibonacci retracement of the entire 3/20-11/21 rally.
Unfortunately, as has been discussed, time is not yet ready for a low, based on cycles, nor weekly DeMark indicators which I find important in combining with other timeframes to gain conviction. As I’ve mentioned previously in these reports, price downtrends have not been broken and momentum is really not oversold given the early week bounce. DeMark counts on weekly QQQ/SPY charts still signal a move back to new lows is needed before any real exhaustion, and it’s important to study QQQ as a gauge for possible trend reversal given the heavy influence of stocks like AAPL and MSFT. Bottom line, SPX 3800-3815 has importance, depending if time aligns perfectly with price. Under 3800 however, would suggest a possible acceleration and prices likely have maximum downside to 3500. This lines up with prior February 2020 highs and also constitutes a 50% retracement of the entire rally from March 2020.
Transportation breaks down to new lows for the Year
In what is likely Wednesday’s most important technical development, the DJ Transportation Avg has broken down to the lowest levels since last March.
Trucking and logistics stocks are being particularly hard hit, but stocks like EXPD, FDX, JBHT were very hard hit and seeing this bellwether index at new yearly lows doesn’t’ give much confidence that market lows are near just yet.
Some might compare the pattern in Transports to that of a large Head and Shoulders pattern, and they’re not wrong given “high, higher high, then lower high” while prices just broke underneath “neckline support” which has contained two prior declines.
Overall, while sentiment shows bearishness turning quickly to fear, broad index gauges breaking down like Dow Jones Transportation Average (DJT) did on Wednesday means it’s still very much premature for any low. I expect another 5% down in the DJT, and recommend holding off on immediately buying dips in Transports.
Crude Oil’s decline sets the stage for Energy to join in on recent weakness
Today’s Energy weakness was something I discussed two days ago as WTI Crude was hitting the top of recent channel resistance. Pullbacks to the lows of this channel are likely technically speaking.
Key support lies at $98 and any decline under that level would allow Energy to play “catchup” to some of the underperformance seen in other sectors. While I expect Energy to still Come out on top” for YTD performance, some consolidation looks quite likely for Crude, and in turn for Energy as a sector. Energy longs should be concentrated in the largest, safest of names, with XLE likely outperforming XOP and OIH in the short run.
A meaningful downturn in rates while Crude also weakens could help Growth start to gradually rebound vs Value. However, at present, this still looks quite premature as Technology remains under substantial pressure.
Target- Where is the DOWNSIDE Target?
Target’s (TGT) weakness now makes it one of two leading Retail companies that have come under substantial pressure over the last week, causing Consumer Discretionary to underperform sharply. While it might be early to make assumptions about the consumer given this weakness, it’s right to take a look at TGT for those who might be long or considering getting long to get an understanding of where this might bottom.
Initially, it’s important to get a feel for how this stock has performed in recent months and why the stock gapped down so severely from a technical perspective. A few thoughts are important to consider:
Initially, Target pulled back in a three-wave fashion starting last August. Then, TGT turned higher, also in an Elliott-wave style three-wave pattern. This is insightful, as it gives useful information about the likelihood of TGT turning down rapidly to make 5 waves on the downside.
Importantly, Wednesday’s gapdown looked to have found initial key support right near the 50% retracement area of the entire 2017-2021 rally. This area lies near 158 and managed to hold on a close. Yet, the gapdown likely constituted an Elliott “Wave 3” move, which normally produces gaps on charts.
Overall, this decline might appear oversold, but is not likely complete. I am looking for lows in TGT between 123-140, which lines up with 61.8% Fibonacci levels along with alternative Fibonacci projections from the first decline back in August of last year.
Bottom line, Target’s decline likely does undercut 158 and move down to at least 140, but should generate sufficient exhaustion/oversold conditions once this meets technical targets a bit lower. Those who are looking should pay heed to the fact that open gaps rarely constitute lows technically. Even on a bounce attempt, it’s likely that this goes lower into June.
