^SPX 0.33% continues to show resilience despite the plethora of bad news, and Monday’s minor early pullback was greeted with buying yet again. ^SPX 0.33% looks to have upside of around 1-1.5% into mid-September, while downside could shed 5% into early October. Thus, risk/reward is starting to look poor for those with timeframes of 6 to 8 weeks or less. China’s surprise rate cut looks to have directly led to a rolling over in Commodities, and this looks to be something which could lead to further weakness in Energy and Materials in the back half of August. The hourly Elliott-wave count seems to suggest prices are nearing at least a minor peak. Yet, downside likely proves minor in August down to ^SPX 0.33% 4100 while a larger decline to 3850-3900 might occur sometime in September which aligns with the worst period of Market weakness during most Mid-term Election years. Overall, 4258 looks to be the first key area of support on any decline, but until breached, trends remain stretched, but resilient. The switch to more defensive themes looks important to keep an eye on, but at present, prices are still pushing higher.
WTI Crude breakdown to new six-month lows keeps near-term trend pointing lower
Brief undercut of August lows reached the lowest levels since late January for WTI Crude.
While $87 held as temporary support Monday on weakness, bounces should prove minimal before pullbacks to $85 or lower to $80-$82 happen into late August.
Elliott-wave structure showed the one-month decline from June 14th intra-day peaks to July 14th bottom likely constituting a five-wave (A) pattern. Following a roughly two-week consolidation/failed bounce attempt, the next leg down began back on 7/29. Thus, a similar duration decline could take WTI Crude down into 8/29 before bottoming with prices likely bottoming in the low $80’s.
The intermediate-term uptrend for WTI Crude from November 2020 lows connecting lows from November 2021 hits near $82. This level also equates to a Fibonacci 61.8% alternate Extension of the first wave of the decline from June. This should be strong support.
WTI Crude cycles both on a daily and weekly basis tend to focus on September/October timeframe for a low. Thus, while many are scrambling to buy dips immediately on a 5% decline, this pullback will likely persist a bit longer into Fall before turning up.
Timewise the end of August would align with a 1.618x Fibonacci projection of the June-July decline and also line up with a one-month decline from late July, matching the initial one-month decline from June 14-July 14th. Thus, while early cyclically, one might look to buy weakness to the low $80’s in the next couple weeks.
Crude cycles show a bottoming by October and rally into year-end
Cycle composites created with the help of “Cycle Finder” by Foundation for the Study of Cycles show this Fall to likely mark a bottom for WTI Crude before rallies into year-end with September/October showing confluence on both daily and weekly cycle composites.
While mid-month has marked a turning point for Crude in recent months, Monday’s decline proved to be a “Tell” for Crude, and arguably should give way to additional weakness down to the low $80’s by end of month.
While weekly cycles bottom in October, the larger intermediate-term turn seems to focus on Spring 2023 for a meaningful bottom that might precede a rally back to new all-time highs. Thus, while there does look to be a trading low approaching within 1-2 months, with short-term timing focusing on 8/29-9/1, any rally back into end of year might still weaken in 1Q 2023 before a larger low. The cycle composite for WTI Crude is shown below on a daily basis.
Energy stocks have been trouncing WTI Crude performance
Interestingly enough, despite a near non-stop decline for WTI Crude since mid-June, Energy stocks have lifted sharply over the last month.
The SPDR S&P Oil and Gas Exploration ETF, or XOP -1.09% , managed to regain about 50% of the prior decline. Equal-weighted Energy ETF’s like RYE gained more than 11.5% over the rolling 1-month period, and XLE -1.69% gained more than 13.85%.
Uptrends in XLE -1.69% OIH -2.13% and XOP -1.09% remain intact, but these might face weakness over the next few weeks if WTI Crude pulls back to the low $80’s.
Overall, daily closes under XOP -1.09% -131.62, XLE -1.69% -73.44, or OIH -2.13% -222.78 would stop out longs, and likely allow for minor pullbacks to happen in these Energy ETF’s into late August. One should consider buying dips on weakness into the Fall, as it’s expected that WTI Crude and also Energy should work well into year-end.
