June 28, 2016
S&P SEPT FUTURES (SPm6)
1978,-9, 1969-73, 1953-5 Support
2014-8, 2040, 2132-4 Resistance
S&P Futures: (2-3 days)- LARGER DECLINE CLOSE TO ENDING, but can't rule out a mild bounce attempt and final low into next week before sharp rally. S&P futures will need to get back over 2000 at a minimum to suggest that even an oversold bounce can occur, and ideally, regaining 2018 will help to establish more conviction. Pullbacks to 1977-8 and then 1969-73 look possible which would offer better buying opportunities and it's doubtful technically that SPX gets down under 1953, or the 50% retracement of this entire move up from February lows.
Still tough to trust that oversold conditions alone are sufficient to help stocks begin a move meaningfully higher, and for now the most realistic scenario calls for a small 2-3 day bounce followed by a washout into early next week. However, sufficient signs of fear and minor capitulation are beginning to arise that suggest this pullback is closer to conclusion than something which would allow for a larger selloff and any further decline into next week should represent an excellent area to consider buying dips for a move back to new high territory.
Specifically, TRIN readings along with VIX inversion and Equity Put/call data look to all signaling that the end of the decline is near. Additionally, European bank indices like the STOXX Europe Banks index are within striking distance of 2011 lows after a severe washout that looks to be very close to support. Momentum and Advance/Decline data remain strong on a weekly basis, and US indices still have shown very little of the technical damage that the rest of the world has shown.
Bank stocks and yields will need to show evidence of bottoming before it's likely that indices can make too much headway to the upside, but still impressive that Advance/Decline lies within striking distance of all-time highs while the percentage of stocks over their 10-day moving average has reached the lowest levels since February. For now, extreme selectivity is necessary, but one should look to buy into the market in the early part of July, as numerous cycles pinpoint a turning point for stocks and given the recent deterioration, it looks far more likely to be a low. Use pullbacks to buy in the next 3-5 trading days, and don't trust bounces unless they're able to recapture 2018.
S&P has gotten extended to the downside in the last two days, retracing 38.2% of the entire February-June rally in two-days' time. While additional weakness still looks possible into early next week just following the 4th July holiday, we shouldn't see more than 50% of this prior rally retraced, and for now, indices remain strong in the US.
A key piece of thinking as to why this pullback should be near conclusion has to do with European banking shares, which are all nearing key support near 2011 lows, and have gotten quite stretched in the near-term. Prices on daily charts lie outside the lower Bollinger Band, while daily charts have begun to show evidence of positive divergence. Meanwhile , Demark counter-trend indicators are close to lining up with buys on both a daily and weekly basis which should mean this pullback should find firm support near 2011 lows before stabilizing. While the trend from last year remains most certainly down, there are a few things finally in place to suggest slowly starting to "nibble" on European Financials, for those with an intermediate-term perspective.
The US Dollar index meanwhile, has broken out of key downtrend line resistance from last year given the recent surge in the Dollar vs Pound Sterling, Yen and Euro. While the Pound has gotten stretched, continued Euro weakness looks possible while the Yen could peak out and allow Dollar strength vs Yen. Overall, this is likely a tough sign for commodities, given the Dollar strength and could lead to much higher prices in USD in the months ahead.
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