The S&P500 ($SPX) managed to hit another all time high on Tuesday, then fell back to and closed at the 50-day moving average. The index sits just above a trendline from the early October lows, and ~6% above the 200 day moving average.
2022-01-09-SPX Trendline Analysis - Daily
The drop caused the ADX to turn bearish, with the directional indicators crossing over on Friday. The price/volume signal remains bullish, but will shift to mixed if the 50-day doesn't provide support next week. The number of distribution days remains low, but that could also change if institutional selling continues.
2022-01-09-SPX Elliott Wave Analysis - Daily - Primary 1
Elliott Wave still shows an uptrend in place, despite last week’s sell off. Price waves are more pronounced, thanks to the increase in volatility, but the structures are more complex and make wave counting harder.
The SPX fell below the Wave [i] peak. If that wave is correct, then a) the all time high wasn't the peak of Wave [iii], and b) Wave [iv] isn't the current wave. It's possible that Wave [iii] is subdividing (shown as Wave (i) and Wave (ii) in the chart above). For this count to remain valid, the SPX can't sink below the Wave [ii] low near 4525.
Unfortunately, there are negative divergences in both the RSI and MACD, which could be signaling a larger decline is underway. If that's the case, it's possible that the SPX is still in a less common type of Minor 2 wave (currently shown ending in early December). This count becomes valid if the SPX sinks below 4525.
Last week's sell-off came courtesy of the U.S. Fed, which released minutes from the December meeting on Wednesday. Contained within was not only discussion of accelerated tapering, but also balance sheet adjustments AND a greater number of rate hikes in 2022. These policies lower liquidity in the bond market and raise interest rates on debt. Each of them can be a drag on companies looking to finance future growth...let alone when you combine all three.
Friday's release of the December unemployment report didn't provide much support for the Fed's hawkish stance. Job creation coming in lower than expected and wage inflation coming in higher than expected. Basically this means the economy, while healing from the pandemic, isn't healthy just yet.
Interest rates broke out ahead of the news (e.g. $TNX). Energy ($XLE) and finance ($XLF) sectors followed suite, while health care ($XLV), technology($XLK), consumer discretionary ($XLY), and real estate ($XLRE) tanked. If the Fed ends up toning down the rhetoric, expect some reversal here. They have zero good options to fight inflation right now.
In either case, the tech sector ($XLK) and consumer discretionary ($XLY) were already experiencing higher volatility, so it's likely that investors were already in the process of repositioning. Consumer staples ($XLP), industrials ($XLI), and utilities ($XLU) appeared to be the beneficiary so far, at least from an "equities" perspective. It definitely wasn't crypto (e.g. $BTCUSD).
Best To Your Week!
Charts provided courtesy of stockcharts.com.
Once a year, I review the market outlook signals as if they were a mechanical trading system, while pointing out issues and making adjustments. The goal is to give you to give you an example of how to analyze and continuously improve your own systems.
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