US Equity markets are likely to show a short-term low by End of week/month/quarter. The ability of QQQ to recapture August lows while showing a TD Buy Setup could be a positive. However, trends and momentum remain under pressure and upside follow-through is needed along with some evidence of Treasury yields and US Dollar starting to peak to have confidence.
Wednesday’s reversal looked to be important at a time when markets are stretched to the downside. The act of recapturing prior lows in QQQ along with the completion of DeMark TD Buy Setups for SPX and QQQ could have very well been the low that was likely into end of week.
As many understand, buying dips within downtrends is quite difficult, and requires some upside follow-through to have real conviction that lows are in place. Signs of fear have cropped up in recent days, with Put/call ratio hitting the highest levels of the year, while Fear and Greed survey is now back in “extreme Fear” territory. SPX did in fact register near oversold readings with the lowest RSI readings of the year, and DeMark signals have provided TD Buy Setups.
However, momentum and breadth remain trending down, and structurally, markets require some follow-through to erase some of the bearish patterns that have resulted from technical price weakness in recent days. While I stand by my comments that a trading low likely materializes this week, SPX will require a move back above 4335. Similarly, DJIA needs to recapture $34,062. I cannot rule out that bounces fail for US Equity markets and lead SPX back down to near 4200.
However, markets seem to have turned upon learning that “McConnell says he is comfortable with the Senate Spending Bill.” (Until a Continuing Resolution is passed to keep the government open for another 45 days, it’s going to be necessary to get some confirmation of this, in my view, and I’ll leave the political discussion for our colleague Mr. Tom Block.)
Below is the daily QQQ chart, which successfully registered a TD Buy Setup. This involves having produced nine consecutive closes beneath the daily close from four trading days ago. While signals of this are now present in both QQQ and SPY, the follow-through in the days ahead will be of utmost importance.
If the week can close with QQQ and SPY above August lows along with DJIA, I would think that QQQ-366 is possible on a bounce. Likewise, the SPY needs to recapture 434 on a close which could lead to 441. At present, it does look like an important one-day reversal from near overbought levels given newfound evidence of fear in the markets. Follow-through will be key for the days ahead.
I’ll share last night’s comments again for those who might have missed. These were originally reported on Tuesday evening, 9/26/23.
The possible good news for Market bulls is that relief might be just around the corner for the following reasons:
- DeMark related exhaustion could possibly materialize for SPY and QQQ by end of week, while SMH might also show similar signals.
- Daily and weekly charts of TNX along with DXY are also very close to signaling exhaustion on multiple timeframes, which is present now but not confirmed on weekly charts of TNX and DXY.
- Technology has actually held up far better than other sectors, and is the second best (Least worst) of any of the 11 major sector ETF’s on an Equal-weighted basis over the past week and month, while third best over the last three-month basis.
- RSI has officially reached the lowest levels of the year on daily SPX charts
- a) Formerly neutral sentiment is now turning bearish. CNN’s Fear and Greed index has registered a 27 reading out of 100, which puts this firmly in the “fear” category, and very close to “extreme fear” which would involve a drop under 25.
- b) VIX was up more than 12% on Tuesday, reaching the highest levels since May.
- Seasonality in recent history tends to be kind to markets which experience a negative September. The last three Septembers which have all shown negative performance worse than 3.50% for the month all rebounded to close out 4Q higher by more than 7%.
- 80-day trading day cycle bottoms in early October and rallies throughout the month.
- SPX is approaching its rising 200-day moving average (m.a.) which lines up with the uptrend from last October along with February 2023 peaks (now possibly support)
- The points lost and time of this most recent downturn from early September is now roughly equal to the decline from late July.
- Defensive sectors still haven’t shown much strength. Technology is outperforming REITS, Consumer Staples and Utilities over the past week along with over the past 3 months. (Utilities has been relatively stronger than Tech over the past month)
NYSE Advance/Decline line breakdown needs to be recouped to have confidence of larger rally
Along with SPX, DJIA, and QQQ recapturing prior lows, it’s necessary for some of the breadth erosion to improve to have confidence of a rally.
Below is the chart of the NYSE composite along with the NYSE Advance/Decline line. Just in the last 48 hours, the A/D line has violated an uptrend going back since last October.
While not a trading signal per se, it does warn of breadth getting worse. While Wednesday’s reversal looked important as a one-day affair, a weekly close back up above August lows will be more meaningful. In regards to the chart below, market bulls will need to see this former uptrend recouped to have better conviction about a market low being in place.
Utilities plunge under support echoing the woes of other Defensive sectors
Interestingly enough, most of the Defensive sectors just can’t “Catch a break”. The Utilities S&P SPDR Sector ETF, XLU pulled back sharply to close at the lowest levels in over two years.
XLU looks early to bottom given the technical formation having given way, and weakness looks possible down to the mid-$50’s before any sort of meaningful low arrives.
While a reversal in interest rates could eventually allow for XLU to rebound, a reversal in the Utilities ETF itself looks early, and downside follow-through is anticipated.
It remains important to the bullish market narrative in my view that defensive sectors just can’t seem to get much traction, despite a 6%+ decline in Equities off the July peaks. I suspect that these groups might weaken even further on evidence of a late September market bottom at a time when no one expects it.
Natural Gas looks to have broken out of its Triangle
This minor breakout in the generic contract of Natural Gas futures looks important technically, and very likely can start to lead Natural Gas (NG) higher throughout October.
These comments are a follow-up to discussion more than a week ago on NG, and cycles along with technical structure seem to suggest that Natural gas can move higher.
While WTI Crude oil looks to be closer to a possible near-term trading high, my thinking is that NG likely should strengthen in the weeks to come ahead of a late October peak.
Movement back above $3.00 should lead up to $3.40-$3.50 in the near-term. This move likely can provide some relative strength to stocks which correlate strongly with NG in the weeks to come.
