Top 10 Technical Reasons to Think a Low Could be Right Around the Corner

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SPX’s technical trend and momentum remain bearish but are nearing areas in price and time this week, which might produce a short-term low, allowing for the start of a sharp bounce into February.? Given the orderly selling that has occurred this month vs. the abrupt, unexpected decline in mid-December, it might be unlikely that capitulation measures happen right away before Equities bottom.?Given the return to Stock/bond positive correlation, some evidence of yields peaking will likely be important to trust any bounce in the Equity market.?Stocks like AAPL and NVDA look to have arrived near important levels, and given the worsening in sentiment in recent weeks, a reversal to this recent downdraft looks quite likely this week at a time when many investors least expect it.? However, the extent of the breadth deterioration has proven severe in recent weeks and a bounce in Equal-weighted SPX might be necessary before having too much confidence that a sustainable low is firmly in place.

The following 10 technical catalysts are coming together to make a strong case for a low to this recent selloff:

1. SPX is approaching last November’s lows and Fibonacci-based price support.
2. SPX is approaching intermediate-term uptrend line support from the October 2023 low.
3. Both NVDA and AAPL are now within 1-2 days of bottoming out, technically, as both near meaningful levels of support.
4. Sentiment is turning bearish; Fear has begun to creep back into markets.
5. DeMark-based exhaustion could be in place for SPY into Wednesday’s CPI report (TD Buy Setups).
6. Elliott-wave Structure is also getting close to bottoming, given the shape and pattern of this decline since mid-December.
7. The Technology, Financials, Industrials, Discretionary, and Communication Services sectors are all nearing intermediate-term trendline support on weekly charts.
8. Market breadth gauges have reached abnormally low levels (SPX Percentage of stocks above their 50-day moving average (DMA) = 16%, the lowest since October 2023) while Percentage of SPX issues above their 10-day (DMA) which has begun to show positive divergence compared to Mid-Dec. 2024.?
9. Short-term Cycle composites (Based on emphasizing the 80-day cycle) show a bottoming in SPX potentially as early as this week, followed by a sharp bounce into mid-February.
10. Treasury yield charts across the curve (2, 5, 10, and 30-year Yields) all look close to signaling exhaustion on this rally in yields which could mark a peak in yields between 1/15-1/21 before pullbacks over the next 3-5 weeks.? Given the positive correlation between Treasuries and Equities lately, any hint of yields starting to peak out could likely be a positive catalyst for an Equity rally.

S&P 500 Index

Breakdown in SPX has not affected the intermediate-term structure

While the extent of the recent Equity market deterioration has proven severe on an Equal-weighted basis since early December 2024, the intermediate-term SPX has not shown a similar level of trend damage.

Weekly charts show strong trendline support near 5700, lining up with last November’s lows along with a meaningful level of Fibonacci-based retracement of the prior August-December advance.

I am expecting that 5700 holds for SPX on this selloff and that lows should be near and potentially here by this week’s CPI report.??? (The alternative scenario would call for a short-term low by Wednesday-Friday of this week, a small bounce, and then a retest of lows, which doesn’t make much downside progress and brings about a plethora of breadth and momentum-based divergences (Bullish)).

Bottom line, a trading low looks to be right around the corner.

S&P 500 Index

Financials sector, along with many other major Sector ETFs is now reaching Support

Simply stated, nearly half the S&P 500’s major sectors are now nearing uptrend line support from lows established back in 2023.

While many of these major sectors have underperformed sharply since last November, sectors like Technology, Financials, Industrials, Communication Services, and Consumer Discretionary all look to be nearing important support after recent weakness.

SPX daily cycle composite seems to bottom in the next 2-5 trading days

When running the shorter-term cycle composite for SPX, with a starting point of 2016, the near-term cycle composite shows a pronounced low over the next 2-5 trading days and a turn-up into early to mid-February.

This composite favors the “80-day trading day cycle”, which has proven to be important over the last 9 years in pinpointing quite a few highs and lows for the S&P 500. This “cycle” idea is truly up to interpretation as it follows some very esoteric and storied pioneers. At the same time, if it works, hey it works! I am bringing it up as the markets have seemed to respect it of late.

If this relationship holds, then the cycle should bottom over the next week and rally into mid-February before weakening further into March.

Given that the Cryptocurrency cycle composite, as well as Treasury yields both highlight March as having potential for an inflection point, I’m starting to give more credence to the idea of a bottom in many risk assets materializing in March before a sharp rally into the 3rd Quarter.

The Key to the Next Data Point

Thus, while a short-term low looks to be approaching, it’s going to be paramount for SPX to exhibit a broad-based rally over the next month to avoid many sectors bouncing only before turning back lower.

SPX Daily Cycle Composites

Source: Foundation for the Study of Cycles

As has been discussed in these reports over the last couple of months, market breadth has been lacking late.? Thus, a stronger-than-normal recovery will be needed to have faith in the longevity of any bounce.? If markets bottom and rally into February, but the rally appears thin and lacks ample participation, then the scenario laid forth above arguably becomes a strong possibility. I’ll monitor this as markets start to stabilize and potentially bounce in the weeks ahead.

In closing, the markets had a number of days at new highs in 2024. As a result, every time the markets hit new highs new support lines and new extension targets are created. Once the high was hit in November and then the market digested the gains a new question arises; Is this it and the party is over for a while, or is this simply another pause that refreshes? This is what I am attempting to quantify for you here in this note. The way we will know (I think), is how the market bounces, how high it bounces and how many sectors / companies participate in the bounce. If breadth doesn’t increase and if the market can’t get to or extend to another new and higher high, then it could mean that we need a longer period of time for the huge move from October of 2022 to digest.

On these points only time will tell. One last point to share is the economic impact of the floods from Hurricane Helaine and the fires in Southern California. The effects on the economy to rebuild are substantial and the length of time it will take to rebuild are also quite long. Below is a recent graphic I found giving some perspective. I don’t mean to prey on adversity, but in adversity there can often also be opportunity presented.

Our hearts go out to all those that have lost their homes, their family histories and to some the lives of loved ones. We also praise and thank all the first responders and all those that jumped to the aid of those in need by contributing and helping at the recovery centers. My wife helped in transporting to the Santa Anita racetrack in Los Angeles. We were amazed at the selfless efforts of all involved and amazed by the sheer volume of aid contributed.

Ken South, Tower 68 Financial Advisors, Newport Beach

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