Technical reasons why an Equity low is near

Schedule Update: I will be traveling on Friday (8/11) and there will be no Daily Technical Report nor Technical Video published. Daily technical strategy will resume on Monday 8/14.

Markets have entered a window for a potential low, but technically odds favor a possible decline under this week’s lows before SPX bottoms early next week.  US Dollar and US Treasury yields look to be on the verge of a larger decline in August which should aid Emerging markets, and Commodities.

The bounce in Treasury yields directly coincided with US Equity weakness, but Yields look to have limited upside ahead of a turn back lower which should also be close in the US Dollar.

SPX has support at 4425-4455, and this looks likely to be tested Friday and/or next Monday before SPX bottoms out. 

Reasons specifically for an upcoming technical bottom are as follows:

1. Intra-month cycles show early August pullbacks to bottom out at this time in pre-election years
2. DeMark counter-trend indicators will line up with downside exhaustion potentially as early as Monday of next week on hourly, 2-hour, and Daily charts.
3. Semiconductor weakness looks almost complete after a sloppy decline.  SOX is nearing a time of equal-wave extension which could mark near-term support.
4. Pattern on SPX decline over the last week has been corrective and choppy which has caused some positive momentum divergence.
5. Near-term momentum has retreated from overbought levels on QQQ as part of a larger bullish sloping weekly structure for momentum.
6. SPX has pulled back to near intermediate-term trendline support but has not violated long-term uptrends.  Thus, weekly trends remain very much intact for SPX and QQQ and momentum remains bullish.
7. SPX is approaching the anniversary of last year’s August high, and one-year anniversaries to prominent peaks can often prove important.
8. Defensive groups have not made resounding progress over the last couple weeks.  Utilities have shown worse performance than Technology on a one-week basis.
9. Treasuries and Equities have increasingly begun to show positive correlation lately and Yields are now vulnerable to reversing course based on sentiment and cycles.  This should prove to be a tailwind for US Equities.
10. There remains no technical evidence of a larger breakdown in former leading sectors like Technology and Industrials.  While both groups have shown mild corrections, this has been constructive as part of larger bullish uptrends for both groups.

Overall, while August is normally a difficult month, I’m pretty confident that markets can turn back higher from early August to mid-September, even if not in a straight line. 

Ideally, the Value trade outperformance should dwindle within the next two weeks and give way to Growth re-emerging, as Technology and Industrials start to come back.  Specifically, Energy is likely to stall out into mid-August while Technology and Industrials begin to bottom out technically and should rally.

As mentioned above, SPX hourly charts shows a very choppy, overlapping pattern which has begun to signal positive momentum divergence.  While a move back under this week’s lows is possible and even likely into early next week, this is thought technically to represent opportunity as prices near this key support zone of 4425-55. 

SOX breakdown getting closer to attractive support to buy

Similar to SPX, the pattern in Philadelphia’s Semiconductor index (SOX) has proven choppy over the last week and looks headed down to challenge early July lows.

I suspect July lows should provide very attractive support to buy dips in many Semiconductor stocks, with ON 2.29% , NVDA 6.25% , KLAC 4.95% , AVGO 3.84% , and LRCX 2.65%  being most technically attractive within this space.

The area from 3530-50 looks attractive for SOX as an area of support into next week.  Pullbacks to this zone either into Monday or Tuesday should constitute an appealing area of support.

Following a bottoming out next week technically, I expect a push back above July highs to near 4000 which looks far more important as a key area of SOX resistance.

Gold showing downside exhaustion which should be bullish

Gold has finally given a downside exhaustion signal based on DeMark’s TD indicators which have formed a TD Buy Setup into Thursday’s session (Nine consecutive daily closes where the close is less than the close from four days prior).

Given that both US Dollar and US Treasury yields are in the process of peaking out in the short run, precious metals are likely to prosper in their seasonally bullish period over the next couple of months.

Gold stocks, represented by GDX 0.73% , made the same signal on Wednesday, and this group looks attractive also to be able to stabilize and bounce in the days and weeks ahead.

Overall, GLD 0.32% , IAU 0.34% , GDX 0.73%  along with SLV, SILJ -0.18%  look technically bullish from a counter-trend perspective on a risk/reward basis and should bounce in the weeks to come.

Healthcare has still not signaled a breakout vs SPX

While the Pharmaceutical stocks stand out as being one of the more technically appealing sub-industry groups within Healthcare in the short run, it’s still difficult to expect a meaningful snapback in Healthcare when viewed in relative terms to the Equal-weighted SPX.

This sector has outperformed since US Equities made short-term peaks in late July.  However, relatively speaking vs. SPX, the Equal-weighted Healthcare ETF by Invesco (RSPH 0.39% ) remains churning in consolidation near former 2023 lows.

Downtrends have not been broken from April 2023 peaks when viewing Healthcare in Equal-weighted terms vs SPX, so this relative relationship is far different from XLV 0.01% which proved to be the second-best performing sector over the last week of the major SPDR Sector ETF’s.

This speaks to large cap strength in LLY 1.15% , AMGN 0.22% , DVA 0.56%  and GILD 0.23% . 

Biotech strength remains lacking in the short run, and both Medical Devices and Healthcare Services have experienced a difficult few weeks.

Overall selectivity remains important within Healthcare until downtrends vs Equal-weighted S&P 500 ETF (RSP 0.04% ) are exceeded.