SPX and QQQ have shown greater than average weakness following the break of support this week. Interestingly enough, some minor stabilization and outperformance occurred Thursday in some of the formerly hardest hit sectors which might bring about some mean reversion higher into November. Trends, momentum and breadth remain bearish and pointed lower; However, sentiment likely will start to reflect more evidence of fear into end of month on this ongoing selloff. Overall, given widespread technical damage in many sectors it’s going to be important to see more evidence of a rolling over in both US Dollar and Treasury yields to have confidence of an imminent rebound.
A couple of interesting developments happened Thursday, as better than expected GDP data failed to lead rates higher. Whether or not US Yields were simply following European yields given ECB’s pause or paying attention to Core PCE data, this brought about a further uncoupling of recent correlation trends between SPX and Treasuries and seems important.
Meanwhile, some faint but important signs of markets selling off on lesser intensity happened on Thursday, which might not have been immediately recognizable to those who are watching end-of-day results only from SPX and QQQ. However, nearly half the sectors were positive on Thursday’s session and some interesting strength out of both Banks and also Small-caps that is worth paying attention to.
Overall, stock market selloffs can end in one of two ways: First, index declines can end on fear-based capitulation with a huge amount of volume in Down vs. Up stocks. Second, the decline can simply dry up and lesser selling occurs as the indices fall which causes breadth to start to gradually become “less bad” and improve. This latter development could be starting given the strength in some of the hardest hit areas.
Bottom line, despite how awful the major Stock indices appear (and Yes, intermediate-term support was violated earlier this week) prices are likely to find support potentially into end of month. This could be based on fear getting elevated. However, cyclically, it’s also important that markets have reached the three-month count from prior 7/27/23 peaks. (For those that know my work well, I emphasize the importance of paying attention when markets near a 90 or 180-day window of prior important highs or lows.) That happens tomorrow, Friday 10/27/23.
Bottom line, I suspect that SPX and QQQ likely find support near their respective 50% and 38.2% retracement levels of the prior advance from last October. This would pinpoint SPX-4053 and QQQ-337. While the degree of recent technical deterioration has begun to look more serious this week, this also doesn’t preclude markets bottoming during times when sentiment is getting more bearish and indices along with breadth are nearing oversold territory ahead of the end of the month ahead of next week’s FOMC meeting.
While markets don’t look to be there just yet, a low to this decline is growing closer, and might materialize between Friday and next week ahead of FOMC. Stay tuned.
SPX and QQQ counter-trend exhaustion signals show the potential for a market bottom initially next week
For the first time since July, SPX along with QQQ have the potential to signal TD Combo and TD Sequential “13 Countdown” exhaustion signals possibly within the next 3-5 trading days.
This looks important, as it lines up with the end of October ahead of FOMC as well as during a time when TNX and the US Dollar have started to wobble a bit.
While “buys” are not yet in place, this could happen as SPX nears the all-important 50% retracement level of its entire rally from last October into late July 2023. Interestingly enough, the 38.2% Fibonacci ratio in time of this prior rally will hit in mid-November and if markets are near these levels by mid-November, that time would take on significance also based on time-based factors.
Overall, I suspect that a low should be right around the corner. However, it’s difficult to say with certainty that SPX and QQQ are there. One should await these signals appearing and being confirmed. Additionally, this coinciding with evidence of Treasury yields peaking out more meaningfully would be even more important.
Small-caps look to be trying to bottom out vs. QQQ.
Interestingly enough the ratio of Small-cap Russell 2000 Ishares ETF (IWM) compared to the Equal-weighted S&P 500 (RSP) confirmed a DeMark based “13 Countdown” exhaustion signal on daily charts today, Thursday 10/26 and rose to multi-day highs.
This could arguably allow for Large-Cap Technology to finally show some weakness along with mean reversion after its big run-up earlier this year. Initial downtrend lines were broken and I suspect that this rally and Small-cap Outperformance would become even more pronounced on a breakout of the larger downtrend from August peaks.
Bottom line, most November-February periods start to show mean reversion where the laggards start to bounce and leaders underperform into a new year.
While it’s still premature to suggest that Small-caps should begin to show absolute strength (and this might take another 2-3 weeks) the degree of outperformance vs. QQQ on Thursday is interesting and makes me think that IWM should be overweighted in small size vs. QQQ with the intentions of getting more confident of a larger trend getting underway with the break of this larger downtrend.
Note, Banks also outperformed on Thursday, and I suspect this group should also be watched for evidence of strengthening at a time when many have abandoned this sub-sector for any potential for outperformance.
Monthly DeMark exhaustion is also now in place for IWM vs QQQ
-Monthly IWM vs QQQ ratio charts also show TD Buy Setups (a monthly exhaustion signal) which has occurred at prior lows (and conversely Sell Setups have occurred at highs)
This gives added confidence about Small-caps likely bottoming vs. QQQ.
WTI Crude Oil composite shows weakness into late November
Given the 8% decline in WTI Crude for October which has exceeded averages along with heading into another seasonally bearish month, it’s important to take stock of the cycles and what they might suggest for WTI Crude, and by extension, Energy.
My cycle composite focuses on late November for a potential bottom in WTI Crude. Given that Crude remains in a seasonally weak period, I anticipate that weakness to the mid-$70’s is possible for WTI Crude and that Energy likely underperforms over the next month.
However, technically this underperformance should prove short-lived and thereafter, a sharp rise into 2024 should get underway.
Bottom line, one should anticipate that weakness is possible for Energy, and that Crude’s recent weakness very well could extend for another month.
