The S&P500 ($SPX) fell 4.8% last week, succumbing to worse than expected inflation data and option expiration. The index fell from a prior trendline, the traditional technical pattern of retesting prior support/resistance.
2022-09-18-SPX Trendline Analysis - Daily
Thanks to Tuesday's big drop, the ADX directional indicators flipped back to bearish, as did price & volume. The index gaped down to the 50-day and kept going on higher trading volume, and followed that up with 2 more days of institutional selling Thursday and Friday.
Elliott Wave still shows the downtrend in progress. The chart below includes a few adjustments to wave labels, but still tracks the Double-Three corrective pattern. At this point, the SPX completed the initial "flat" segment in mid-June, and 3-waves up in mid-August qualifies for the next "any 3-wave pattern" segment.
Now comes the hard part, as any corrective pattern is possible is the Double-Three remains valid. The index could experience another "flat" pattern, a traditional "zigzag" pattern, or something else. In all cases, there's a very high probability the SPX falls below the June low.
2022-09-18- SPX Elliott Wave Analysis - Daily - Primary Y
August CPI data disappointed many market participants before the stock market opened on Tuesday. The CPI index rose 0.1% from July, while year-over-year data showed annual inflation fell slightly to +8.3%. Core CPI increased 0.6% from July, with the year-over-year reading at 6.3% (July's y-o-y figure was 5.9%).
August producer prices were a bit better, but not by much. Wednesday's release showed PPI dropped 0.1% month-over-month, while the year-over-year reading remained constant at 8.7%. Core PPI rose 0.2% m-o-m, with the y-o-y figure showing an increase of 5.6%.
Retail spending data came out Thursday, and continued to show a weakening consumer. And Friday's quadruple witching day didn't disappoint, in terms of volatility and trading volume.
I wasn't expecting CPI to have such a dramatic impact on the market, but it appears that investors and traders drank too much "peak inflation" kool-aid and had to readjust their hedges ahead of Friday's option expiration.
To be fair, I also thought we had seen a peak in inflation data. Most narratives over the past 3 months have said that inflation had peaked, the market had already accounted for all the rate hikes, the end is near for this Fed hiking cycle, buy the dip, etc.
But the bond market continues to signal more risk in the near term, peak inflation or not (i.e. it remains steeply inverted). And corporate earnings still have NOT priced in the impact of higher inflation (i.e. slowing retail spending). So the market sell-off itself wasn't so surprising.
This week, the U.S. Fed is set to hike interest rates again; Fed watchers expect another 0.75% increase. There's also a slew of housing data set to be released Monday through Wednesday, and it's likely adds to the case for an ongoing economic slowdown (despite inflation).
Best To Your Week!
P.S. If you find this research helpful, please tell a friend. If you don't, tell an enemy.
Sources: Bloomberg, CNBC, Hedgeye, U.S. Bureau of Labor Statistics
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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