Near-term and intermediate-term technical trends remain bullish for US Equities, but momentum has now grown quite stretched heading into this week’s FOMC meeting. The combination of overbought conditions coupled with a near completion of DeMark-based exhaustion signals points to a possible stalling out post this week’s likely Fed rate cut (as shown by Fed Fund futures). While the intermediate-term trends and momentum remain bullish, I don’t find the near-term risk/reward appealing this week with SPX over 6600. Market breadth has declined in the short run (last two weeks), and I suspect that some minor consolidation could prove likely starting mid-week. Given how stretched SPX has become lately, I feel that any daily close under the 5-day rising moving average (SPX-6566) likely could coincide with 3-5 days of weakness. At present, DXY and Treasury yields remain downward sloping, precious and industrial metals remain in short-term uptrends, along with Cryptocurrencies. Global developed market and Emerging market Equities remain in bullish uptrends.
My thoughts are literally unchanged from last night, and I feel that US Equities are a poor short-term risk/reward with ^SPX above 6600 and QQQ 0.95% above 590.
As shown below, QQQ 0.95% has now signaled a daily “8 count” (out of a possible 9) of the TD Sell Setup count following the TD Sequential and TD Combo (13 Countdown) exhaustion signals since the beginning of September. Any daily close on Wednesday 9/17 above 584.06 would successfully mark a completed TD Sell Setup and could result in minor consolidation to this rally over the next 3-5 trading days.
In plain English, there are exhaustion signals in place following today’s close across multiple intra-day timeframes which could coincide with a mild selloff in the days to come.
A pullback down to test or break 580 by a small margin wouldn’t surprise me into next week, and I feel that upside should be capped at 600 in the short run.
Nasdaq QQQ Invesco ETF
The comments below are being repeated from last night’s report for emphasis, but with an update to point #2.
Overall, my short-term ^SPX and QQQ 0.95% concerns have to do with the following:
- Near-term overbought conditions– 2-hour charts show RSI (Relative Strength Index) having reached levels which coincided with pullbacks this year on most occasions (8/13, 7/28, 5/16, 1/23, and 2/19) while daily RSI is now approaching 70.
- DeMark-related exhaustion is now showing intra-day exhaustion based on TD Sequential and/or TD Combo on both SPY 0.77% and QQQ 0.95% charts. Furthermore, QQQ 0.95% now shows a TD Sell Setup 8 count, which is sufficient to mark a short-term peak for this week. However, given the lack of weekly exhaustion in place, I’m skeptical that any mild setback this week will prove all that important.
- Market breadth has waned in the last two weeks and generally has been lower since July of this year. While a pick-up in breadth did occur from early August into late August, that has since waned in the last week. (Note, despite today’s +0.47% ^SPX gain, seven out of 11 sectors were lower on the day (based on the 11 Equal-weighted ETFs that make up ^SPX.)
- $SPX rally from 9/2 has nearly exactly equaled the rally which began around this same time in August (8/1-8/15) This recent leg higher from 9/2 would be equal in points gained to the rally from 8/1 at around 6630 in ^SPX.
Any break of ^SPX-6566 (5-day rising moving average) could allow for a 38-50% retracement of the rally from early September (+255 ^SPX points since 9/2 lows, or around +4% gains since early September during a historically very weak stretch seasonally speaking).
Thus, a break this week of 6566 should lead either to 6527 or 6495 before stabilizing and then pushing back sharply higher into October. Given the comeback in Technology and ongoing poor sentiment levels on both a retail and institutional basis, it’s hard to put much stock in a meaningful selloff just yet.
Traders are pricing in between 65-70 bps of rate cuts between now and the end of the year
One quick glance at what Fed Fund futures are now pricing in for rate cuts this year shows that there remain at least two rate cuts now being priced into the market between now and year-end.
The odds decreased a bit following today’s stellar Retail sales numbers. However, the path looks fairly clear at this point, and there are now 121 basis points (bps.) of cuts priced in through next June.
50 basis point cut might come as a surprise to markets, as the implied rate probability shows a 105% chance of a 25 bp. cut.
Thus, while traders have been upping their bets for 50 bps. it looks like this might prove to be a surprise for US Markets and might be unlikely following today’s strong Retail Sales data.
US Dollar breakdown hits its lowest levels since July
The Dollar suffered a very big breakdown today, despite economic data coming in better than anticipated ahead of this week’s Federal Reserve announcement tomorrow.
The combination of weaker US Economic data in recent weeks, coupled with the Fed Rate cuts likely becoming a reality as of tomorrow, along with the Administration’s preference for a weaker “greenback” to enhance manufacturing competitiveness, has all been serving to put pressure on the Dollar, and this looks to continue in the short run into October before the start of a multi-month bounce.
While this likely could prove short-lived given Europe’s debt crisis and below-average growth, it should help to drive the EURUSD up to 1.21 in the short run.
DXY, meanwhile, could experience technical weakness down to 94 before stabilizing and starting to turn back higher next month.
For now, a weak US Dollar should help to bolster Emerging markets and commodities, and along with falling US Treasury yields, it should still be beneficial to risk assets over the next month.
U.S Dollar Index
Alibaba’s breakout likely helps this rise to $188 in the near-term
Given the pressure on the US Dollar, it’s right to look to Emerging markets and to Chinese Equities in particular, given the recent strength.
BABA 0.38% has surpassed resistance written up in last month’s UPTICKS, and I am raising resistance to 188, then $219 while raising support to $140, then $130.
This high-volume breakout which is happening as the US Dollar has pulled back lately is quite positive for Chinese Equities, and BABA 0.38% has reached the highest levels since late 2021, despite still being down nearly 50% off its all-time highs.
I’m bullish on further progress for BABA 0.38% over the next month as the US Dollar likely pulls back further, and I anticipate that BABA 0.38% likely could reach the first target near $188, which is a 50% retracement of the whole decline and quite important. However, momentum is growing more positive, and I expect a further path higher for this stock into mid-October.
Alibaba Group Holdings Ltd.
