April 6, 2016
S&P JUNE FUTURES (SPm6)
2034-5, 2020-2021, 2004-5, 1956-60- Support
2049-50, 2053-4, 2063, 2071-2 Resistance
Bullish uptrend still intact for US stocks, but Equity uptrend wavering in the near-term with prices near key trading support- Breaks of 2035 likely lead down to 2012 in S&P Futures, but still are likely to prove short-lived given the improvement in breadth and momentum on an intermediate-term basis. Pullbacks therefore likely prove short-lived, and still need more proof even to call for a short-term selloff.
1) Financials breaking down relatively to SPX
2) German bund closing at lowest levels since last April (Often leads US TY Yields)
3) WTI Crude oil has dropped well off prior highs, creating divergence vs SPX which is just starting to be relieved, given SPX decline Tuesday
4) USDJPY has dropped to new closing lows under the recent consolidation, and something to keep a close eye on, given the prior close positive correlation of SPX to USDJPY. Additionally, Bank of Japan wants nothing more than the Yen to decline, so this rally must be causing real concern, and could prove to be an impetus for additional action (Though does that matter?)
Following Tuesday's decline, Equities have begun to show increasing signs of rolling over yet again, not dissimilar from periods in mid-March and early March, where a 2-3 day pullback occurred which tested the 10-day moving average and then turned back higher. Common technical gauges like MACD have rolled over to negative, while RSI has declined to 60 on a 14 period basis, undercutting the lows seen in late March. Could this time be different, finally yielding to the much awaited pullback after a near-250 point S&P rally in the last six of seven weeks? Bond yields would certainly indicate its possible after have continued lower globally in recent days, while WTI Crude has given back roughly 1/3 of its rally from mid-February, and the divergence from equities finally snapped, as equities narrowed the recent gap between WTI and SPX. Additionally, Dollar/Yen showed more meaningful signs of breaking down, yet another negative, which in the past has led to SPX following suit whenever the US Dollar turned down in meaningful fashion vs the Yen.
However the seasonality remains positive for SPX in April, despite performance being slightly more subdued in the month of April during Election years. Given that breadth escalated to the extent it did in the last couple months while the rally rose far higher than most bear market rallies "should have" given how depressed momentum became, are both bullish qualities for this rally to continue to new highs. Healthcare and Technology are both showing very good signs of strength, while Industrials have pulled back only fractionally of late and also remain a strong sector to favor. Momentum wise, popular technical gauges like MACD on weekly charts have turned positive, which makes this a very difficult rally to get a feel for, trend wise. Momentum therefore is overbought and waning on daily charts.. Positive on a weekly basis, while negative on a monthly. Meanwhile, prices lie just fractionally under last year's highs. Bottom line, a break of 2035 on a close for S&P Futures likely does lead to a bit of weakness in the near-term. However, given that sentiment gauges remain subdued, pullbacks should prove short-lived, before rallies back to new high territory.
S&P lies near key support at 2035-37 which was hit during Tuesday's trading as S&P gave back nearly 40 handles from highs hit Monday morning pre-open. Given the degree of momentum deterioration in the last week, any break of 2035 in Wednesday's session is likely to result in at least a bit more weakness, where the two-day selloff could turn out to be 3-5 days in length before stabilizing. For now, prices lie at key support, and are likely to bounce from current levels, but need to be watched for any evidence of breaking down.
SPX vs Crude oil shows the degree to which WTI has diverged in the last week, after a very tight correlation in the last few months. SPX pullback today could have been the start of prices starting to join Crude yet again, while WTI bounced hard from early lows, with momentum reaching the highest since late March. For now, breaks of 2035 in S&P June futures would allow S&P to narrow the gap even further, while Crude breaking back above its downtrend over the last week should help prices rise and join S&P.
EuroSTOXX 50 has turned down and given back more than 1/3 of its rally from mid-February, as Europe takes the lead in correcting recent gains, while US indices by and large remain resilient. This may, or may not be a factor that leads US indices lower, but it's important to note that Europe right now remains considerably weaker than US.
Financials have been a constant source of weakness in the last month, with XLF turning down to multi-day lows and more importantly, relative charts breaking down to the lowest levels since late February. Given that this sector remains 15% of the SPX, this is a real headwind to Equities making progress in the near-term. Financials should be underweighted until this relative line vs SPX can start to stabilize.
The US Dollar's weakness vs the YEN hit the lowest levels on a closing basis since late 2014 in Tuesday's trading, which likely remains a source of concern for BOJ which is trying to do what they can to help the Yen decline. Yet the intermediate-term chart remains quite negative for US Dollar vs Yen, and this recent consolidation over the last couple months now looks to be resolving itself by a move down to new lows. SPX will need to be watched carefully on a break under 110 by USDJPY.
The decline in breadth in the last few weeks can be seen by this McClellan Oscillator chart breaking its uptrend from early 2016, and shows why equities are a bit more high risk at current levels in the near-term with declines in both Breadth and momentum. While this can clearly turn back higher from current levels, the extent of the decline is troublesome given so little deterioration in prices.
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