SPX: BREAKING OUT OR BREAKING DOWN?MACRO FACTORS: Given the recent CPI print coming in over 9 in conjunction with a labor market that refuses to slacken, there is little reason to believe that a FED pivot is anywhere on the horizon. It can seem perplexing as to why the FED would continue to hike rates when it doesn't seem to be having the intended deflationary effects at the economic level, but when we consider the amount of fixed rate debt that currently exists in the marketplace and how delayed that latent impact can be on consumers, it’s easier to understand how modifications to base effects can take 3 or 4 quarters before tangibly emerging onto main street.
The above chart is illustrative of a strong labor market and is currently one of the largest impediments towards the Fed’s inflation taming efforts. The top box (JTSJOL) shows the Total Non-Farm Job Openings just beginning to roll over, but not yet below its moving average (green line). We see this as more likely a result of job offers being rescinded than it is of jobs being filled and a potential indication of companies downsizing or reducing the rate of hiring in anticipation of slowed growth expectations over the next few quarters.
The second box (JTSQUR) shows the Total Non-farm Quits. The quits are indicative of job insecurity levels amongst workers. When workers are feeling confident in their ability to get another job, they are more inclined to quit their current job to “trade up”. When workers perceive a negative, future, economic outlook, increased fear of company downsizing can begin to set in. This results in an increased probability of workers feeling less confident about their prospects in the jobs market, which eventually emerges in the Quits rate beginning to trend down. Quits has begun to roll over, but just like the Job Openings, it has yet to cross over its moving average (green line above), indicating it might have some more downside wood to chop in order to properly insatiate Chairman Powell.
SPX 1D: Moving into our S&P500 index analysis, we see price moving into the upper 3rd standard deviation of its downward trending 100-day linear mean indicating the potential for a breakout or breakdown type of market inflection point over the next few days or weeks. The SPX broke YTD, highs on both the DMI and RSI indicators over the course of this week’s rally, giving further credence to the “lows are in” theory and bringing the long dormant bulls out of the closet after months of being driven into hibernation by the high-grading, bears.
Despite these bullish signals it is our opinion that this is nothing more than a "bear market rally/dead-cat bounce" off the recent floor and here's why:
DMI: Our DMI indicator is showing strong positive divergence from the +DI which hit YTD highs, but the ADX differential, which measures the strength of the price move by gauging its potential for impulsivity, is well below the significance level of 25 coming in at 17.4. This translates to significant upward price action with low volume conviction. In other words, a weak move.
VFI: Taking one look at our Volume Flow Index we see that while volume flows have come up over the moving average, flows are a long way from pressing up toward the zero line like they were during the March rally. Given the unlikeliness of the bulls closing the distance on the volume gap, we consider it unlikely that price will be able rise substantially further than it already has without significant volume inflows. Significant volume inflows can be hard for markets to procure in a liquidity tightening cycle such as the one we are in right now.
RSI: While our RSI is not quite at the overbought line of 70, it is the highest reading YTD on a 1 day time frame chart at 65.9, and is well into overbought (above 70) on longer intraday timeframes. Recent history on 4H and 1D times frames has shown price beginning to reject at these levels on the RSI and we don't see this time as being any different barring a pivot from the FED which seems equally unlikely at this point.
MULTI-TIME FRAME MACD: Taking a look at our MACD from a multi time frame perspective starting in the lower left hand corner and moving counter clockwise, we have 1DAY (lower left), 1WEEK (lower right) and 1MONTH (top) time frames.
Starting with our short term, 1 day (1D) time frame in the lower, left box we see we are in a substantial bullish trend with MACD and Signal illustrating strong spread divergence at the mouth. This indicates that there is enough price cushion in the short-term trend for MACD to remain positive even on a small pull back.
Moving to the lower-right box we have the 1-week (1W) time frame which is just beginning to roll over to the upside after printing two positive weeks of tape with the most recent being a YTD high on the MACD histogram which measures the breadth of signal divergence. This rally has been a violent move to the upside, which is commonplace in a liquidity starved market, sensitive to even the slightest upticks in volume inflows.
While the lower time frame MACD charts appear positive, it’s the 1-month MACD indicator, that is most troubling. This is the most significant drawdown on a 1-month MACD indicator in 22 years, including both the 2001 and 2008 financial crisis. While the steepness of the descent-angle is leveling off, the breadth of the divergence at the mouth is gaping. It does not appear that the 1-month MACD indicator is going to be crossing back positive anytime soon.
From a structural perspective we can see that the bulls have their work cut out for them if they want to turn the 100-day linear trend around. Due to the March 2022 high's still propping up the back end of the 100-day linear trend (See horizontal line labeled ‘MARCH RALLY’ above.), the bulls would need an impulsive move to the upside, past the +3SD line at 4217, up to the 4300 price region. At this point price would need to consolidate above the 4100 level for a few days in order to put enough pressure on the 100-day linear mean to begin shattering the trend. A significant breach of the lower EMA Envelope (green tab) at 3899 would substantially increase the probabilities of this recent rally coming to an end. Given the low volume flows, lack of ADX follow through on the DMI and an RSI approaching overbought on the 1day time frame, we see the shattering of the down-trending, 100-day, linear mean as an unlikely outcome over the course of the next week to 10 days.
Solid price architecture is built on strong volume flows that speak to market conviction around directional sentiment. We are not seeing that market conviction from our technical analysis. It is our position that SPX price action will reject at or around the 4217 line (+3SD) within the next week or so. At this point the SPX should begin to take its 5th and final leg of the Elliot Wave Cycle down to the 3652-3311 price range as illustrated on the chart directly above. Buckle up, be agile and stay liquid!
(NOT FINANCIAL ADVICE)
