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  3. Stock Market Outlook - 2022-05-22

Stock Market Outlook
For The Week Of May 22nd = Downtrend

INDICATORS

    ADX Directional Indicators: Downtrend
    Price & Volume Action: Downtrend
    Elliott Wave Analysis: Downtrend

ANALYSIS

The stock market outlook still shows a downtrend in place, with the S&P500 flirting with a 20% drawdown drop from its all time high. So far, sell in May and go away was the right call!

Technical analysis of daily SPX prices

2022-05-22-SPX Trendline Analysis - Daily

The S&P500 ($SPX) fell ~3% last week, and now sits 10% and 15% below the 50 and 200 day moving averages, respectively. All three signals continue to show bearish trends in place. Price/volume shows most accumulation days are quickly followed by sell offs on above average volume, but Elliott Wave indicates a relief rally may be in the cards near term.

Technical analysis of daily SPX prices

2022-05-22- SPX Elliott Wave Analysis - Daily - Primary 2

The current Elliott Wave count shows Minute [v] wave of Minor 3 should end soon (if not already), giving the SPX a chance to rally back towards the Minor 1 low (~4380). Note that there was another positive divergence in the RSI(5), but not the MACD; similar to the set-up at the end of April.

COMMENTARY

Another wild week. A couple of hedge funds closed their books, and a more hawkish Fed caught option traders by surprise. Then there were the earnings reports: Target and Walmart reported lower than expected margins and their stock prices were punished...as was most of the retail sector.

Many taking heads and so-called experts are pointing to a "strong" consumer as a reason to discount weakness in earnings reports. Don't be fooled. Consumers across the globe are struggling with high inflation, and that struggle won't show up in corporate earnings until the back half of this year.

"Sub-prime" credit data (which lags by a couple of months) shows that consumer credit card balances have already started to increase. This category of borrower is the first to feel the impact of higher inflation, and credit card can only prop up spending levels for so long. Next, expect to see delayed payments to increase (they're already beginning to inch higher).

Best To Your Week!

P.S. After "zooming out" last week, I was asked to "zoom out" even further. The result was "not good", and opens the possibility that the SPX has a longer and deeper correction than most investors anticipate. The specific question concerned Cycle I and II labels; is it possible the January peak 2022 was end of Cycle I? Previously, the count showed the Cycle I wave ending in mid-February 2020 when COVID-19 hit, Cycle II wave ending in late March, Primary [1] of Cycle III ending in January 2022.

Technical analysis of daily SPX prices

2022-05-22- SPX Elliott Wave Analysis - Weekly - Primary 2

But the bull market from 2009 (i.e. Cycle I wave) was courtesy of quantitative easing and low interest rates, and those conditions didn't end until this year. While correlation is not causation, it does make a convincing argument. Anecdotally, it makes sense that all of Cycle I would have a common backdrop.

Technical analysis of daily SPX prices

2022-05-22- SPX Elliott Wave Analysis - Weekly - Cycle 2

Looking back, a new count hinges on Primary [3] and Primary [4]; between 2018 and 2020. That period threw a lot of people off, and I STILL haven't seen a lot of agreement on the labeling. So it's definitely possible that Primary [4] was some type of “flat” or “combination" wave structure, paving the way for the post-COVID rally as Primary [5], and the January peak ending Cycle I. If Cycle I did end in January, then the wave structure I'm using for the outlook is off by one level.

Technical analysis of daily SPX prices

2022-05-22- SPX Elliott Wave Analysis - Weekly - Primary A

The implications are:

  1. The SPX is only halfway through the first downward wave a large bear market (Intermediate (3) wave of the Primary [A] of the Cycle II downtrend, rather than the Rather than being in the final leg of the correction/downtrend (Minor 3 of an Intermediate (C) Wave) ).
  2. When Primary [A] completes, the SPX will see a substantial bear market rally
  3. Then the SPX drops back towards pandemic lows and we've got another Crying Jordan on our hands


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Charts provided courtesy of stockcharts.com.

For historical Elliott Wave commentary and analysis, go to ELLIOTT WAVE lives on by Tony Caldaro. Current counts can be found at: Pretzel Logic, and 12345ABCDEWXYZ

Once a year, I review the market outlook signals as if they were a mechanical trading system, while pointing out issues and making adjustments. The goal is to give you to give you an example of how to analyze and continuously improve your own systems.

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