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4 Key technical reasons why this market is gaining ground

April 21, 2016

S&P JUNE FUTURES (SPm6)
Contact: info@newtonadvisor.com

2087-8, 2077-8, 2060-1, 2047-9, 2020-2021Support
2106, 2115-6, 2123-5, 2135                        Resistance

TREND OVERVIEW

S&P Futures: Long SPM6- Covering shorts prematurely at 2097 - Increasing signs of limited upside in the short run but broader trend still very much bullish, and in the next 48-72 hours, a final push up to 2105-6 and even 2115-6 looks possible before prices stall out and undercut 2087.   For all except the very micro-trend in scope,  this should still translate into selling into this market into next week.  However, for the purpose of a day to day perspective, it looks early based on Wednesday's trading ahead of the ECB.

EuroSTOXX 50-  Getting above March highs at 3128 has led to a quick acceleration up to 3142 and could show further near-term strength to 3200-3200 before stalling out.  For now, extended, but short-term bullish.

Hang Seng China Enterprise index-  Upside likely contained near-term at 9500-9550.  Under 9000 on a close likely leads down to 8750. Until 8750 is violated, the trend from mid-February remains bullish and pullbacks would be used to buy.


Attractive Technical Risk/reward Longs
PAY, GRMN, RIO, VALE, ESV, SGMS, SLM, PRAA, GILD, ETFC, NXPI, TXN, ADI, JOY, FIT, WB, FXI, VNTV, MRO, WMB, HES, APA, NAVI, SWN, LGND, MDT, KMB, SBUX, SAFM, BCR, BSX, DVN, ELLI, MSFT, NKE

Bullish, but extended- Buy Pullbacks-  X, MBT, AEM, NEM, FCX, GDX, GG, TRXC, EBF, DG, CHD, OC, PM, MCD, AVGO, SONC, POOL

Attractive Technical Risk/reward Shorts:  TSLA, WDAY, CIEN, QLIK, T (36.75 tgt), RT, LC, SQ, DF, TSN (low 60s) ADS, KO (44.5 Tgt) GPS, BBBY, FL, MNK,  P, RL, CROX, CF, FOSL, JWN, HOG, HTZ


Wednesday's Bullish surge higher in Crude oil, 10-Year Treasury yields, and Dollar/Yen make it likely that any stalling out in Equities is postponed until next week and any sort of short bias in US Equities is likely wrong in the near-term.  While a number of cautionary factors have appeared in recent days, as detailed yesterday, there remain a number of bullish items that can't be overlooked right now and will put a bearish stance on the sidelines until they play out fully.  

A few factors that suggest fading equities right away might still be premature:

1) A very bullish short-term formation in Crude oil was formed Wednesday when prices pushed back over 42.40, opening up the door for $45.  A one--month Cup and Handle pattern looks to be in place, and given the strong positive correlation between Crude and SPX in place, any further gains in WTI likely won't be immediately ignored by SPX. 

2) Similar action by TNX and USDJPY are important to mention, as both of these pushed higher in a manner that can allow for a bit more upside.  TNX getting above 1.80 can allow for 1.84-5, while JPY closing up at the highest since early April likely leads to a push to 110.75.  Both of these have had a consistently higher positive correlation with SPX than Crude, so near-term breakouts here also can't be overlooked.

3) Healthcare breaking out is meaningful along with the acceleration in Financials and Energy which combined represent over 1/3 of the SPX.  While overhead resistance looks to be near in both Energy and Financials, it's tough to sell SPX with both of these accelerating and not yet at key resistance.  XLF resistance lies at $24, while XLE could reach 68.15-68.50 before stalling in the next week.

4) Demark indicators used to time counter-trend signs of exhaustion in the SPX still look premature on daily charts of SPX futures along with NDX by around a week.  Until these are in place, and the market shows evidence of reversing course, it should pay to stick with the trend.

5)  High Yield ETF (JNK) has yet to turn back lower, and weakness in High Yield has signaled the start of the deterioration in the Small-caps back in 2014 along with the acceleration in US equity indices early this year.  If Equity indices are due to peak out again before moving to new highs, it shouldn't come as credit spreads continue to tighten.  Upside likely is capped by JNK near 36.50, which looks like an optimal area to fight this two month uptrend.

Overall, the thesis from the last few days remains basically unchanged for all those except daytraders.  Given the 15% rally over the last 10 weeks from mid-February, we're likely to exhibit some evidence of slowdown given factors such as overbought conditions with waning momentum, resistance near former highs, Sector ETFs up against key former highs (XLI-Spring 2015, XLY-November 2015) while the seasonality for this timeframe in Election years is less than optimal for Stocks.  Yet, these concerns are offset temporarily by the factors above (1-5) which might keep the selloff at bay a bit longer.   Favored sectors include Healthcare, Materials, and Energy, looking to trim gains in Financials, Industrials, andConsumer Discretionary over the next few days into early next week.  Charts and comments below.

NDX failed to turn down and take out 4500 on the downside, and given the snapback in the SOX to hold above 660, trends still dictate a long stance in the NASDAQ, expecting an upcoming move above 4600 which might even reach 4700 before any real reversal of trend gets underway.

US 10-year Yields spiking up above 1.80% was important on Wednesday ahead of Thursday's ECB and lead to a quick movement higher in both Crude and S&P, with yields finishing up near 1.85%.   The pattern on hourly charts was important in having formed a reverse head and shoulders pattern, with low, lower low and then higher low, which when 1.80% was exceeded, caused a real surge in yields.  At current levels, this area is indeed important in the near-term for TNX based on its weekly charts and trendline from late last year.  Thus, some stalling out and backing and filling looks likely with former resistance at 1.80% now being key support on pullbacks.   Historically, TNX has led movements in S&P, so if equities are due to reverse, we ought to see signs here first, with 10-year Treasuries beginning to rally.

WTI Crude had a very bullish formation early Wednesday which led to the "Algos" kicking in and driving Crude back above former highs to the highest levels since last December, nearly a 61.8% retracement of the pullback since last October.   Resistance in the short run lies between $45-$45.50, but we'll need to see some real evidence of Crude reversing itself to have any sort of negative stance, as technicals in the near-term remain constructive.

Crude's push higher in breakout fashion led the S&P up above 2100 briefly Wednesday and given this correlation, it's still important to keep an eye on Crude, as it has had a much more important role with how S&P has moved than many believe.
 

Dollar/Yen made an important move early Wednesday which can allow for a bit more upside here to 110.75. Typically an important gauge for the SPX, and gains in USDJPY also likely lead a bit higher still for S&P.

Pullbacks in the VIX managed to undercut last October's lows to the lowest levels since last August.  While a sudden downward acceleration in VIX can sometimes occur near lows in implied volatility, and market highs, near-term, it pays to wait until we see more evidence of stabilization here before attempting to pick bottoms in Vol.

Disclaimer:

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