MSFT rebound leads SPX back while NYSE A/D line breaks out

US equity markets continue to show signs of resilience following MSFT’s sharp rebound from early losses following its warning of a further slowdown in Sales and weaker outlook for its cloud business. 

SPX managed to completely regain early losses to close flat on the session, rallying over 60 SPX points to finish right at the highs of the session.  As can be seen below this area at 4016-9 has contained prices in recent days.

At current levels, prices are very close to a larger breakout in SPX along with NASDAQ, which already occurred on an equal-weighted basis on Value Line’s Arithmetic index about two weeks ago.

An SPX breakout seems imminent, and very well could happen this week which would gel with the bullish cycle composite view along with bolstering the view that 1^st quarter 2023 could likely be a lot stronger than what many expect.

Overall, movement above 4039 would drive SPX up to 4100, and the ability to eclipse these December 2022 peaks (4100) would certainly reinforce the bullish view.

As discussed in my Annual Technical Outlook yesterday, momentum and breadth have begun to improve materially at a time when Technology has begun to show evidence of clawing back.  This is important and positive during a time when many longer-term gauges of sentiment remain quite negative.

Treasury yields have now fallen for the second straight session.  Meanwhile, the Financials sector looks to be breaking out while defensive groups like Utilities and Staples continue to be hard hit.

Despite a couple days of sideways churning, the near-term trend is looking more and more bullish and a triangle breakout will be confirmed over SPX-4039.

MSFT’s stabilization is a positive, despite the ongoing downtrend

MSFT certainly didn’t disappoint dip-buyers Wednesday, and early weakness was immediately reversed to help the stock close back up above $240 from its earlier $230.91 print, higher by nearly $10 off the early lows on the heaviest volume in more than a month.

As can be seen, the stock has stopped going down, but trends have been largely range-bound for the last six months.

This isn’t bullish nor bearish, but thought to be a positive following its 2022 decline to test the 38.2% Fibonacci support of its entire rally from 2009 lows.

Technically speaking, stocks like MSFT-1.90%  will have to break downtrend lines from late December 2021 to give confidence that large-cap Technology is making a real comeback.   The same can be said for AAPL-0.57%  and GOOGL0.35%  which has not yet occurred.

However, once this happened, many of these stocks will be higher by at least 10-15% off their 2022 lows, and many parts of Big-cap Tech are already looking much more appealing.

Key for MSFT will be the ability to surpass its December peaks at $263.92.  However, even climbing above $260 would help this achieve a breakout of its downtrend, and this is the first key area that trend following investors should be paying attention to.

From an Elliott-wave perspective, the rally off the early November lows does look to have occurred in five waves, followed by a shallower three-wave correction.  This is quite positive for the prospects of a further push higher into February and March, and upside targets above $260-3 lie near $275-282, a resistance zone that likely could hold initially on rallies into Spring 2023.

Overall, I like MSFT’s prospects to bounce sharply in the weeks to come, but this tactical rally will be part of a larger downtrend until the stock can get back over $260.

Areas which are considered support to buy pullbacks if this rally does not materialize right away lie at $219, then $213 but are considered less likely areas to revisit after this rally up from early January.

Utilities are growing weaker and weaker

One interesting way to examine sectors is to plot them vs the S&P in equal-weighted terms to gain insight as to whether the sector has begun to trend higher and outperform the SPX or trend lower to underperform.  Doing this with Utilities shows us a very different formation than many are used to seeing.

This large Head and Shoulders pattern which has unfolded in the last eight months certainly looks ominous towards the prospects for this group.  However, as we know, the act of breaking the “neckline” shown below as a blue trendline interesting lows, is required for actual confirmation of this happening.

If this trend is broken, it would point towards meaningful weakness for the Utilities sector, and likely would coincide with a larger breakout in the stock market.

Leading stocks within Utilities like NextEra Energy, or NEE0.34% , fell sharply on very heavy volume Wednesday.  This resulted in another difficult day for Utilities performance and this sector remains a short-term laggard and has underperformed dramatically in recent weeks.

This relative chart will be something to keep handy for bulls and bears alike.  Breakdowns in the Utilities group in a larger fashion would certainly not be something which is considered bearish to risk assets.

NYSE Advance/Decline breakout should bode well for upcoming rally

Charts of the NYSE and the NYSE Advance/Decline line show why the next big move in US equities should be higher, not lower.

The Advance/Decline line has just exceeded the entire downtrend from last November for the first time this week.

This is encouraging, and goes a long way towards confirming what recent breakouts in the Equal-weighted indices suggested might be the case a couple weeks ago.

Overall, I view this as a positive step for US equity markets, and expect that the upward path of the 80-day trading day cycle could be getting underway this week.