Short-term trends have stalled out following several failed breakout attempts up against near-term resistance, which might result in some minor consolidation lower post FOMC. This would gel with bearish end of September seasonality trends following a test of an important resistance area. However, momentum and breadth remain quite positive, and technically it’s right to expect that weakness proves short-lived and SPX eventually will carry back higher into mid-October without much deterioration. Treasuries also appear to be peaking out, and yields could rise coinciding with a short-term pullback in Equities. Overall, without evidence of any serious technical damage, it’s difficult turning too negative on US equity markets. Most of the Triangle patterns for SPX, QQQ, IWM should all be resolved by a pushback to the upside to join the DJIA’s breakout following some minor consolidation.
Overall, I think it’s right to point out that FOMC “action” is different from “Expectation” and those who were scratching their heads post FOMC’s 50 b.p. cut need look no further than the press conference as to why a minor pullback might be beginning.
Chair Powell seemed to push back against some of the cuts already in the curve during the press conference. Moreover, the fact that the Equity market had already risen 26% ahead of the first cut in four years (and it turned out to be 50) Powell had to delicately “thread the needle” to explain the Fed’s view of why it was important to cut 50 b.p. if the economy was in good shape.
Bottom line, post FOMC, SPX managed to stall out right to the SPX-5689 secondary resistance target before giving way to fractional losses on the day. (Important price/time Gann-based resistance target) Bonds also responded negatively following an initial gain, and 10-year yields finished up 6 b.p. on the day (Bond investors might have been surprised that a 50 b.p. cut resulted in losses for the day)
As mentioned yesterday, it’s thought that SPX could only retrace 38.2% -50% of the recent 11-day rally before pushing back to new highs into mid-October.
Given Fibonacci retracement intersections on both the rally from August as well as early September, there are several areas that show some overlap which might prove important (and ultimately could prove higher probability areas of support)
Overall, 5545-60 looks like the first important zone of support, followed by 5513. Finally it’s thought that a maximum area of drawdown would take SPX to 5485, which represents a 180-degree area of support based on Gann Theory.
Thus, I do not expect a meaningful drawdown in late September, but I do feel that a minor pullback has begun as of Wednesday in both Equities and also Treasuries (yields should rise) Given the combination of momentum, breadth, lack of complacency and bearish late month seasonality for September in Election years, it’s possible to show some minor consolidation over the next week before another rally back to new highs for SPX, and QQQ.
S&P 500 Index
Treasuries likely to face selling pressure after Wednesday’s reversal
As discussed, the FOMC’s 50-b.p. rate cut itself was far different than the message. Powell’s pushback on the cuts which have currently been priced into the curve into next year suggests a more hawkish “data-dependent” view, and long rates immediately began turning higher post the Press conference.
In the short run, I expect bond yields to turn higher over the next week and could begin a minor correction after the huge decline in yields that has occurred in recent months.
As seen from the perspective of IShares 20-year Treasury Bond ETF, today’s selloff is a technical negative and should allow for downside follow-through in the days to come. (Thus, prices should fall, meaning Treasury yields should rise).
While the correlation in the Treasury market might eventually start to lessen from the extremes seen in recent months, I suspect that both Equities and Treasuries might fall into the end of the week. Thus, rates might rise and Equity indices might consolidate.
As shown on daily charts, the uptrend for TLT remains very much intact. Thus, a near-term pullback to 98 looks possible following its recent stalling out and trend reversal near prior December 2023 peaks.
Thereafter, any violation of late August lows near 96 would warn of much greater trend damage for TLT.
20+ Years Treas Bond Ishares
Treasury Yield cycle composites also show a reversal of trend happening and bond yields might rise
Interestingly enough, the same cycle composite I employed when studying bond yields this past Spring which warned of a peak in yields and a decline into September is now suggesting a bounce might be underway.
Given the rise in yields to multi-day highs along with exhaustion signals based on DeMark indicators suggesting possible peaks in TLT and lows in place for TNX, i feel like this cycle is starting to turn back higher in the short-run.
Thus, ironically, at a time when most feel the FOMC’s cuts should lead rates lower, this translates into merely short-term rates dropping. The long end of the curve which is sensitive to growth and inflation looks to be stabilizing in the near-term. Thus, a bull Steepener remains in effect on the 10’s-2’s curve (2s/10’s) and should lead this yield curve to continue to dis-invert (grow steeper and less flat)
However, into next year, this starts to turn back down again and weekly cycle composites remain bearish for US 10-Year Treasury yields into next Spring/Summer.
Thus, it’s important to combine both daily and weekly cycle composites for a more accurate view. At present, daily cycles look to be turning higher. Yet, weekly cycles remain pointed down. I’m inclined to favor a bounce in yields given Wednesday’s sharp reversal. However, yields will need to begin breaking resistance to have confidence of a larger rally. As said above, TLT might decline to 98, but a move under 96 is necessary for conviction on a larger decline.
For ^TNX 0.26% the US 10-Year Treasury index, the ability to get back over 3.93% would signal that a larger advance for 10-year yields could happen.
At present, I view this as a short-term bounce only, into October and potentially into the US Election barring evidence of further strengthening in yields that exceeds resistance.
Treasury Yield Cycle
Homebuilders might benefit from consolidation after stalling out in overbought territory post FOMC decision.
Homebuilders have recently broken out to new all-time highs, but appear to be up near resistance after this big run-up.
XHB 0.90% , the SPDR Series Trust Homebuilders ETF, managed to hit $124 and reverse course, which I feel is important as resistance in the near-term after a huge surge back to new highs.
While this sub-industry looks compelling to own on pullbacks, I feel that upside gains might prove limited in the near-term after this area delineated on daily charts by channel resistance, provided very strong resistance.
I’ll consider XHB quite appealing in the event that price can pull back to $117-$118. At present, the risk/reward looks poor for short-term investors and traders and consolidation would help to alleviate some of the near-term overbought conditions.
SPDR Series Trust – SPDR Homebuilders ETF
