The near-term SPX pattern looks to be rolling over following Monday’s weakness, but it’s right to call the short-term pattern a near-term consolidation within an intermediate-term downtrend. Overall, trends look likely to resolve lower into late July before stabilization and reversal back higher. Near-term, wave structure makes the case that there could be a bit more churning over the next couple weeks, making for a choppy July. Yet, the ultimate path of least resistance remains lower at present, and I expect June lows should be tested and taken out by a minor amount. Moving below 3780 would be the first sign of one-month trend damage. Additional levels that appear important are found at 3742, then 3636. While the urge to buy dips remains strong for many, US benchmark indices still look to move lower and it’s right to be patient.
China rollover likely extends in July before a bottom
China’s efforts to stem another COVID-19 outbreak look to be directly coinciding with Chinese equities rolling over during Monday’s session. The one-week closures of Macau casinos have caused severe weakness in stocks like LVS and WYNN. Weakness is spreading to many other casino names as well, with declines in many emerging markets as the US Dollar advance continues.
The NASDAQ Golden Dragon China Index (HXC shown below) shows two interesting technical developments worth discussing. First, uptrends from May were broken during Monday’s session (7/11/22). Second, the Elliott-wave count from May looks to have carved out five waves higher into June before consolidating and then technically breaking down.
The key takeaway here is that additional weakness looks highly likely in the short run. Areas of importance lie at 6835 and below at 6485. Movement under 6485 likely could result in a 100% roundtrip lower to test May lows. Yet, it’s thought that, following pullbacks in the weeks to come, China, along with other Emerging markets, might be buyable as evidence of the Dollar rolling over becomes clear post July FOMC meeting. At present it looks early to buy dips given Monday’s weakness, and this breakdown is technically meaningful.
Emerging market trends might be down, but opportunities to buy dips should materialize on further weakness into month-end
Weekly charts of EEM have been trending lower since February 2021. This looks to have nearly exactly coincided with the start of the parabolic move higher in the US Dollar, which is now growing quite overbought.
While many believe that Russia shutting off Natural Gas to Europe should result in extreme EUR/USD weakness (Further DXY strength), much of this looks to be getting baked in at this point.
Interestingly enough, the weekly DeMark count when eyeing TD Sequential and TD Combo indicators could possibly line up with its first 9-13-9 pattern since February 2021 peaks. For those familiar with this formation, it suggests that a meaningful low in Emerging Markets could be coming within 3-4 weeks on a bit more weakness.
Key support zones to consider buying weakness lie at 36-37 on EEM, and TD Buy Setups would be finalized potentially into end of month (following another three consecutive lower weekly closes, which make weekly closes under the close from four weeks prior).
Bottom line, the formation of a TD Buy Setup in late July would directly coincide with the July FOMC meeting and might also coincide with a peaking out in the US Dollar.
Communication Services remains one of the weakest sectors near-term and it looks early to buy dips
As many investors are aware, Communication Services has the dubious distinction of being the worst performing S&P GICS Level 1 sector over the last three months, second worst behind Consumer Discretionary on a YTD Basis.
(Communication Services Select sector index includes companies from Diversified Telecommunications (Telco) services along with Wireless Telcos, Media, Entertainment, and interactive media and services).
Monday’s break of the one-month minor uptrend in EWCO (Invesco’s Equal-weighted Communication Services ETF), given woes from TWTR, DISH, MTCH -0.13% , PARA 5.52% and NFLX 0.89% (which were all down more than 5% Monday), have served as a meaningful headwind to this group starting to stabilize.
While TWTR could find some near-term support at prior lows just above $31, I expect that stocks like DIS -0.15% , MTCH -0.13% , TTWO, CMCSA -0.03% , and NFLX 0.89% likely weaken further in the month of July. This makes the group premature to buy dips despite all the weakness that has already occurred. Technically speaking, I anticipate new monthly lows for all the stocks listed above. If/when these pull back into late July, this could create some opportunity for dip buyers. However, at present, it looks clearly premature.
