A BEARISH ABC COUNT FOR THE S&P 500 -- DEFINING THE CURRENT DOWNSWING -- DEFENSIVE SECTORS SHOW RELATIVE STRENGTH -- HEALTHCARE, UTILITIES AND CONSUMER STAPLES EDGE HIGHER -- FINANCE SECTOR CONTINUES TO LEAD LOWER
A BEARISH ABC COUNT FOR THE S&P 500 ... Link for todays video. It is time to open Pandoras box with some Elliott Wave analysis of the S&P 500. To smooth the data and filter out the noise, I am using a 5-day exponential moving average for analysis. My last Elliott Wave interpretation was in the July 16th Market Message, which featured two scenarios. Both called for a summer rally above 1100. The first scenario was a bullish 5 wave count. The second was a bearish ABC correction. Chart 1 shows the first interpretation with a five wave count. At the time (mid July), Wave 4 was ending and Wave 5 was beginning. This bullish count was looking good when S&P 500 closed above 1120 at the end of July, but the index abruptly changed course in August. SPX failed to hold above 1100 and momentum turned bearish as the Percentage Price Oscillator (PPO) moved back into negative territory.
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Chart 1
With the August decline, it is time to consider the bearish alternative on chart 2. I was suspect of a fifth wave in mid July and proposed the ABC correction as the alternative bearish scenario. This scenario involved a move above the June high as a sort of bull trap for Wave B. With the decline over the last few weeks, it looks like Wave C is underway with a downside target around 900-950. Two measurements point to this target zone. First, a 50-62% retracement of the entire advance would extend to this area. Second, Wave A was 100 points and Wave C can be equal to Wave A, which was around 180 points. With Wave C starting near 1125, a 180 point decline would target a move to around 945.
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Chart 2
CURRENT DOWN SWING DEFINES BEARISH BIAS... Accepting the bearish ABC correction as the correct Elliott Wave interpretation is dependent on the August breakdown. Chart 3 shows the S&P 500 surging in July and meeting resistance around 1120-1130. This zone stems from the July high and the 50-62% retracement zone. A 50-62% retracement is typical for a counter trend rally or Wave B of an ABC pattern. After stalling around 1120 for six days, the index broke support with a sharp decline in mid August. This support break held with further weakness last week. Also notice that MACD moved below its signal line and into negative territory. Right now the tea leaves are aligned in favor of the bears.
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Chart 3
What would it take to prove this bearish stance otherwise (wrong)? As noted above, the August breakdown negated the bullish five wave scenario. Despite this breakdown, chart 4 shows a potentially bullish setup that warrants our attention. First, notice that the decline over the last two weeks retraced 50-62% of the prior advance. Second, there is support around 1060 from the mid July low. Third, the Commodity Channel Index (CCI) moved to oversold levels. A falling wedge is taking shape, but the wedge is still falling. The index established resistance at 1100 with a reaction high last week. 1100 also marked resistance in mid July (red arrow). At this stage, a move above 1100 with good breadth is needed for a reassessment of the bearish stance. A number of key indices and broad market ETFs established important resistance with last weeks reaction highs. We should also be watching these for confirming breakouts.
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Chart 4
DEFENSIVE SECTORS SHOW RELATIVE STRENGTH ... August has been a tough month for stocks, but the defensive sectors have held up the best. Perfchart 5 shows the nine sector SPDRs and the S&P 500 since July 29th. The S&P 500 and eight sectors are down with finance, industrials, energy and technology leading the way lower. Healthcare is the only sector to show a gain (+.74%) since late July. Utilities and consumer staples, the other two defensive sectors, are holding up relatively well with losses less than 1%. A smaller loss than the S&P 500 means these two show relative strength. Relative strength in these three defensive sectors means the market is currently in risk-averse mode. John Murphy wrote about relative weakness in small-caps and the Nasdaq on Thursday. This also reflects a risk-averse environment that is negative for stocks overall.
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Chart 5
HEALTHCARE, UTILITIES AND CONSUMER STAPLES EDGE HIGHER... Stocks were largely lower on Monday, but the three defensive sectors ended the day with small gains. Once again money is moving from riskier sectors to safer sectors. Chart 6 shows the Healthcare SPDR (XLV) declining with the market in August, but the price relative is rising. Despite an August decline, XLV is still outperforming the S&P 500. The price relative rises when XLV is either up more than the S&P 500 or down less. On the price chart, XLV is near support from the early August gap and the July trendline. The ETF remains in a downtrend over the last two weeks with resistance from last weeks high. Chart 7 shows the Consumer Staples SPDR (XLP) edging lower over the last four weeks. The price relative flattened since early July, but the overall trend remains up since late April. Chart 8 shows the Utilities SPDR (XLU) consolidating above its May-June highs. XLU is the strong of all sectors because it is the only one above its May-June highs. The price relative confirms relative strength with a steady rise.
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Chart 6
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Chart 7
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Chart 8
FINANCE SECTOR CONTINUES TO LEAD LOWER... Relative weakness in the finance sector and regional banks remains one of the biggest negatives right now. The PerfChart above showed the Financials SPDR (XLF) as the worst performer in August. This weakness can also be seen on the price chart. Chart 9 shows XLF breaking below its mid July low. The S&P 500 remains above this corresponding low. The indicator window shows the price relative moving to new lows over the last two weeks. XLF has been underperforming the S&P 500 since mid August. Moreover, relative weakness increased in August as the price relative moved consistently lower the last three weeks. Chart 10 shows the Regional Bank SPDR (KRE) breaking below its July lows over the last two weeks. This is one of the weakest industry groups of all.
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Chart 9
