Treasuries, US Dollar and Stocks have potential to turn next week
- Treasury yields and US Dollar also look to be nearing time-based reversals of trend.
- Defensive sectors are starting to show real underperformance which is a positive.
The path of least resistance remains to the downside, and while early Monday reversal attempts looked initially encouraging, the late day pullback towards lows of the session should offer market Bears a bit more profits before a real trend reversal. Factors such as bearish sentiment, the start of volume and breadth dislocation, and oversold conditions in various momentum indicators are initial reasons for hope for the Bulls. However, much of this timing largely resides in three key methods: 1) Cycles 2) Elliott-wave analysis 3) DeMark exhaustion signals. The combination of these when eyeing duration of wave movement and lining that up with potential DeMark exhaustion directly lines up with two of my cycle composites for a bottom in risk assets starting the first week of October. This daily QQQ-1.73% chart below shows why two more days of weakness would be particularly important initially for a market bottom, triggering a possible TD Sequential “13 Countdown” signal right near June lows. Targets for QQQ lie at 269 with a remote possibility of 265. However, one should consider using weakness to buy this week as lows are approaching right as a bullish period of seasonality kicks in for mid-term election years.
TLT weekly charts show similar Time counts as Equities
Interestingly enough, when running DeMark indicators on Treasury Bond ETF’s like TLT ,we see a possible confluence of exhaustion similar to Equities heading into next week.
The US Dollar index also shows the same possible timing, which could make early October interesting for a possible trend reversal.
An important zone of support at $102.50-$103.50 looks compelling if reached next week to consider buying TLT for a reversal higher starting in October, and potentially stretching higher over the next couple months.
Treasury sentiment has rapidly begun to deteriorate understandably with rates pushing higher. Yet, weekly TNX and TYX cycle composite charts show a fairly large reversal back lower starting in the weeks ahead. This likely should result in an upcoming reversal in Treasury yields which I feel will directly coincide with a stock market bottom.
Overall, any TBT or TMV investments should be sold based on technical and time-based reasons for those with a 2-3 month timeframe, while TLT and TMF now look far more appealing from a risk/reward perspective. Unfortunately, the lows aren’t likely to be in place until next week, but I expect this confluence of multiple signals across Equites, Treasuries and FX could prove important.
US Dollar index looks to have strong overhead resistance just above
DXY’s parabolic surge this year has carried prices higher over the last 13 of 16 months to the highest levels in over two decades.
While my technicals do suggest that upside from here should prove difficult this year, any backing and filling between October-December still likely will push back higher into next year briefly to test 2001-2002 highs to complete this wave pattern before a meaningful top is in.
At present, trying to fade the US Dollar is difficult in the short run, but DeMark counts on DXY largely mirror what’s being seen on weekly Treasury yield and US Equity index charts. In addition, weekly counts on EURUSD and also GBPUSD are also near completion. Thus, the next couple weeks should bring some opportunity for those wishing to buy the Euro or Pound Sterling, and one can look at 0.935-0.95 for EURUSD and 1.00 GBP/USD (Parity to US Dollar) is seen as a very strong downside level of support.
The monthly chart below shows very strong momentum leading DXY to its largest overbought condition on a monthly basis (RSI above 80) since 2015 and before that, 1985. While a small sample size, both of those prior occasions resulted in meaningful underperformance in the years to come. Overall, it’s unlikely the US Dollar runs higher through Q4. I expect a good reversal that should start sometime in October.
Utilities show sharp selloff as Defensives start to lag
Interestingly enough, despite US Equity trends still pushing lower, Utilities have begun to backtrack sharply in recent days.
While Consumer Staples already was considered a laggard to Discretionary despite Equity indices moving sharply lower, this recent deterioration in Utilities is interesting.
Over the last 5 trading days, Utility ETF XLU1.18% has underperformed the SPDR S&P Technology ETF, XLK-1.67% with returns of -6.58% (XLU) vs -5.07% (XLK). Furthermore, as has been widely reported, other defensive groups like the REITS have been one of the worst of the major sectors over the last month out of the major SPDR S&P ETF’s with returns of -15.19% on a rolling one-month basis, the third worst behind Energy and Materials.
It’s thought that this early indication of weakness in Defensives likely should correlate with Equity indices stabilizing and turning back higher in the near future.
XLU1.18% has key support in the upper 60s at $67-$68.50, though $70 might hold temporarily as an area of Fibonacci and Ichimoku cloud support. Given the deterioration in momentum, minor bounces likely could prove to be selling opportunities back down to the high $60’s, until $74 is recouped.
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