SPX is now officially above the aforementioned upside target of 3850, yet time-based targets were still a bit early to suggest a turn on Tuesday, pinpointing Wednesday-Friday as a better area where stock indices might pause/reverse course. Those time targets are derived from a combination of short-term cycles and DeMark exhaustion combined with Elliott-wave targets in both price and time. Given that S&P quickly moved Tuesday above 3850 while time factors were early, S&P managed to stretch all the way to 3862 in SPX cash, while futures advanced to 3874 intra-day. I’ll discuss the factors that might cause a stalling out in the pages ahead, but it’s important to note that Tuesday’s equity surge directly coincided with rates and the US Dollar rolling over. This was expected to start in October and last into December. At present, the Treasury yield decline looks more believable than the US Dollar. Yet both should be monitored carefully in the days ahead. Overall, it’s thought that SPX might have a maximum initial move up to 3912 before a reversal gets underway, which I expect will be buyable into early November.
Reasons why Equity markets might stall out in late October
While the reasons for this equity bounce were largely based on a combination of cycle forecasts, bullish Mid-term seasonality, bearish sentiment, defensive underperformance, DeMark downside exhaustion, and better breadth and momentum than late September lows, markets have moved higher quickly, and look to be nearing the first meaningful area of resistance where a late October peak could happen. While my work supports buying dips in November on any weakness and still expects that markets can work higher into December, there are several factors that are important and worth discussing. These are listed in bullet form as follows:
-Hourly RSI has reached overbought levels
-Elliott-wave targets focus on 3918, which would allow 10/13-10/18 rally to equal 10/21 until present, in price points gained.
-Despite pullback in rates, the two-month uptrend in yields remains intact and might allow for yet another test of highs before a larger setback in rates.
-DeMark related exhaustion could form on ^SPX 0.24% , QQQ 0.36% , AAPL 0.39% this week in the form of a TD Sell Setup after the recent bounce. This might allow for consolidation of this week’s rally.
-Technology earnings very well could weigh on stock indices (GOOGL -0.55% , MSFT -0.68% poor results came in post market close Tuesday, though unclear as to whether this is jumpstarting any real decline)
-SPX lies just beneath 50% retracement of its August-October decline which likely proves important. Note, this also lines up right near an alternate Fibonacci extension of the first rally off the lows from 10/13.
-Weekly and monthly momentum based on MACD maintain negatively sloped momentum and rally since 10/13 certainly has not exceeded the broader downtrend from January which lies just below 4200
-Equities have not followed 60-year cycle perfectly in recent weeks, bottoming on 10/13, and might not obey the Mass Pressure composite’s bullish directional bias from 10/26 into early November, as markets have already been rallying ahead of time
-Elliott pattern off the lows has not been too constructive in forming five waves, per my estimation. Thus, one cannot say with certainty that October lows will definitely hold.
In summary- These are a few reasons that go against the tried-and-true reasoning of being bullish in the face of bearishness, poor sentiment and joining those who wish to fight the current intermediate-term downtrend and bearish momentum in pressing longs for a strong rally into year-end. That could very well materialize. However, my gut feeling says this should not be a straight line higher, and the reasons above give me reason enough to bet on a pause starting in the next 2-3 trading days, hoping to buy dips at lower levels for a continued advance. As has been discussed, the sector rotation and strength in Technology has been impressive of late, along with strength in many other sectors like Industrials, Energy, Healthcare and Financials which has helped breadth and momentum improve. Moreover, there hasn’t been sufficient reason into Tuesday’s close to sell longs and/or have reason to hedge technically speaking based on price movement alone. If/when signs of this develop in the next few days into end of month, it will be right to respect that reversal and discuss in more detail.
US 2-Year Yields form minor Head and Shoulders pattern
While yields look to be breaking down across the yield curve over the last 48 hours, it’s the action in the 2-year yields that warrants particular attention.
Hourly patterns have formed what could be a potential Head and Shoulders pattern, which is fairly clear when examining intra-day charts of the US 2-year yield.
Breaks of 4.39% should lead to a quick decline down to two-month trendline support at 4.15% which likely holds on the first pullback.
US 10-year Treasury yields have also given initial indication of a rolling over
This daily chart of ^TNX 1.12% showed the first breakdown to multi-day lows in yields in more than a month. Minor one-month uptrends were violated, yet yields did not break the uptrend from early August.
In the next 12-24 hours, it looks likely that TNX pulls back to 4.00% and even lower yields could be likely, with 3.90-3.95% representing initial support on yield pullbacks.
It’s difficult to make a case for a broader pullback in yields getting underway until there is a larger trend violation which will require a decline under 3.87% in TNX.
It’s expected that any decline into end of October might still reverse to briefly test recent highs before a larger Treasury rally (Yield decline) gets underway.
Solar Energy could outperform both Fossil Fuel Energy and also SPX in the near-term
Interestingly enough, Solar energy stocks look to be stabilizing right on time and should bounce in the weeks/months to come. Invesco Solar ETF TAN -0.52% broke out of its monthly downtrend on Tuesday, and counter-trend exhaustion signals based on DeMark indicators are now lining up to suggest some upcoming mean reversion vs. the SPX in the coming weeks.
In recent weeks, I discussed Alternative energy stocks likely outperforming Fossil Fuel names after having underperformed for about six weeks. That now looks to be also extending to outperformance over the SPX.
Daily relative charts below of TAN in ratio form vs the S&P 500 ETF SPY 0.24% show the first completed TD Sequential and TD Combo 13 countdown signals since this peaked out in mid-September
While fossil fuel energy stocks have stalled out a bit in recent days similar to WTI Crude, the action in names like Enphase Energy ENPH -2.61% and Solar edge Technologies SEDG -1.68% make these attractive to consider technically as well as the TAN -0.52% etf which holds both of these stocks.
While a move back to new relative highs will take time, I anticipate that at least half of the recent decline from mid-September can be recouped, and that Solar energy likely outperforms SPX in November.
