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  3. Stock Market Outlook - 2022-05-29

Stock Market Outlook
For The Week Of May 29th = Downtrend

INDICATORS

    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.

Technical analysis of daily SPX prices

2022-05-29-SPX Trendline Analysis - Daily

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.

Technical analysis of daily SPX prices

2022-05-29- SPX Elliott Wave Analysis - Daily - Primary Y

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, based on the notion that bear market begins after falling 20% a peak. But 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.

Technical analysis of daily SPX prices

2022-05-22- SPX Elliott Wave Analysis - Weekly - Intermediate 3

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.

Technical analysis of daily SPX prices

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

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.

Technical analysis of daily SPX prices

2022-05-29- SPX Elliott Wave Analysis - Daily- Intermediate C

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).

Technical analysis of daily SPX prices

Elliott Wave Analysis - "Double Three" Corrective Pattern

Laying in those patterns on the weekly view provides more likely alternatives for the overall bear market.

Technical analysis of daily SPX prices

2022-05-29- SPX Elliott Wave Analysis - Weekly - Cycle II

Technical analysis of daily SPX prices

2022-05-29- SPX Elliott Wave Analysis - Weekly - Cycle II



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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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