SPX and QQQ broke support on Wednesday, showing the largest Percentage declines since 2022. While I expect that SPX is nearing the next serious level of support, just above 5400, it’s going to be important to see US Equity indices stabilize this week and begin to turn back higher. Wednesday’s decline does not change the outlook of the probable push back to new highs into August. However, given that cycles (which were correct in forecasting a July peak) don’t bottom until early to mid-August, we’ll need to get more confidence that lows are in place before getting too aggressive on thinking support is imminent following a support violation to new monthly lows that closes near its lows of the day. Overall, I am expecting that DJIA, RSP, SPX are very close to support, and the wave structure for QQQ suggests this is also getting close. However, failure to recoup more than 62% of the prior drawdown would invite a bit more consolidation into early August before a move back to new highs gets underway. While the rally back to new highs was postponed a bit by Wednesday’s decline, I fail to see this as the start of a period of much greater weakness.
Unfortunately, the US Equity market rotation into Small, and Mid-cap Stocks arrived with a few unpleasant consequences, one of them being a larger than expected exodus out of Technology. While some consolidation was expected in Technology compared to the broader market, the extent to which many large-cap Technology stocks dominate SPX and QQQ has translated into a quick -3.5% decline in SPX since mid-July and even greater amount (-7.0+%) out of QQQ -0.17% since mid-July.
Does this mean the rally’s over for US Stocks, and it’s time to worry about a larger correction? Fortunately, I feel the answer here is No, given a few key reasons:
- US indices remain above intermediate-term uptrends, so structurally, SPX, QQQ, DJIA, IWM all remain in good technical shape
- Technology maintains excellent technical structure, and its recent consolidation relative to the broader market has erased most of the recent overbought conditions, making Tech a much more appealing risk/reward
- US Treasury yields and US Dollar have both been starting to roll back over given some of the mixed economic data. This should be a positive for Equities as August gets underway. There has been no meaningful break in the correlation between Treasuries and Equities.
- Broader breadth levels remain at healthy levels and rotation into Small, and Mid-cap stocks has made the broader market much healthier, vs the prior Tech-dominated rally. Thus in the last couple weeks, breadth has improved, not deteriorated.
- Sentiment is not nearly as enthusiastically bullish to suggest a larger market peak
- Seasonality argues for strength in August, which has proven to be far stronger in Election years than in a regular four-year cycle when August is normally one of the weaker months.
- My SPX cycle composite suggests a bottom in early August followed by a push higher into early September ahead of a possible two-month setback. Thus, the larger selloff likely did not start just yet, but could get underway in about four-to-six weeks.
Initially, it’s right to take a close look at Wednesday’s break of support, which violated early July lows, showed a huge high to low range, and finished near the lows of the session. That’s not normally the recipe for an attractive trading low.
If this most recent decline from 7/23 peaks equals the first decline from 7/10, such a move would likely reach 5413, just above SPX-5400.
As of Wednesday’s close, this level is just 15 SPX points under current levels.
Additionally, the Equal-weighted SPX (not shown) has corrected back to test the pivot of its former breakout, and these areas normally represent attractive support.
Overall, I’m skeptical that SPX breaks 5400 right away, and should be closing in on at least a temporary trading low sometime between Thursday 7/25 and next Monday 7/29. However, a strong counter-trend bounce will need to get underway to erase some of the negative momentum caused by Wednesday’s decline.
S&P 500
When viewing this selloff on a daily chart, one can see that SPX is closing in on Ichimoku support, which I feel should help prices stabilize and then start to push back higher.
To the “market bulls” credit, the structure in SPX, DJIA and RSP, not to mention, IWM all look to have produced minor three-wave declines that are closing in on support.
Thus, it’s hard at this time to extrapolate that a larger 10%+ selloff is getting underway. I expect that SPX likely bottoms above 5400 by end of week.
S&P 500
QQQ looks to be forming a five-wave decline
One possible cautionary tale, however, is evident when examining the hourly wave structure for QQQ.
As can be seen above, this looks clearly like an Elliott-style “five-wave” decline. If this is true, then it will be difficult to simply push back to new highs right away. Elliott practitioners know that five-wave moves usually indicate that bounces are near. However, these patterns normally play out as a bounce that leads to yet another five-wave decline, which would line up for a pullback into early to mid-August.
Thus, while I do suspect that the end of this move from mid-July is growing quite close, and should be in place by sometime this week, I can’t yet say with confidence that a move back to new highs should happen in QQQ.
Ideally, when the prior lows from 7/19 can be recouped (which lie at 473.94) one can estimate that a rally to 50-61.8% of this entire recent decline might be getting underway.
If QQQ has bottomed today, then a rally back to between $484-$489 might be likely ahead of yet another decline down to near $450. This latter level has significance near the bottom of the daily Ichimoku cloud (not shown below) along with lying just above a 61.8% Fibonacci retracement of the advance from April to July. $450-$451 also intersects the larger intermediate-term trendline projected up from last October’s lows.
At current levels, the 50% retracement is also quite important, which lies just under current levels near 458.70 (QQQ closed on 7/24 at 463.58)
Overall, prices look to be nearing a level where they bounce. However, market bulls will need to see a move back over a 61.8% retracement to have more confidence that a rally back to new highs should happen immediately into August without any more consolidation. Following this recent 7% decline from mid-July, that’s difficult to state just now without much proof.
It very well could be possible that SPX, and RSP push back to new highs for 2024, while QQQ shows negative divergence and does not achieve this move. This will be something to watch in the weeks to come which would give a clear signal that potential volatility awaits heading into September.
Invesco QQQ Trust
2-Year Yields plummet to new 2024 lows following Dudley’s comments
Two-year Yields fell to the lowest levels since February following former NY Fed President Bill Dudley’s arguments that a July Fed Rate cut is justified.
While the market-implied odds of a July cut remains close to zero, the overnight index swaps have reached levels seen back on 7/15, when economists at Goldman Sachs (where Dudley worked before he joined NY FOMC) argued that they saw a “solid rationale” for rate cuts.
Technically speaking, I expect US 2-Year Note yields to trend down to test 4.12% from their current 4.433%.
US Government Bonds 2 YR Yield
Tesla breaking early July lows should put $203-$208 on the radar
TSLA 2.81% broke its July lows which has taken it down to just above meaningful support- I had mentioned in Herbert Ong’s TSLA YouTube interview last week that $208 was the next target under $222-5 and you can see this marks a 61.8% Fibonacci retracement of the rally from June lows.
Additionally, the area from $203-5 would represent an area where the latest leg of the decline from 7/23, yesterday’s peaks would reach 1.618x the initial leg down from 7/11. Furthermore, this also represents a 50% retracement of the entire rally up from April. Thus, at fractionally lower levels, there are ample levels of technical support for TSLA, and it looks like a very good risk/reward on this decline given the 10/10 announcement being just about 2 months away.
Moreover, I suspect this pullback from 7/11 is simply an ABC-type Elliott-wave decline and TSLA will remain within my technical UPTICKS list. Furthermore, I sense that the stock is drawing very close to important technical support on this post-earnings decline. My YouTube video link with my interview with Herbert Ong on “Brighter with Herbert” is found below, which might provide some context on the short-term consolidation at work.
The period between 27:30 min into 29 min interval discusses Tesla weakness and where this might be able to stabilize at downside support
LINK: https://youtu.be/6NIcB4N6CYw?si=TY9YE8pQeL5o7xGW
Tesla Inc.
