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Treasury yields and USDJPY both reverse near key trendline resistance- Equities have limited upside near-term

July 22, 2016

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

2150-2, 2137-9, 2109-10    Support
2177-9, 2183-5, 2193-4       Resistance


S&P Futures: (2-3 Days) Similar to yesterday's theme.. Trend bullish, but upside limited at this point for S&P in the short run, awaiting signs of reversal. ( SPU6 Target-2183-5 ) Prices showed only scant evidence of trying to reverse, but remain above stops at 2151.   2139 having a bit more importance.  (2155-SPX cash) Tough to rule out a retest of 2171, and then 2183-5, which should be an area to sell into.  Closes under 2151 take futures down to 2139 and only on a break of 2139 does a larger pullback happen.


TECHNICAL THOUGHTS


Thursday's Draghi remarks set the day's tone Thursday for what would be a sharp reversal for Treasury yields and USDJPY while US Equities largely failed to do much damage.  Prices of S&P futures are within 1 point of closing levels from last Thursday, which shows the extent of the lack of volatility over the past five days, at a time when equities are trying to consolidate recent gains.

Transportation stocks fell hard on Thursday, down over 1.25%, as Airline weakness caused the broader Industrials to lead all major S&P sectors lower, down 1%.  Energy and Materials also fell, as WTI Crude pulled back to test key support near $44.50.  Utilities and Healthcare were the only two sectors out of 10 which showed gains, as Biotechs jumped again to spark the continuing resurgence in Healthcare, while Treasury strength served to help the Utilities at the expense of Financials.

Overall, the Reversals in Dollar/Yen and in Treasury yields look important, and should result in Equities potentially also following suit to the downside next week.  For now, there remains insufficient proof that this is underway with regards to Equities and we can't rule out a minor pop back to new highs before this begins.  But a reversal in 10-year yields down to 1.45 from 1.62 (Thurs earlier highs) would likely put sufficient stress on the Banks which should cause some type of "Backing and Filling"

For Friday, earnings results out of Chipotle, Visa, PayPal seem to be causing mild bounces in the after-market in these stocks, while T, Starbucks, and Capital One are all lower post-close Thursday.  Companies like Honeywell, General Electric, Textron, and Moody's are all expected to report pre-open on Friday. 

Key to Note:

Starbucks- (SBUX)  Still very much range-bound after rally within longer-term Neutral range-  Post close -5% gap down leaves this in No Man's land.  Still very much unattractive to try to buy dips just yet, and no interest technically.

AT&T (T) -  Stellar ongoing technical pattern and near-term consolidation in place from overbought conditions which should make this buyable as part of the ongoing rise.  Overall a good technical stock, but just overbought near-term and in need of some consolidation.

Chipotle (CMG)  Downside from here appears limited and after a mild climb in the last few weeks to key upside trendline, Thursday's post close earnings related gap can help this make additional progress to the upside. 

PayPal (PYPL) Quite attractive given the two prior peaks followed by an ascent to challenge this area once again.  Post close, this moved to new all-time highs before fading, but still is attractive to buy for an upcoming surge back to new high territory.

 

Looking at daily charts of S&P, the recent rally attempt really hasn't turned down sufficiently to think a pullback is yet underway, though has flattened out severely in the last week which has caused a pullback in daily momentum.  S&P managed to hit an exact Fibonacci ratio of 61.8% of the projection from initial rally from February into mid-April, when projected upward from late June.  While it's difficult to call for an exact top in this rally until SP gets down at least under 2139, with 2151-3 being an initial area of key support.  In the bigger scheme of things, S&P could selloff all the way down to near former April highs and still not do any meaningful technical damage.

 

10-Year Treasury yields reversed course right at 1.62, which represented a key area of resistance for TNX, and Thursday's reversal back lower looks important given the combination of this move along with trendline resistance drawn from May highs.   Bund yields made a similar reversal near their own downtrend line, both of which suggest that an upcoming Treasury rally (yield selloff) should occur into next week.  Targets for 10yr yields lie near 1.45 while 5-year yields could decline back under 1% to 0.93-0.98% before stabilizing.

 

USDJPY also likely to pullback into the BOJ meeting late next week.  Incredibly enough, not just Treasury yields have hit important resistance, but also Dollar/Yen, where today's selloff looks important despite Kuroda's comments regarding "No Helicopter money" eventually proving Untrue.  For now, some backing and filling for USDJPY is likely down to 104 to 103.50 before next week's meeting, which suggests that the Yen rally might coincide also with weakness in US stocks, if history is any guide.   The two week rally of late coincided with the strongest rally of the year for Equities, so a stalling out now could also have significance.

 

Airlines were the worst performing sub-group within Transportation on Thursday, causing the DJ Transportation index to fall more than 1.25%.   This pullback just reached multi-day lows today after nearly a week of consolidation, and suggests additional downside for Airlines in the days ahead, with XAL having the potential to reach $85 or slightly lower before bottoming and turning back up.  For now, stocks like UAL, AAL, DAL, JBLU all look like attractive shorts on a 2-3 day basis. 

 

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