Increasing odds of a retest of August lows, which should prove temporary

US Equity markets look to have made short-term lows near initial support.  However, a few technical concerns argue for any bounce to prove short-lived before a retest and minor break of August lows.   The shape, structure, and participation on any Friday/Monday SPX bounce will be quite important.  US Dollar and TNX still have not definitively peaked out.

While SPX does look to have found support near the window mentioned last night- 4410-4430, a few things are of concern that are worth discussing:

1. Elliott-wave structure seems to indicate a five-wave decline from 9/1 peaks
2. SPX broke former highs from 8/24 peaks also, which damaged the short-term structure
3. VIX has confirmed TD Sequential “13 Countdown-Buy” exhaustion signal today-9/7
4. AAPL 0.06%  decline has gotten a bit more severe, and temporarily bottomed near Aug. lows
5. US Dollar nor US Treasury yields do not yet look to have peaked, but look close
6. Sentiment is not yet bearish despite this decline to SPX~4451
7. Seasonality remains sub-par for the month of September
8. Cycles which normally turn higher during pre-election year Septembers have not done so

Overall, this doesn’t necessarily rule out a rally into next week and I expect that does happen.  However, the shape, structure, participation and/or market breadth of any bounce is going to be very important to pay attention to.

Momentum indicators like MACD remain negatively sloped on weekly charts and are close to turning back negative on a daily basis.   

Trends which turned down to bearish from late July have not been properly recouped to say that 8/18 lows were “the low” but merely “A low”  Now markets have begun to roll back over this week and the severity of this week’s decline is a bit uncomfortable from a bullish standpoint.

While I suggested SPX-4410 as a “line in the sand” (and I stand by that), bounces likely will find some kind of resistance either on Friday or into Monday of next week near 4477 up to 4504 (S&P September Futures resistance, but not much different than SPX cash index)

If/when SPX 4541 can be recouped, then I will respect that, believing that SPX can continue pushing higher.  However, given seasonal concerns along with the looming Government shutdown possibly a few weeks away, one can’t help but be a bit defensive in the short-run given the concerns I listed above.  I’ll monitor these and will discuss further in the days ahead.

Bottom line, if my sudden concerns materialize, and SPX breaks 4410, I suspect that a quick, short-lived decline should take place which likely could test and break August lows by a small amount before forming a bottom.   Thereafter, I expect SPX likely pushes back to new 2023 highs.   Thus, the scope for a selloff likely has a time element of about 1-2 weeks at a minimum and around 4-6 weeks at a maximum, before this former rally can reassert itself.

I’ll discuss some of the positives in tomorrow’s report, because there are quite a few.  For today’s report, it’s simply best to concentrate on a few concerns of some recent things that have “gone wrong” or changed the technical structure for the worse (in the short run, only).

SPX daily pattern very well could lead to a brief retest of lows before lows are in  

As shown below, the decline from late July broke the existing uptrend for SPX before attempting to rally back into early September.  This week’s decline suggests that 9/1 peak near ~4541 is quite important technically but might not be tested right away.

The daily SPX chart with Ichimoku cloud has contained the price action for SPX thus far, having peaked near the highs of this Cloud into 9/1.

Given SPX’s move on Thursday to violate the prior peak from 8/24, this narrows down the possible ways one can interpret the current price action.

In my view, the most likely pattern at this point might result in a test and break of August lows which then could provide support near 4260 before pushing back higher. (Any rally back over 4541 cancels and postpones this decline.

Thus, while a possible bounce happens on Friday into early next week, I’m skeptical that 4541 is taken out right away in this scenario.  Bottom line, I expect resistance over the next 2-3 trading days to materialize from 4477 up to 4504 (ideally) Support comes in near 4410 and then 4335, then 4260.

It’s not illogical to expect that the decline from 9/1 will mirror the original decline from 7/27 peaks in some ratio of price and time.  I’ll discuss this next week to provide appropriate downside targets and fine-tune my thought process.  At present, this chart below seems to require a possible retest of lows structurally, which very well might line up with a temporary breakout in Treasury yields.

This likely would set the stage for sentiment to turn bearish quickly, but also could provide dip buyers with an opportunity.

US Dollar likely requires another 2-3 weeks before peaking

All eyes continue to be on the US Dollar, along with discussions of upcoming intervention possibilities by Japan and China to stem the declines in their respective currencies.

While those that study DeMark indicators might expect a sudden peak in the DXY along with bottom in EURUSD based on daily DeMark exhaustion, it’s important that weekly charts also align with the daily in showing exhaustion before expecting any sort of larger reversal. (My personal thoughts after having applied these indicators for years)

Weekly charts suggest peaks might be delayed for three weeks.  This could allow for a possible TD Sell Setup on weekly charts of DXY ( Nine consecutive weekly closes where the close is above the close from four weeks ago)

In plain English, a rally in DXY to 105.50-106 into late September could allow for a better risk/reward scenario for those attempting to fade the US Dollar advance.

I’ll monitor closely, but it’s worth noting that DXY and SPX have had pretty consistent negative correlation over the past year.  The US Dollar low in mid-July nearly correlated exactly with a time where SPX peaked out.  Thus, any hint of DXY turning back lower along with TNX would seem to be a tailwind for US risk assets.

My intermediate-term thought process on the US Dollar is similar to US Treasury yields.  I expect both the Dollar and Yields to fall into year-end.  However, neither has given compelling evidence yet of peaking out.  I’ll discuss this again when more proof of a top in price for both DXY and TNX occurs.

Copper is showing evidence of a near-term selloff approaching.

Short-term technicals seem to indicate that Copper might weaken in the short run, which makes sense given the persistent uptrend at work in both US Treasury yields and US Dollar index.

Wave structure has turned more negative in the near-term, given a very impulsive five-wave decline into mid-August.

Unfortunately for market bulls, the subsequent bounce was not too compelling and seems to be very choppy and overlapping.

The subsequent weakness this past week has begun to trend lower in a much more orderly fashion.  Overall, until Copper can reclaim $3.85 (COMEX Copper) my thinking is that a bit more near-term weakness is very possible for September which very well could result in a retest and slight undercut of August lows.

Overall, my intermediate-term view on Copper is quite bullish, and I feel that any pullback makes this quite attractive technically speaking.

However, the near-term deterioration has been damaging to the technical structure, and it’s worth reiterating that prices are going against the bullish view right now.

VIX also signaling a trading bottom which aligns with seasonality studies

Finally, it’s worth pointing out that daily charts of VIX by Symbolik show a confirmed buy signal (properly referred to as a completed 13-Countdown which has been followed by a “price flip” (a close above the close from four days prior) (This serves to confirm the “buy”)

Additional charts of VIX vs the VVIX, (VIX of the VIX) have officially broken out of downtrends from earlier this year (this began in early August 2023)

Thus, there are a couple different reasons to suspect that Implied volatility might lift in the month of September.  Furthermore, this aligns with bullish seasonality which many investors are well aware.

Bottom line, this confirmed buy on daily VIX charts heightens the probability, in my view, of a selloff in US Equities to test August lows.  I’ll monitor this as it progresses, but it makes technical sense, given my other studies as well as making sense given a possible government shutdown which might materialize within the next few weeks.