Key Takeaways
- Tuesday’s mild stabilization could be setting up for a minor bounce into/post FOMC
- Gold and silver both likely to weaken down to 2022 lows as real rates rise
- Ethereum’s weakness growing closer to intermediate-term support to buy
SPX is now down ~10% just since the June 7th close after five consecutive days of selling. This area lies just above 3700 heading into the FOMC decision, but I’m expecting this decline doesn’t play out as a straight line, and might bounce into/directly after the meeting, regardless of what the announcement turns out to be. This “Sell the rumor, Buy the news” could help SPX fill one of the gaps to its recent decline from 6/2 and the first target lies near 3900, which would fill the first gap, retracing 38.2% of the pullback. The next key area of importance lies at 4017.17, or near the 61.8% retracement area. While the trend should be down into 6/24, and/or 6/27-30, signs of hourly oversold conditions combined with DeMark exhaustion on 240-minute charts could allow for a minor bounce to unfold. Look to sell into strength by Friday/next Tuesday.
Gold not the inflation hedge many expect
Gold’s breakdown looks serious and negative, violating one-month uptrend line support, and at current levels would finish at new four-week lows. This is a bearish omen that likely results in further deterioration into the end of Q2 which could challenge and break May lows.
This decline has directly coincided with the rapid rise in real rates, and 10-year real rates now lie at 0.81bp. The entire decline in Gold happened exactly the same day that real rates bottomed back on 3/8/22 with 10-year real rates at -1.10. Since that time, Gold has steadily deteriorated as this has lifted sharply, and particularly over the last few trading days.
It’s thought that economic weakness which causes yields to start to rollover would jump-start Gold’s advance into its seasonally bullish time towards a possible peak in September or October. However, since Treasury yields have made long-term breakouts of downtrends going back since the 1990’s, it’s unlikely that a gold bounce has any longevity just yet. Moreover, if a bounce in Treasuries proves temporary and yields start to turn back higher in September/October, this likely could take the “wind out of Gold’s sails” yet again.
Elliott-wave structure seems to suggest a pullback to new lows should represent the final move lower from March peaks, as this would officially complete the 5th wave of 5 from three months ago.
Downside targets for Gold’s front month futures contract, shown below, lie down near 1672, which would allow for waves 3 and 5 to be equal price-wise and would line up with lows made last August, when Gold spiked lower before rebounding. Traders should be on alert for any evidence of Gold pulling back to new lows for the year, as this could open the window for trading buys into the early part of Q3 in July. At present, further weakness looks highly likely.
Ethereum set for potential intermediate-term low on weakness into late June 14, 2022
Ethereum looks to be nearing an intermediate-term low, and time and price projections would come together ideally on/near 6/19 at a price of 873. Daily charts show the two separate waves lower, from 11/10/21-1/24/22 and the most recent decline from 4/3/22.
The first decline shed 2707 points, or 55.6% in 77 calendar days. The subsequent consolidation lasted 69 days before this latest decline from early April got underway. This most recent decline has now almost precisely equaled the first decline in both price and time. Thus, at a price of 873 over the next week, this would allow for price and time equality, making this very likely to bottom out.
Momentum indicators like RSI show daily readings to have gotten as oversold as January of this year. Meanwhile, weekly RSI has reached record lows for ETHUSD in the mid-20’s. Finally, DeMark exhaustion has been triggered (but not confirmed) on daily charts using TD Sequential and TD Combo with three more days needed to perfect the current TD Buy Setup. Overall, ETHUSD looks quite attractive to buy and hold at current levels based on momentum, sentiment, counter-trend exhaustion with wave equality possibly providing an ideal entry point within a week.
Equity put/call data getting close to levels that marked lows over the last 5 years
Interestingly enough, the continued chatter revolves around whether this market has shown sufficient capitulation to bottom out. While markets have shown above-average TRIN readings (Arms index) lately, and VIX backwardation has started to surface ever so slowly (Spot VIX is now 1 percentage point above 2nd and 3rd month futures, though not at 5+ which typically has marked equity market bottoms) this doesn’t yet seem like a proper level of fear just yet to drive an intermediate-term low after a 20% + decline in Equity indices.
Bearish sentiment certainly has been prevalent for the last month, though arguably polls like AAII or Investor’s Intelligence are thought to be just a minor piece of the puzzle. Until/unless markets show true dislocation and/or an overbalance of selling, it remains difficult to consider the market truly fearful.
Another useful gauge is to watch for times when the Equity put/call ratio spikes up above 1.0. This would equate to an equal level of puts being bought vs. calls, and this ratio normally has trended between 0.40 on the downside and 1.20 on the upside over the last 10 years.
Looking at this daily chart, we see that 2020 equity bottoms happened with Equity put/call at 1.00, while in late 2018, this ratio got to 1.13. Furthermore, the early 2016 bottom for US equities occurred when Equity put/call hit 1.14. Current readings show an 0.84 reading.
This is elevated to the highest levels since mid-2020, though nowhere near levels (yet) which have marked intermediate-term lows going back since early 2016. Given that the last 3 10%+ declines all saw Equity put/call ratio trend to at least 1.00 or higher, I think this is a useful gauge to watch carefully on any further Equity index weakness into late June (For contrarian purposes).
