The Monday meltdown finally showed some key elements of fear which suggests that this selloff could be nearing conclusion. While the SPX and QQQ’s 3% declines represented the largest moves since 2022, there still hasn’t been an equivalent move in the Equal-weighted indices, which look to be in much better shape. Additionally, USDJPY’s decline, which was thought by many to have been a key catalyst for this giant cross-asset decline, is rapidly approaching last December lows, which should provide some stability in the next couple days. Furthermore, Technology as a sector has now sold off to near this year’s lows and as Tom Lee has discussed, valuations look reasonable ahead of a time when FOMC could be set to cut rates as many as five times in the next four months. Overall, I sense that the decline from mid-July is nearing its end and a bounce should begin to get back underway this week, into mid-September.
Tuesday’s gains looked constructive given that breadth picked up quite a bit on this broad-based rise, and signaled greater than a 4/1 Advance/Decline along with a similar ratio of volume into Advancing vs. Declining issues.
To speak about this from a more granular level, all 11 sectors rose more than 1% on the day, and 5 sectors out of 11 rose more than 2%. That’s a pretty constructive bounce, directly following Monday’s huge 90% Down day and VIX spike.
While some backing and filling could be possible until prices can reclaim the area at 7/25 prior lows (5391 area), it’s right to expect a push back up into September following this big three-wave decline.
Movement above the first stated resistance (from Tuesday’s intra-day Flash Insights) of 5300 should help to drive price up to test 5390-5 area.
Additionally, it’s important to note that prices could have bottomed at an exact Fibonacci-based time ratio of the former “Low-to-Low” cycle from 10/27/23 into 4/19/24.
As daily charts show the 61.8% “Fib” ratio of this former low-to-low cycle hit on 8/5, while the 50% ratio of this same period managed to mark a peak back in mid-July.
If price continues to respect this prior low-to-low period, there could be a turning point around 10/11/24 which would represent a 100% time ratio of this former period, with additional areas of importance into next year hitting in early April, 2025. (For Further reference- The late George Lindsey frequently wrote about the importance of using prior lows to determine a peak, and discovered and authored books regarding the infamous “3 Peaks and a Domed House” pattern.)
Overall, I am bullish for a push back higher into mid-September. However this likely won’t be an interrupted advance, and another cycle method I use shows a prominent low happening between 8/15-8/19 which I expect to possibly be a higher low than this week.
Technically, I don’t feel that it’s right to be bearish, despite the violent selloff over the last couple weeks. The reasons are as follows: (Repeating from yesterday’s report)
–While Technology has sold off sharply, it’s now nearing former lows from 2024 while the broader market has shown minimal true evidence of deterioration.
-USDJPY now seems to be nearing strong support and could stabilize near 140 and bounce.
-Finally, some evidence of volume dispersion was witnessed as more than 90% of volume fell into Declining stocks and produced just our second “90% Down Day” of 2024.
-Elliott-wave structure still shows the move from mid-July as being part of an ABC corrective structure, and any decline under 5119 into Tuesday should bring about a low at levels above the prior bottom from mid-April 2024.
-Sentiment polls such as “Fear and Greed” have now moved into “Extreme Fear” territory while the VIX pushed above 60 briefly on Monday with the VIX curve showing sharp backwardation.
-Last week brought about a move back to new all-time highs for SPDR Select Healthcare ETF (XLV 0.76% ) while Invesco’s Equal-weighted Financials, and Industrials ETF’s (RYF, and RGI, respectively) both moved to new highs one week prior. Thus, despite the “Tech Wreck” a number of sectors had been acting quite well prior to Monday’s drop.
-Weekly charts of MSFT 2.43% , AAPL 1.70% , AMZN 1.92% , META 2.90% , NVDA 5.12% , and GOOGL 1.68% have not shown much intermediate-term technical deterioration.
-Cycle Composite of SPX shows this selloff to be likely completed by 8/19 at the latest ahead of a sharp rally back to highs into mid-September.
-Seasonality shows strong August performance in Election years, and normally in 2H following a strong first half. Our current August performance shows -6% returns over the first three days of August. I expect the back half of August to prove much more positive.
NIKKEI looks to have bottomed where it needed to
Monday’s 12% decline in NIKKEI 225 (NKY) capped off a difficult 3.5 week stretch where NKY lost over 20% off its highs.
As many investors are aware, NKY made a new monthly all-time high close back in March before largely consolidating gains in recent months.
However, at current levels it remains difficult to expect that this recent weakness has caused too much technical damage for the following reasons:
-Price has held uptrend lines from 2020 as well as longer-term uptrends on logarithmic charts
-Price regained 10% on Tuesday following Monday’s 12% loss, forming an “Inside Day” which often can be helpful towards reversing a downtrend.
-NKY declined to an area that largely had marked multi-year consolidation support from the start of this consolidation back in February 2021 until November 2023.
While momentum certainly has suffered given the severity of the recent drawdown, I expect a quick rally back up to test April 2024 prior lows at 36,733.
Any move back over this level would argue for even further gains into the Fall before possible consolidation.
The one question it’s right to ask is whether this correction is completely done from a Wave structure perspective, or whether this “ABC” corrective pattern will make a small bounce only before morphing into another “ABC” pattern (when viewed using Elliott-wave analysis).
At present, it’s tough to know that answer right away. However, given that the USDJPY is very close to meaningful support and NKY has begun to turn back higher, I view this sudden recovery as being constructive and more bullish than bearish.
Natural gas could be set to bottom and turn higher into October
Following a very steep ‘about-face” of the rally into June highs (which looks to have convincingly formed a “Double Top” ), Natural Gas now looks positioned to be potentially making a low and could rally in the months to come.
Price has fallen down to undercut February lows in September Natural Gas, while the generic contract remains above the bottom that was formed between February and April of this year.
UNG 1.68% (US Natural gas fund LP), which I’m discussing as a vehicle for Natural Gas delivered to Henry Hub, Louisiana, has finally begun to show evidence of downside exhaustion after a steep slide over the last couple months.
At current prices of $13.32 as of Tuesday’s close, UNG has an unconfirmed daily and weekly DeMark exhaustion signal, and has shown some minor evidence of trying to stabilize.
I expect that any weekly close back above $14.29 would be very bullish for UNG, driving this up to $17.50-$18 before this stalls out.
Furthermore, just the ability to regain prior lows from April 2024 at $13.87 would make this attractive technically speaking, and I feel that UNG is appealing from a risk/reward perspective at current levels.
Natural gas cycles turn up for two months into mid-October
Interestingly enough, the weekly Natural Gas cycles show a strong upward bias into mid-October 2024 before turning down into 2025.
Thus, I expect that prices likely could bottom out and confirm the recent DeMark signals and rise into October, which could make Natural Gas and/or UNG an attractive entry at current levels.
Thereafter, I expect that cycles might exert some downward pressure on UNG and potentially begin a topping process.
The cycles for early 2025 look quite bearish for UNG, so I expect that the window for any Natural Gas rise could prove to be two months at a maximum. I’ll keep a close eye on UNG and discuss in the weeks to come. However, this looks appealing to me at current levels.
