February 15, 2017
S&P MARCH FUTURES (SPh7)
2332-3, 2316-8, 2290-2 Support
2348-50, 2355-7, 2360 Resistance
S&P Futures: (2-3 Days) Bearish- Wednesday's defensive stance looked premature given the followthrough in Financials, but prices are very stretched in the short run, and while difficult to be too Short here before the reversal happens, it's also a very tough spot for longs beyond 1-2 days, and upside still looks limited. Traders can use 2360 as stops but expect a move down below 2300 to potentially 2280, so still about a 7/1 risk/reward from here and 2/1 from yesterday's close.
SX5E- EuroSTOXX 50- Bearish- Upside looks limited following the push to challenge late January highs, and a much higher likelihood in the near-term of pullbacks down to near 3280 and below that near 3220. Upside should be capped near this 3330 peak, and over would allow for a brief move to 3365-75
HSCEI- Bearish- Signs of exhaustion are apparent for HSCEI, with Thursday marking an official TD SELL SETUP to this move from late January. Pullbacks down to 10250 are likely, but the breakout move overall is viewed as bullish, so one should look to buy into any weakness into early March, with key areas at 10250 and then 10090-10100.
Longs/Shorts for a 3-5 day period:
Technical Longs: VXX, XLF, YHOO, GOOGL, NSC, MAR, AMZN
Technical Shorts: EEM, FXI, QQQ, KORS, VFC, DV, SIG, KR, VZ, WMT, TAP
The acceleration over the last few days seems to have caught most offguard, and indices ignored most of the negative momentum divergence signs from early Wednesday and charged higher another 0.50% while breadth moved up by just around 3/2 positive, not too encouraging for the bulls at this point. Financials were doing much of the heavy lifting in yesterday's trading, but certainly an important sector to be moving higher at 15% of the SPX. We'll need to see some evidence of this recent breakout in Financials stalling at some point to have some conviction of any sort of pullback.
For now the risk/reward is clearly poor technically speaking in the short run given rampant overbought conditions, signs of momentum not following suit, while there lies a plethora of counter-trend sells in place on many indices. Yet, the signals were mostly just established YESTERDAY in SPX, NDX, CCMP, INDU, VALUA, and EEM, and still have not largely occurred in a few different important indices, such as the Russell 2000, or many of the sectors outside of Technology. Industrials is due to trigger counter-trend sells on Thursday, while several others, like XLF, XLV, XLY will still require another 2-3 days. Other sectors, like XLE, XLB, XLU, IYZ, are down from recent highs and do NOT reflect any counter-trend sell.
Bottom line, the seasonality this week traditionally IS positive while the Friday of February expiration and the following week tend to be a much more mixed picture. Given the confluence of all these indices coming together showing very overbought conditions, any type of pullback might very well take a few more days before materializing, but the risk/reward for new longs here is Sub-par, and trading longs should utilize stops given the degree of parabolic advance which has occurred the last few days.
Finally, interesting to point out that the VIX closed at the highest level of the month yesterday, rising over 11% in trading, which is an unusual move given the upside acceleration in the Financials. Often times it is useful to look for signs of VIX resilience during a steep Equity market ascent for signals of an upcoming turn. In this case, we'll need to see at least a move down to multi-day lows in SPX to have real conviction that this is getting underway. Technically speaking, I would expect to see lesser and lesser participation in the days ahead, coupled with a drying up in volume and breadth, which precedes a pullback next week. To reiterate yesterday's thoughts, extreme selectivity is imperative at this stage of the rally in the short run.
Additional thoughts and charts found below
Negative momentum divergence failed to stop prices from rising another 0.50% in Wednesday's trading, and the already overbought conditions became even more so by the close. 82% of stocks are trading above their 10-day moving average at present, which is on par with levels seen last December. Meanwhile, SPX prices have traded above their upper 2% Std Deviation Bollinger Band now for four straight sessions, while the monthly prices are above their Monthly Bollinger highs by nearly 3%. Overall, getting back under Thursday's lows of 2331 in S&P futures is paramount to expecting that a move down to 2280-90 can happen, as this would also violate the minor uptrend in place from 2/8 lows, which is when the steeper ascent began. For now, for those flat, look to sell into strength at 2355-7, and daily closes over 2360 necessitate holding out for better entries.
The VIX rose over 11% on Wednesday, a rare occurrence when we're seeing such parabolic activity while breadth is so flat/mildly positive. For now, this should be a warning that this recent lift should be coming to an end, likely by February expiration in the short run. One should use any backing off in Implied volatility to consider buying premium with thoughts that the weeks ahead could see some expansion in "VOL".
From a sentiment perspective, we've just begun to see other sentiment gauges start to line up with more bullish positioning, as the Equity Put/call recorded readings of .53 on Tuesday and actually lifted up to .58 during Wednesday's trading after hitting the lowest levels since mid-December. Those former Extreme put/call readings happened after an 8-10% move in the SPX just following the Election, but the subsequent price action into year-end was anything but bullish, but resulted in extreme consolidation through year-end before the push up which we've seen over the last couple weeks. Overall, this low Put/call reading is a warning that equity sentiment is getting more positive at a time when economic data seems to be also ratcheting up and the race towards a March rate hike looks to be on.
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