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Stock Market Outlook
For The Week Of December 11th = Uptrend

INDICATORS

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

ANALYSIS

The stock market outlook stays in an uptrend by the tiniest of margins, while U.S. market participants await the next shoes to drop (inflation data and a rate hike).

The S&P500 ($SPX) fell 3.4% last week, dropping below the 200-day moving average.  The index failed to breakthrough a long-term, bearish trendline dating back to mid-January, instead breaking the recent bullish trendline from October-November.

Technical analysis of daily SPX prices

2022-12-11-SPX Trendline Analysis - Daily

The ADX shifted to mixed, with DI indicators essentially overlapping and the indicator itself falling below 20.  It’s as close to a bearish as you can get without flipping the signal.

Price/Volume shows a small amount of distribution last week.  The signal is still in an uptrend per the criteria, but trading action is similar to the beginning of last downtrend (mid-August).

Technical analysis of daily prices

2022-12-11- SPX Elliott Wave Analysis - Daily - Primary Y

Elliott Wave remains bearish, as it has for the entire rally.  The ending diagonal pattern (mentioned last week) fell apart when the SPX dropped back to 3900 and the 34-day moving average. Adding the negative MACD cross over and RSI divergence added insult to injury.

Upon further review, I overlooked a subdividing Minute [iii] wave (mid-November).   A similar pattern emerged in early October during the Minor A wave: volatile, 1-day waves for Minute [i] and [ii], followed by a subdivided Minute [iii].  The fractal nature of market price movements means patterns often repeat themselves, and that's the case here as well.

The refreshed count reveals the 5-wave Minute pattern ended at the high on December 1st, which also marks the end of a Minor C.  Most importantly, the completion of the 3-wave Minor pattern marks the end of the Intermediate (X), counter-trend rally.

Labeling reversals in market direction is challenging.  At the moment, last week's price action matches a pattern that played out the week of August 22, so Tuesday's low is likely the first Minute wave of the next phase of the bear market.

COMMENTARY

Last week's November Producer Price Index (PPI) data was higher than expected on a month over month basis, but shows inflation pressure easing from a year over year view.

Thursday's PCE data showed that the Fed's favorite inflation measure remained high in the month of October, although it did retreat from September's increase.

Year over Year Change (%)
Jun Jul Aug Sept Oct Nov
PPI 11.2 9.7 8.7 8.5 8.1 7.4
Core PPI 6.4 5.8 5.6 5.6 5.4 4.9

This is good news for Main Street; PPI measures "the average change in the selling prices received by domestic producers for their output over time", so we're paying less for goods and services.

This is bad news for Wall Street; falling PPI generally means lower earnings for public companies, because: (Price - Cost) * Quantity = Profit.  Companies reduce price to maintain or increase volume, which can be done much faster than reducing costs (e.g. labor or supply chain contracts).  Referencing the final point from last week's post,

    ...[Q3] profit margins (earnings) shrank as companies accounted for higher costs for raw materials, debt financing, and labor. Those costs will ultimately determine the type of recession we experience in 2023.

More data is on the way this week, so buckle up! Tuesday (Dec 13th), we get CPI data for November.  Wednesday (Dec 14th), we get the Fed's decision on the latest interest rate hike at 2:00pm EST, followed by the FOMC press conference at 2:30pm.  U.S. retail sales data for November hits the wires Thursday.

And last but not least, Friday is weekly, monthly, and quarterly option expiration.

Some food for thought regarding price patterns mentioned above: After the last market top in mid-August, the market fell below the 13-day moving average on increased but below-average trading volume.  That sell-off generated a negative cross-over in the MACD indicator.  Then the SPX rallied slightly, only to sell-off on August 26 in response to hawkish comments from Powell at the Fed’s Jackson Hole press conference.  Entering this week, you'd be forgiven if you had a sense of deja vu; the only thing we're missing is a low volume rally followed by a hawkish speech from the Fed...

Best To Your Week!

P.S. If you find this research helpful, please tell a friend.
If you don't, tell an enemy.

Sources: Bloomberg, CNBC, Federal Reserve Bank of St. Louis, Hedgeye, U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics



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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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