Category: Newsletter

On Thursday, the market cracked the 20-DMA and swiftly fell to retest the 50-DMA. There is an important lesson in this week's action. Over the last several weeks, we have warned about the weakening of momentum and relative strength and the triggering of the MACD "sell signal." However, many followers commented that the market kept rising despite my warnings and "this time was different." The lesson is that while technical analysis is NOT perfect, the signals derived from the analysis are often a good process to follow. As always, "timing" is the most difficult challenge. The indicators told us that the market would likely "derisk" before the election, which is now evident.

Unsurprisingly, the market stumbled a bit this past week, breaking the "rising wedge" pattern to the downside. While the correction has been mild, with the election looming, some further consolidation or reversal as portfolio managers "derisk" for election risk should be expected. However, the market continues to find buyers at the 20-DMA as portfolio managers are unwilling to be "out of the market" currently.

The chart below is the WEEKLY S&P 500 chart, with three different signals to confirm the start of the seasonal period. With Friday’s close in the green, keeping the week broadly positive, all three seasonal buy signals have been triggered.

On top of a strong job report, the latest CPI reading reduced market hopes of a more aggressive rate-cutting cycle. In September, CPI rose 0.2% versus a 0.1% expectation, bringing the annual inflation rate to 2.4%, which was also higher than the expectation of 2.3%. Notably, Core CPI rose 0.3% versus a 0.2% expectation.

On Friday, the latest employment report from the Bureau of Labor Statistics (BLS) quelled any concerns of a near-term recession. While overall employment printed an astonishing 245,000 jobs, a massive chunk of those jobs were from Government hiring and seasonal adjustments.

Notably, completing the "cup and handle" pattern suggests a potential further upside to 6000 by year-end. While that target may seem ambitious, it aligns with recent Wall Street upgrades.

As noted last week, the trend of higher lows and the triggering of the MACD "buy signal" all suggested the recent correction phase was over. That was confirmed this past week, as the market broke out to new all-time highs following the 50 basis point cut in the Federal Reserve overnight lending rate on Wednesday.

Things did not look good heading into this week. However, the market rallied off the 100-DMA and retraced to the 50-DMA. Then, on Wednesday morning, a hotter-than-expected CPI report led to a sharp 1.5% selloff that retested the 100-DMA a second time. Things looked a bit dire, but strong words from Nvidia's (NVDA) CEO sent stocks surging higher to a 1% gain by the close. That reversal cleared resistance at the 50-DMA, confirming the retest of the previous support. That bullish action continued through Friday, clearing the 20-DMA as well.

This past week, slowing economic data and a weak payroll report weighed on market sentiment, pushing the market below initial support levels at the 20—and 50-DMA. That suggests that the current correction process that began in early August is continuing ahead of the upcoming November election.