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Prices stretched entering July, and upside seems limited until consolidation can happen- Newton's Notes Daily Technical Comment 07/01/16

July 1, 2016

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

2068-73, 2049-51, 2034-6, 2001-3      Support
2091-2, 2102-3, 2119-20                     Resistance

 

 


S&P Futures: (2-3 days)- The risk/reward doesn't favor new investments at current levels given a 5%+ rally in three days' time.  Attempting to fade this move thus far has proven futile.  Futures managed to exceed 2075 which brought prices quickly up to the next key level which is 2087-91.  If this rally is going to stall out at all before moving to new highs, this level "should" have some importance, whereas above 2100 lies nothing until 2119 peaks from 6/23.  But it doesn't pay to get aggressively short at this point, without at least some proof of a reversal. For now, ample resistance lies near 2090 but could pullback to 2073 without doing hardly any damage.  I suspect that there should be some attempt in stalling out and consolidating these gains before a move back to new highs, but can't rule that out, based on the markets resiliency thus far.  For now, hedging looks proper, as part of a long bias which eventually should carry prices back to new highs.


TECHNICAL THOUGHTS


Incredibly enough, the late surge in S&P helped to regain sufficient losses to put the index back into positive territory for the month, while allowing for a third straight quarter of gains which allowed for quarterly gains of 1.9%.  The volatility has been a sight to behold of late with six straight days now of 1% Up or Down moves with the S&P having gained more than 5% in the last three sessions alone.   Europe's gains have been even more spectacular, rising 6.8% since Monday, or the mostin this period since 2011.  As said on Monday, at a time when most people would question one's sanity for being in equities after the BREXIT decision, that spike in fear ended up creating a great buying opportunity.   Just at a time when it feels so uncertain, it's wise to look around at how sentiment is creating opportunities by keeping most investors hesitant on the sidelines at a time when breadth remains excellent and indices are just fractionally below all-time high territory. 

Not only stocks managed to gain ground for the quarter, as both Bonds and Commodities grinded out gains that were the best in years.  Government bonds worldwide gained 2.3% for June, the most since June 2008 with an effective yield of 0.5%.  Commodities rose 13% for the 2nd quarter, the best performance since 2010, with Oil accounting for a meaningful chunk as WTI's 26% gains were the best quarter for Crude since 2009.  

Heading into the first day of the month and the final day of the week, many are scratching their heads as to why equities have rebounded so sharply in an environment where not much changed.   The S&P futures contract has rallied over 100 points since Monday, erasing nearly the entire BREXIT breakdown, yet the environment doesn't necessarily feel that much more certain.  (The ECB's statement of providing additional liquidity seemed important from a non-technical standpoint, but yet most of the last two days were marked with rampant short-covering.) 

Yet short-covering alone, as was seen Thursday, is seldom a reason to expect an immediate reversal.  For now, yet again, attempts at avoiding buying dips has proven wrong, and it's important to see some evidence of trend reversal before growing too negative in thinking prices need to pullback.   Key cycles for trend change arrive near 6/6-6/8, so pullbacks into late next week should offer great buying opportunities in Equities along with selling opportunities in the Treasury market, which have largely failed to follow equities higher in recent days.   While this might seem like a concern, it's entirely possible that yields bottom out and follow Equities higher vs expecting an immediate drawdown.  The next few days should be telling.


Charts and additional analysis below.

 


 

SPX managed to push higher in the last hour to close at new quarterly all-time high closes for the end of 2Q 2016, while finishing just below all-time high territory on an intra-quarter basis.   As can be seen in the Quarterly chart above, momentum has flattened out as would be expected on this trend moving sideways since the middle part of 2014.  Another key development for followers of Demark's indicators, is that SPX's close helped it record a 12 count on TD COMBO, with July's open cementing in the Quarterly 13.  Despite requiring a "Price-flip" before getting too aggressive, it is worth mentioning that sells are in place now on SPX quarterly, based on TD COMBO.  Both NDX and DJIA have quarterly sells in place now using TD COMBO, with the DJIA having confirmed its sell three quarters ago, with upside risk lines at 18367.

 

Commodity returns for 2Q bested all others since 2010, but as can be seen, formidable resistance lies directly ahead, casting doubt on the success of last quarter's gains providing any solid bottom for prices.  For CCI index, key resistance lies near 490-500, and would need to be surpassed to consider this rise to be the start of a larger advance for this group.  For now, given the US Dollar's resilience, the best that can be said is CCI has trended up to multi-quarter highs on a short-term basis, but remains in long-term downtrend from 2011.

 

 

Aerospace and Defense, in relation to the Industrials group, has been making excellent progress, and this chart shows this to be a good risk/reward sub-sector as part of the greater group.  Given that Industrials has broken down of late in the last month, this surge by this part of the sector is definitely an encouraging sign.

 

 

EWZ, or the Ishares Brazil MSCI Capped ETF, broke out over the last few days, as Emerging markets managed to gain 3.3% for the month of June, with gains in the Brazilan Real enjoying its best performing month in 13 years.  For now, prices are stretched, but on any pullback in the days ahead, EWZ looks quite attractive to buy dips, thinking that a move up to the mid-$30s is likely.

 

 

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