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Short-term pullback likely after July expiration to resolve overbought conditions

July 15, 2016

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

2140-2, 2131-3, 2109-10, 2085-7    Support
2160-2, 2180-3                   Resistance

 


S&P Futures: (2-3 Days) Bearish-  Price has gotten stretched too far to the upside in the short-run, and despite the breakouts to new highs in several US indices, upside looks limited.  Given the bearish seasonal tendencies for July expiration and the week thereafter, pullbacks look likely for SPX in the short run, and could cause a 3-5 day selloff into next week.

Technical Sell ideas:  URBN, RL, PEP, KSS, ATVI, SIG



TECHNICAL THOUGHTS


S&P has gotten too stretched in the short run, and despite the breakouts to new highs in several indices, there remain a plethora of other Sector ETF's and Global indices which are now testing former highs from 2015 and/or key trendlines which should make further upside progress difficult.    ETF's like XLK, XLE, XLI XLY, XLF are all hugging areas of importance, and while a few might seem to have broken out, weekly closes are far more important than one day at new highs.   The DJ Transports is back up at 8000, a key level for this spanning back over the last year, while the Bloomberg World index has reached April highs

Meanwhile, momentum indicators have begun to show some deterioration on intra-day charts, after this 9% run in the last two weeks.  9 period RSI on 240 min charts (4hr bar) has fallen down to 61.8, the lowest level since 7/8, while we've seen the percentage of stocks trading above their 10-day ma also fall off in the last week.  The VIX, meanwhile, has begun to stabilize near early June lows, just below 13, after having fallen more than 50% off its highs just a few weeks ago, a move that potentially has gone too far too quickly given a lack of clarity with nearly any of the things that were a concern a few weeks ago.

One thing that seems to have changed fairly quickly is Sentiment, which based on the Daily sentiment index readings (DSI) of 87 out of 100 (7/14/16) have reached the highest levels in nearly two years.  Suddenly, it seems the Media's non-stop talk about "New-All-time Highs" seems to have resonated with the public, at least to some extent.  Other sentiment gauges have improved in the last week, though are not yet at exuberant levels.

Sector-wise, Financials should be mentioned as a real positive in recent days given the global bond selloff that caused yields to spike hard in recent days.  We've talked about the German bund yield having the potential to bounce and indeed, its moved from -0.20 bps to near 0 in just the last five days.  US Treasury yields have followed suit, but arguably have moved a bit too far too quickly.  Financials have been the beneficiary of this yield spike, but XLF arguably reversed course right near key resistance on the upside Thursday, after attempting to break its one-year resistance from last year's highs.  Relatively speaking, as will be shown below, XLF vs SPX managed to bottom out right near prior lows and has bounced.  While the larger pattern for Financials remains difficult to embrace, this improvement in short-term momentum and relative strength is worth noting, as it comprises over 15% of the SPX.   For now, until we can see meaningful improvement in the trend for Bond yields, and not just a bounce, this recent surge might prove short-lived. However,


 

Charts and additional analysis below.

 


 

S&P futures managed to push ever higher by getting above initial resistance to levels near 2168 before fading, and still remains stretched in a manner that likely leads to at least some form of consolidation in the week ahead before additional gains can occur.  For now, upside should prove limited to areas near 2180 as a maximum area of resistance, which has the highest open interest heading into July expiration.  However, a pullback under 2137-40 looks more likely and should result in weakness down to near early June highs (former resistance now support) before any real low is at hand.

 

 

Financials relative to the SPX looks to have stabilized and bounced near a key area of former support near relative lows that were made earlier this year.  The surge in bond yields coincided with this move, which now looks to have moved a bit too far too quickly, but the gains in Financials have been sufficient to lead all other S&P sectors outside of one, Materials, in the rolling five days.  This bounce was a huge positive in terms of helping to provide necessary tailwinds to the market, representing over 15% of the SPX. 

 

 

Similar to XLI, XLY, Financials look to have hit key resistance near a longer-term area of resistance from highs made this time last Summer.  While Financials outperformed all other SPX sectors on Thursday and have outperformed substantially over the last week, XLF looks to likely stall out in the short run given this resistance near 23.80 that should serve to repel this advance.

 

 

Daily Sentiment index hit a level of 87 out of 100 as of 7/14/16, which represents the highest bullish reading since 2014 for SPX.  While other sentiment readings haven't yet turned as optimistic, this gauge normally is important as a contrarian gauge when it hits the mid-90's for a peak in price.  Thus, the recent breakout to new high territory looks to be something which is slowly but surely becoming more readily accepted, and could serve as a negative for stocks in the near-term, along with the fact that other indices remain nowhere near new high territory. 

 

 

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