Stock Market Outlook entering the Week of May 29th = Downtrend
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- ADX Directional Indicators: Downtrend
- Price & Volume Action: Mixed
- Elliott Wave Analysis: Mixed
ANALYSIS
The stock market outlook shows a downtrend is still in place, despite the bear market rally.
The S&P500 ($SPX) jumped 6.6% last week, erasing almost a third of its total loss for the year. The index now sits ~13% off it’s high for the year, 7% below the 200-day moving average and only 3% below the 50-day. It closed in a critical zone, in terms of support and resistance, with the start of the March rally (support) creating a solid resistance level.
SPX Price & Volume Chart for the Week of May 29 2022
The ADX signal remains in downtrend, but could flip if we see a more up days this week.
The S&P 500 showed a small amount of accumulation last week, so the price & volume signal shifts to mixed. The index picked up a follow-through day on Thursday, four days after the May 20th bounce, which is the earliest possible confirmation of a rally. That said, it’s a weak set-up based on below average trading volume and remaining below the 50-day. A high volume follow-through this week would be a better signal.
SPX Elliott Wave Analysis for the Week of May 29 2022
Elliott Wave also shifts to mixed, and gets a new count/wave structure to go along with it (more analysis below, per the usual for the past few weeks).
COMMENTARY
A short week on tap; U.S. markets are closed Monday in observance of Memorial Day.
You’ve heard a lot of commentary about whether or not we’re in a bear market. Historically, a bear market begins after falling 20% a peak. But really that’s an arbitrary number; a talking point.
Does something radically change in your process when a market is down 20% vs 19%? What about when the Nasdaq is down more than 20% but the S&P500 isn’t? I’m guessing that’s a negative in both cases.
What does impact your process? Data. Like the VIX remaining above 20 during the March rally. Down 20% or not, that’s bear market territory and requires changes.
Speaking of data, what about consumer spending, credit card balances, or savings rates? After downbeat forecasts from Target and Walmart, many talking heads are seizing the relatively upbeat reports from Macy’s, Nordstrom, and Ralph Lauren as a sign the consumer is still strong, along with spending levels and “high” savings rates. Unfortunately, the difference between the two types of retailers is actually a sign of weakness.
Target and Walmart serve consumers in lower-income brackets, and their reports show a change in spending behavior likely caused by high inflation. Their customers are also the ones that began tapping credit card balances (with ridiculously high interest rates) to maintain their spending when inflation first began to pick up.
Nordstrom and Ralph Lauren cater to higher-income brackets; the last consumers to feel the sting of inflation and change their spending habits. Their customers have the highest savings rates, which allows them to maintain spending in spite of higher inflation.
Best To Your Week!
P.S. Based on the analysis shared last week, I updated the waves to show Cycle I ending at the beginning of the year.
SPX Elliott Wave Analysis for the Week of May 29 2022
Something about the wave structure of Intermediate (1) has seemed wrong from the start, especially when zooming out to the weekly view (like we’ve been doing the past few weeks). Maybe it’s just the symmetry of the whole thing, who knows. The pattern that kept popping out to me was 3 waves down, then 3 waves up, then 5 waves down. After last weeks bounce, it made even more sense.
SPX Elliott Wave Analysis for the Week of May 29 2022
That’s actually another type of corrective pattern, called a “flat” (verses a zigzag). In this case, it looks like an irregular or expanded flat. It looks like a much better match to the price action and technical indicators.
SPX Elliott Wave Analysis for the Week of May 29 2022
All good right? Not quite. Thanks to last week’s rally, this new flat pattern is already complete, implying the whole downtrend is over. That’s wishful thinking, since the Fed’s quantitative tightening program hasn’t even started yet. Given the current economic backdrop, a longer-term correction is likely, and a flat pattern enables this type of extended move, called a “double-three” (or even triple if it comes to that).
Double Three Corrective Pattern
Laying in those patterns on the weekly view provides more likely alternatives for the overall bear market.
SPX Elliott Wave Analysis for the Week of May 29 2022
SPX Elliott Wave Analysis for the Week of May 29 2022
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