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Dollar rally a bit premature- Equity selloff continues

May 4, 2016

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

2045-7, 2033-4,  2026-9              Support
2072-3, 2084-6,  2097, 2105-6  Resistance

 

TREND OVERVIEW

S&P Futures: Short SPM6- (Stop lowered to 2076) Tuesday's downward continuation should result in a test of early April lows near 2026.  Gains above 2076 would postpone any selloff , but for now, the next 2-3 days have the potential to work lower.

EuroSTOXX 50-  EuroSTOXX is down to important support near levels mentioned as being max support-  2970-5 important, then 2883 intraday.  Unless early April lows of 2860 are violated, it's right to think of this move as short-term only, and expect some stabilizatoin and bounce.

Hang Seng China Enterprise index- Bearish- Break of two month trend suggests additional downside can happen in the next 3-5 days before any recovery.

Attractive Technical Risk/reward Longs
LMT, TAP, DG, MDT, CVS, AVY, NOC, CL,TSN, NXPI, TXN, CVC, WB,VNTV, NAVI, LGND, KMB, SBUX, SAFM, BCR, BSX, DVN, ELLI, NKE

Bullish, but extended- Buy Pullbacks-  VMC, FIS, MBT, AEM,TRXC, EBF, DG, CHD, OC, PM, MCD, AVGO, SONC, POOL


Attractive Technical Risk/reward Shorts:  FIT, FXI, BBBY, MAT, GT, RHI, ANF, GPS, HTZ, CF, SPLS, USG, AWI, WDAY, CIEN, QLIK, LC, SQ, DF, ADS,MNK, P, RL, CROX, FOSL, HOG, MYL

Near-term trend remains bearish after prices reversed right where they needed to early Tuesday and pulled all the way down to last week's lows before bottoming and attempting a minor bounce.  Breadth started out quite negative at over 5/1 , but improved into the close at just 3/1 negative, but markets still showed an overwhelming amount of volume on the downside, as Declining volume outweighed advancing volume by nearly 7/1.   Energy and Materials were the chief underperformers, while Financials also contributed to losses with more than 1.3% decline in that sector.

Overall, the quick reversal in the Dollar seems to have caught a few offguard, who rushed to sell gains in Materials and Energy stocks, while the break of support for TNX caused outflows in the Financial sector, which typically seems to be correlated quite positively with the Treasury market.  Bottom line, while the Dollar has gotten stretched in recent weeks, it's difficult technically to go from low to highwith most in the Media rushing to call a bottom in the US Dollar.

Technically, it IS possible to make the case for a sharp oversold rally in the US Dollar between mid-May and early July, based on the degree of oversold conditions, along with near completion of counter-trend buy signals using Demark's TD Sequential and Combo indicators.  Furthermore, a large degree of speculation is taking place now in the Metals and Energy space, as judged by the latest CFTC data, which shows non-commercial longs hitting multi-month highs in Crude oil and Gold and Silver.   Traditionally, these kinds of large bets by the Speculators tend to be ill-timed. 

Additionally, Stock Traders Almanac shows the period from mid-May through the end of June to be quite poor for the metals, as Silver has declined in 29 of the last 42 years during this time, or nearly 69% of the time.  Checking back, Silver was down over the last 8 of 10 periods between mid-May and late June, with very sharp declines during this time in 2011, 2012 and 2013.  However, given that the US Dollar index has not yet completed counter-trend buys, while the EUR/USD and Silver, Gold have not yet completed, nor confirmed counter-trend sells, it's still likely that the US Dollar index should test Tuesday's lows while the metals make a final dash towards the highs into next week.

For the next few days, I expect selloffs to prove muted, while thinking that the S&P has maximum losses down to 2026-30, or roughly 30 points lower, or about 1.5%.  Bond yields should likely find strong support at TNX 1.75 and German Bund yield support at 16-17bp, while bounces in the US Dollar in the next couple days prove short-lived and give way to further weakness down to test and briefly undercut Tuesday's lows.  Financials should be avoided this week while Yields settle, and given the ongoing decline in stocks, it's best to favor Staples in the short run, while buying dips in Technology, Healthcare, Industrials in the next week.

 Charts and comments below.

S&P near-term price action remains bearish, with Tuesday's decline stripping out all the positives of Monday, retracing the entire range.  While Monday's lows were regained by the close, momentum remains negatively sloped and additional downside looks possible given this change in trend from last week.  Minor weakness down to 2026-30 area looks possible for S&P Futures.

NY Composite has mirrored the price action in the SPX and is typically a better gauge for broader market action.  This move under trendline support from mid-February has undercut last Friday's lows, and should experience a bit more selling before this move is complete.  However, maximum losses in this scenario should materialize over the next couple weeks at levels above 10,000.

The Russell 2000 looks to have peaked out after its rally from mid-February, as its dramatic underperformance in Tuesday's trading( -1.64% vs SPX -0.87%)  managed to reverse right near key downtrend resistance drawn from last Summer.  While pullbacks in the next week should still be used to buy dips until/unless this mild uptrend from February is broken, it looks apt to underperform further in the next few days based on Tuesday's reversal.

The US Dollar index bounce Tuesday failed to gain sufficient ground to think the lows of this large decline have been put in place, and if anything, another 1-2 days of strength would set up for a move back down to test and breach lows, coinciding with the EUR/USD moving back up to test former highs near 1.17.  Counter-trend buys have not yet been triggered using Demark sells, and momentum remains very sharply positioned to the downside.

 

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