The Elephant In The Room

In my post on Monday I stated that any move to retest the highs would require the participation of Tech and said I’d do a dedicated post yesterday to explain why that is very likely the case. That has slipped a few trading hours into this morning.

The chart below you’ve already seen if you read my post on Monday, and that is the SPX daily chart, showing a new all time high at the start of October, and then a bumpy retracement since then.

SPX daily chart:

The chart below is very different, on this chart there was a significant swing low at the start of October, and a strong uptrend for the rest of the month, with the index staying close to the daily upper band for most of the rest of the month and the latest high on this move yesterday.

The chart below is $SPXEW, the version of SPX that includes all the same companies, but with them all having equal weight rather than being weighted by market cap. The difference is stark, and that difference is the relatively modest in number but very heavily weighted Tech component in SPX.

According to quant500.com as of Monday there were 86 Tech companies in SPX, accounting for 36.2% of the index by market cap, though it seems likely that the weight in the index was in the 40% to 45% range before recent declines, given that QQQ is down over 10% since the ATH at the start of October, and SOX is down about 30% since the ATH in June.

Either way it seems that over 80% of SPX companies were in an overall strong uptrend since the start of October, but the downtrend in Tech was enough to drag the whole index into a significant downtrend for the month.

SPXEW daily chart:

DIA has a Tech component too, with six Tech companies out of the total of 30, weighted today at 18.6% of the index by market cap. That too made a significant low at the start of October and was in a strong uptrend over most of October, but was dragged down towards the end as GOOG fell 20%, CSCO fell 15%, AAPL, AMZN & NVDA dropped 10% and MSFT dropped 6%. That was enough to drag the whole of the Dow 30 down over 3% over the last ten days of October against the 2% or so the overall index actually dropped over the period. Excluding Tech, DIA was also in a strong uptrend through October.

DIA daily chart:

Tech is the elephant in this index room, and if Tech hadn’t dropped hard from the high at the start of October, both SPX and DIA would have had a strongly bullish month. That is the reason that I said that if we are going to see US indices follow the rest of the historical stats up into the end of the year, Tech will have to lead or at least join that move.

How likely is that? Well there are some signs that Tech could turn back up here.

On QQQ a daily RSI 5 buy signal fixed last week and these historically perform well. As I write a possible hourly RSI 14 is brewing and, if it fixes, those also tend to perform well. QQQ was testing the 200dma at the lows so far this week and that is an important level that often holds as support or resistance.

QQQ daily chart:

There is also a daily RSI 5 buy signal fixed on the Philadelphia Semiconductor Index (SOX), though as with the one on QQQ the index has fallen significantly since that buy signal fixed. There is also an hourly RSI 14 buy signal that fixed yesterday. SOX has now fallen an eye-watering 30% or so high to low since the high in June and is still testing a decent support level between 10,000 and 10,500.

There was an H&S that had broken down on SOX with a target in the 9150 area that I posted a few times in December and that failed at the start of October with a target at a retest of the all time high. That target isn’t always made but usually delivers.

If it is going to deliver here then the current pattern forming from the June high would likely be a bull flag and I have drawn in a couple of flag support trendline options. Neither of those has been reached yet but the lower low below the July low at 10,445.44 on Monday is encouraging for this being a bull flag. If it is a bull flag I would expect the next significant low soon. If it isn’t a bull flag then I’d note that I see almost no support between 10,000 down to 8,500.

SOX daily chart:

There is a lot of talk here that Tech is in an AI bubble, which I agree with, and that the AI bubble has now popped, which I am doubtful about, but could be the case. If the AI bubble has popped then the aftermath could easily drag SPX down 50% all time high high to low as the air comes out of the bubble.

As for the bubble I’m planning another post this week explaining why I believe that AI is a speculative bubble, though that post might get bumped into next week if the rest of the week on SPX is particularly interesting.

In terms of whether that AI bubble has popped I’m keeping an open mind, though I’d note that while identifying likely bubbles is fairly easy, identifying when that bubble is bursting is notoriously hard. The patterns on the individual Tech AI players don’t look that encouraging as yet, and the topping process can take a few months to a couple of years. We’ll see.

If you like my analysis and would like to see more, please take a free subscription at my chartingthemarkets substack, where I publish these posts first. I also do a premarket video every day on equity indices, bonds, currencies, energies, precious commodities and other commodities at 8.45am EST, but only for paying subscribers. Other places to find me are my page on the platform previously known as twitter, and my YouTube channel.

Four and a Half Horsemen

It has been a few weeks since my last post on 25th September, due to holiday, illness and other reasons. I was looking then for an all time high retest on SPX to make the second high on a large double top, and we saw that all time high retest in early October. For the rest of October SPX trended down into a low on Friday.

In the short term SPX touched and broke slightly below the daily 3sd lower band at Friday’s low, and as is generally the case when the SPX gets close to or hits the daily 3sd lower band, that has triggered a strong rally.

By my count SPX has tested or come very close to a test of the daily 3sd lower band thirteen times in the last eighteen months (before Friday) on the chart below, all marked with yellow highlights, and the results were as follows:

• 9x delivered a rally that broke back over the daily middle band (currently 7723)

  • of which five delivered new all time highs, including a further two on the way to those new all time highs.

• 2x delivered a decent rally that peaked on the next trading day

• 1x delivered a decent rally that peaked on the second trading day

• 1x delivered two more days of 3sd lower band tests into a big swing low

On this basis, assuming we don’t see serious lower lows today, which currently looks like a safe assumption, there is therefore about a 40% chance that a swing low was made on Friday, leading to a new all time high. There is about a 35% chance that a rally has started that will deliver a break back over the daily middle band, but not a new all time high. There is about a 25% chance that this rally will peak today or tomorrow before making a new low.

SPX daily chart:

In terms of heading to an new all time high the historical stats from the end of October into the end of the year are strongly bullish in a normal year, and even stronger in a midterm year.

That’s just a historical average of course, and doesn’t deliver every year. We do also have a lot of news coming up this week that may move the markets.

There will likely be no all time high retest on SPX unless Tech & AI rally with it. I’ll be doing a dedicated post tomorrow looking at that but I’m watching the sector carefully and one risk this week is that if the Democrats take back both House and Senate, that may well be perceived as bad for AI.

There is also a lot of talk that the US and Iran will resume bombing Iran after the midterms end, very possibly on Wednesday, and if that happens then that may quickly escalate into major infrastructure damage across the US allies in the Persian Gulf. That could deliver a big decline on equities into the end of the year.

So what is the pattern setup like for continuation down? Well it’s pretty decent actually, and there are four (and a half) big patterns that I will be watching if we see more downside.

The first is the double top on SPX. We saw in early October the high retest I was looking for in my last post on 25th September, and that has set up a high quality possible double top. A sustained break below double top support at 7507.77 would look for a target in the 7160 to 7190 range.

SPX 60min chart:

The second is the double top on QQQ. We saw in late September and early October the all time high retests I had been looking for in September, and that has set up a decent quality possible asymmetric double top. A sustained break below double top support at 660.45 would look for a target in the 554.41 to 571 range.

QQQ 60min chart:

The third is the mostly formed H&S on DIA. I mentioned in my last post on 25th September that an H&S right shoulder might form, and so far we have seen that. There is now a decent quality possible H&S mostly formed on DIA. A sustained break below the neckline currently in the 507 would look for a target in the 463 area.

DIA 60min chart:

The fourth is the mostly formed H&S on IWM. I mentioned in my last post on 25th September that an H&S right shoulder might form, and so far we have seen that. There is now a very high quality possible H&S mostly formed on IWM. A sustained break below the neckline currently in the 269.50 area would look for retest of the April low at 237.50.

IWM 60min chart:

The half is the H&S set up on SPCX that I’ve been following since Starlink services in Ukraine were restricted three weeks ago, as I’ve been interested to see what the effect would be on the international reputation of Starlink, which is expected to be an important profit centre for SPCX in the future. That reaction has been mainly negative, with concrete plans made now by Europe and Canada to build their own alternative, and a general perception elsewhere that depending on Starlink for an essential services would be a mistake.

It may be for unrelated reasons but a decent quality H&S has formed on SPCX and broke down on Friday with a target at a retest of the August low.

SPCX daily chart:

I take historical stats seriously as they often deliver, and they most definitely point up from here into the end of the year. I’m also skeptical that the AI bubble is bursting now, rather than starting a topping process that might take another year or so to complete.

On the other hand I was saying in multiple posts in September that there wasn’t a good topping setup then for all these US indices to go down much further, and that is clearly no longer the case. We will see how this plays out.

If you like my analysis and would like to see more, please take a free subscription at my chartingthemarkets substack, where I publish these posts first. I also do a premarket video every day on equity indices, bonds, currencies, energies, precious commodities and other commodities at 8.45am EST, but only for paying subscribers. Other places to find me are my page on the platform previously known as twitter, and my YouTube channel.