U.S. Equities Trading Outlook: Weakness Into Next Week

Mark Newton
s&p 500 index decline bear market reversal price targets analysis investing image may 15

Our Pullback tested May lows and has bounced.

I expect a decline on Friday, but largely some churning over next 2-3 trading days with max lift to 2889 before selloff down to break 2766 which warns of a “final” move lower to likely 2635-75.

The larger trend will remain bearish under 2889 and right to sell rallies.

Looking at Thursday’s action, our ongoing selloff this week did hardly much damage thus far, barely undercutting May lows before rallying back sharply to close positive.

The NASDAQ has been much stronger, holding well above its May low. This is something to watch carefully.

Interestingly enough, the rally off the lows was a clear 5-wave bounce. Thus, from an Elliott perspective, this likely does NOT complete the bounce. However, after a 5-wave move there can be a reaction, which might happen lower Friday before a final bounce attempt, which technically I don’t expect should get back above 2889 before turning lower.

In plain English, the decline from earlier this week is ongoing, but expect some choppiness in the trading days ahead which ultimately should break 2766 down to the mid-2600s without getting back above 2889 which would change the picture. Thus, sell into rallies.

Broad Market Commentary:

The Bottom line: The trend will remain bearish until/unless 2889 is exceeded, the area which was violated on Tuesday to turn the trend negative.

The S&P 500 and other stock market indices found support Thursday after an early decline largely lacked a lot of downside momentum, and early -2/1 breadth was far better (less intense) than what had been seen on Tuesday/Wednesday.

The S&P 500 managed to find support right near early May lows while NASDAQ held at much higher levels. Thus, while many ETFs like XLF, XLI, XLB XLK had broken support and fallen for two days into Thursday, markets put in temporary lows and rallied throughout most of the session. 

The pattern on the rally looked to be five waves higher, which gives us two clues: 1) This likely will turn out to be a 3-wave counter-trend bounce that started Thursday morning BEFORE markets turn back down for a decline to break 2776, Thursday’s lows on their way to near 2650. 2) Any advance at this point that breaks back above 2889 would go a long ways towards suggesting that our mini-correctoin had run its course and could actually start to churn higher towards 3020-30.

Overall, Yields remain compressed, and all eyes are on 5/8 lows near .60 bps which can’t afford to be breached without causing equities to likely join suit and pullback. Sector-wise though, Technology and Communication services, despite their minor weakness over last few days, are still not weakening meaningfully that gives rise to a larger concern about our current pullback developing into anything more intense. Until this changes, it’s wise to think of this as a short-term pullback from early week highs only.

What’s changed concerns the move in Precious metals which look a lot more positive as a result of Thursday’s gains, and will be discussed in more detail below.

Key points:

1) This remains a bear market bounce, NOT the start of a new bull market.

2) Any stalling out in early/mid-May that backtracks likely will NOT reach new lows right away given the extent of our rally.

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Author has positions in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.