Weekly Trader's Outlook

Last week, Nate maintained a "Moderately Bullish" outlook, citing a potential mean reversion in Treasury yields, pre-earnings season positioning, and favorable October seasonality. That view largely played out, with both the S&P 500 (SPX) and Nasdaq 100 (NDX) reaching new all-time highs.

Beneath the surface, however, market leadership showed signs of rotation. Technology reached a new relative high versus the S&P 500 before reversing, while Energy and Health Care maintained relative strength. Meanwhile, Consumer Staples and Utilities, two traditionally defensive sectors, showed signs of improving relative trends.

Stocks tested support Thursday as WTI and Brent crude rose more than 4%. Meanwhile, the 10-year Treasury yield consolidated during the week. Recently, crude oil prices and Treasury yields have been sitting at a one-year inverse extreme when looking at the one-month rolling correlation between the two, which deviates from their typical relationship.

My outlook for next week is "cautious." The primary considerations are: 1) Potential support beneath oil prices; 2) Negative momentum divergences in major indexes; 3) Improving trends in defensive sectors; and 4) Failed relative breakouts in Technology and High Beta.

Evidence that would challenge this view includes lower oil prices or yields, improving index momentum, renewed weakness in defensive sectors, and broader stock participation.

• Monday (Oct. 12): no reports
• Tuesday (Oct. 13): NFIB Small Business Optimism, ADP Weekly Employment Change, Existing Home Sales, Federal Budget Balance 
• Wednesday (Oct. 14): MBA Mortgage Applications, Consumer Price Index (CPI), Core CPI, Real Average Weekly Earnings, Real Average Hourly Earnings, Federal Reserve Beige Book
• Thursday (Oct. 15): Advance Retail Sales, Retail Sales ex Auto, Retail Sales ex Auto and Gas, Retail Sales Control Group, Philadelphia Fed Business Outlook, Initial Claims, Continuing Claims, Producer Price Index (PPI), Core PPI, Business Inventories
• Friday (Oct. 16): New York Fed Services Business Activity, Import Price Index, Export Price Index, Industrial Production, Manufacturing Production, Capacity Utilization, Treasury International Capital Flows 

• Monday (Oct. 12): FedEx Corp. (FDX)
• Tuesday (Oct. 13): Citigroup Inc. (C), Domino's Pizza Inc. (DPZ), Goldman Sachs Group Inc. (GS), Johnson & Johnson (JNJ), JPMorgan Chase & Co. (JPM), UnitedHealth Group Inc. (UNH), Wells Fargo & Co. (WFC)
• Wednesday (Oct. 14): Bank of America Corp. (BAC), BlackRock Inc. (BLK), Fastenal Co. (FAST), Morgan Stanley (MS), Progressive Corp. (PGR), State Street Corp. (STT)
• Thursday (Oct. 15): Bank of New York Mellon Corp. (BNY), Marsh McLennan (MRSH), Prologis Inc. (PLD), PNC Financial Services Group Inc. (PNC), Charles Schwab Corp. (SCHW), Snap-on Inc. (SNA), U.S. Bancorp (USB), Interactive Brokers Group Inc. (IBKR), J.B. Hunt Transport Services Inc. (JBHT)
• Friday (Oct. 16): Citizens Financial Group Inc. (CFG), M&T Bank Corp. (MTB), Regions Financial Corp. (RF), Truist Financial Corp. (TFC), Travelers Companies Inc. (TRV)

Taken together, the data remained consistent with solid activity, a resilient labor market, and persistent inflation pressure. That mix may limit expectations for aggressive policy easing and keep investors focused on Treasury yields and rate-sensitive areas of the market.

• S&P Global US Services PMI: 58.8 vs 58.7 est.
• S&P Global US Composite PMI: 58.4 vs 58.3 est.
• ISM Services Index: 54.9 vs 55.0 est.
• ISM Services Prices Paid: 74.0 vs 73.3 est.
• ISM Services New Orders: 59.8 vs 60.3 est.
• ISM Services Employment: 50.1 vs 48.8 est.
• ADP Weekly Employment Change: Week of Sept. 12: -22.5k vs prior 20.0k. Week of Sept. 19: 23.75k vs prior 22.5k.
• Trade Balance: -$105.6 billion vs -$102.1 billion est.
• Imports MoM: Imports rose 4.3% vs 4.2% prior
• Exports MoM: 1.4% vs -2.1% prior
• MBA Mortgage Applications: -4.2% vs -6% prior
• NY Fed 1-Yr Inflation Expectations: 3.9% vs 3.64% est.
• Consumer Credit: $8.281 billion vs $15 billion est.
• Initial Jobless Claims: 197k vs 200k est.
• Continuing Claims: 1,716k vs 1,700k est.
• University of Michigan Sentiment: 46.3 vs 47.6 est. 

Treasury yields consolidated this week as investors evaluated economic data, the Federal Open Market Committee (FOMC) minutes, and the approaching earnings season. Energy prices remain resilient, as Crude Oil prices consolidated near a confluence of potential support.

The S&P 500 broke out to new all-time highs this week following a potential bullish reversal, which appeared to form an inverse head-and-shoulders pattern. After an upside break, prices pulled back to new potential support at the old neckline near 7,780. Using classical charting techniques, the pattern could carry a measured objective near 8,050, if the 7,780 level holds. Pattern objectives are not guarantees, as they can fail. A break below that level could shift attention toward former highs, near 7,550. At the time of this writing on Friday, price is hovering near 7,780.

Although the trend appears to remain intact, there are some potential warning signs in momentum. With the latest push to new highs, momentum, as measured by the Relative Strength Index (RSI), failed to confirm this new high, which is often interpreted as a bearish divergence. This nearly six-month divergence resembles the momentum structure seen late last year and earlier this year, before the subsequent correction. The comparison is historical and does not indicate that the current setup will resolve the same way. Momentum may offer an early warning, but many technicians view price as the final arbiter.

Finally, the Average Directional Index (ADX), a trend strength gauge, appears to be forming a trough, potentially signaling weak trend strength which may precede acceleration in either direction.

Near-term technical translation: cautious

After breaking out to new all-time highs this week, the NDX appears to be testing a potential support area at its polarity zone of former highs near 30,700.

From a momentum perspective, the Nasdaq 100 also appears to be forming a similar divergence. The index appears to have completed an exhaustion gap, which some technicians interpret an upside gap that is quickly filled, signaling possible deterioration in trend strength.

If that pattern were to continue, technicians would look to the next area of potential support. A break below former highs could shift attention to the zone near the prior gap and 50-day moving average, roughly 1,000 points lower, though past performance is no guarantee of future results.

Near-term technical translation: cautious

Both defensive sectors, Staples and Utilities have been making new relative lows versus the S&P 500 over the past year. More recently, their absolute and relative trends appear to be changing, with both sectors testing areas that some technicians may associate with potential failed breakdowns or bullish reversal formations.

Consumer Staples' price trend reclaimed an area of prior support, potentially forming a failed breakdown. Some technicians refer to a quick recovery above former support as a "bear trap." Follow-through above nearby resistance could provide additional confirmation. On a relative basis to the S&P 500, Staples appear to have formed a similar formation, reclaiming an area that acted as old support.

The Utilities sector may have formed an island reversal. An island reversal is when price gaps in one direction, in this case, to the downside, followed by a gap in the opposite direction after one or multiple trading sessions. Price has not yet reclaimed former support while potential resistance and relative trend do not appear to have exhibited the same improvement as Staples.

Near-term technical translation: improving defensive-sector trends, potentially signaling a more cautious tone beneath the broader market

Crude oil appears to be testing potential support around $87–$90, where two Anchored VWAPs, the 50-DMA channel support, and horizontal support converge. The Moving Average Convergence Divergence (MACD) indicator also appears to be exhibiting waning downside momentum, making this an important near-term inflection area.

If support holds, technicians may watch the mid-September gap near $100 as a potential resistance area. Renewed strength in oil could add to the risks facing equity investors.

Near-term technical translation: potentially bullish

The Bitwise 10 Large Crypto Index is down 3% since last Friday, with bitcoin down 2% and ether down 7% at the time of writing. Crypto markets sold off midweek following higher oil prices, rising Treasury yields, and a warning from a researcher associated with the Ethereum Foundation urging users to enter "bunker mode" and begin migrating from existing addresses to new addresses whose public keys remain unknown. The combination of these developments appeared to weigh on crypto prices. That said, looking across a range of bitcoin-related indicators and using bitcoin as a proxy for the broader crypto market, nearly every measure currently reflects more constructive market conditions than earlier this year. While none of these indicators are currently displaying extreme readings, activity across spot markets, flows, leverage, and sentiment measures points to improving participation and demand.

Market breadth measures participation beneath the index level. Technicians generally view broader participation as more supportive of an index trend, while narrowing participation can indicate greater concentration.

The rise in NYSE new lows, even as major indexes remain near record highs, illustrates the uneven participation that technicians sometimes call a "stealth correction." Although new high readings remain depressed, several shorter-term breadth measures have recently improved. Additional follow-through would help confirm whether participation is broadening.  Historically, expansions in the new high list have often accompanied broader market participation.

The percentage of S&P 500 stocks above their 50- and 200-DMAs have reached some of the lowest levels in over a year and appears to be beginning to revert. The NYSE Advance/Decline line has also modestly bounced and held from year-long potential support. Another breadth measure, the McClellan Oscillator, has bounced from oversold readings and at the time of this writing on Friday, has crossed the 0 line–which some technicians would view as a supportive indication of improving breadth.