February 7, 2017
S&P MARCH FUTURES (SPh7)
2284-6, 2273-5, 2254-6, 2260-2 Support
2289-90, 2298-2300 Resistance
S&P Futures: (2-3 Days) Bullish- Last week's breakout consolidated a bit on Monday, but maintains good structure and Demark counts are premature- a move back to new highs is likely before any peakout
SX5E- EuroSTOXX 50- Bearish- Europe has taken the lead in turning down ahead of US and weakness in SX5E, DAX, IBEX, FTSEMIB all look to have a bit more downside near-term. SX5E got down to near last week's low close and 3230 will have importance, under leading to 3187
HSCEI- Neutral, as prices have reached the highs of the recent range, while not exceeding 9910 which would turn the trend bullish. Under 9632 would be a concern, while over 9910 lets this move extend.
Longs/Shorts for a 3-5 day period:
Technical Longs: GDX, DOW, LYB, NEM, AMGN, BAC, ABT, KMT, URI
Technical Shorts: S, VZ, CCI, SIG, SPLS, WMT, TAP, HRL, XRT, KSS, BBBY
Monday's minor pullback failed to do much damage in S&P with prices barely giving back 1/4 of last Friday's gains, while the NDX pushed up to new highs for the month and within 1 point of all-time highs. Incredibly enough, Monday marked the 35th straight trading day without a 1% intra-day swing, which looks to be a new record as stocks continue to churn with incredibly low volatility. Breadth was lower by a 3/2 margin while volume flowed at over a 2/1 pace into Down vs Up stocks, yet by end of day, none of the major 11 sectors were down more than 1% and both Technology and Industrials were higher. While many continue to warn of low volatility preceding a likely range breakout which occurs on big downside volume, it's still tough to make that case, and movement back to new highs looks likely this week for S&P, DJIA and NDX before any reversal plays out. Demark indicators which show counter-trend exhaustion for weekly and monthly charts remain premature for daily, and when scanning many equity and sector charts, most require another 3-4 days higher before producing any signal. So, despite some sentiment indicators starting to tilt more "bullish" again, it's proper to wait until we see proper upside exhaustion and/or begin to show some evidence of technical damage.
Key developments for Monday were focused on three things: First, Precious metals extend their recent breakout and still look likely to trend up in the next few days, despite being stretched. This should constitute the final part of this push higher in the metals before the US Dollar turns back higher. For now, the move seems incomplete and Gold, Silver look likely to move to 1250 and 18 respectively. The second development concerns the movement in Treasury yields lower which began last week in Europe and has slowly extended to the US which showed 10-Year Treasury yields pulling back to under 2.41%. This does look near-term bearish for yields and could lead to additional minor weakness down to 2.30-2% before bottoming out. For now, sentiment remains bearish on Treasuries with Specs still holding -297k Short contracts in Treasuries, expecting yields to move higher on faster US economic growth. For now, last week's FOMC dovishness seems to be leading Treasuries higher. Unless yields take out 2.32% though, this move should be faded on pullbacks and used to sell Treasuries over the next 3-5 trading days.
The Third development concerns Europe beginning to show markedly greater weakness than US equity indices, and DAX, SX5E and SXXP all look to be potentially forming topping patterns in the short run, which needs to be watched carefully for any evidence of US following suit. For now, it looks right to favor US stocks over Europe, expecting that Europe begins to slide and show more underperformance in the days/weeks ahead. ETF's like EZU, VGK both have begun to turn lower of late, hitting new multi-day lows, while the ratio of EZU/SPY just broke down under key trendline support in the last few days. Overall, for now, it seems right to stick with the US, expecting higher prices, yet to expect weakness out of Europe. While this can last a bit longer in the near-term, it's thought that eventually the US will follow suit, but not before another attempt at new highs in SPX, DJIA and NDX this week.
Additional thoughts and charts found below
This hourly S&P shows the resilience in S&P futures holding the area right near prior 2/1 highs, which is a key area of structural support on a short-term basis. Movement back to new highs is the more probable near-term scenario, and above 2294 should drive prices back to new all-time highs. UNDER 2284 would take prices to 2274-6, but only in the event of a break of 2262 would the structure truly turn negative. Until/unless this occurs, it's better to follow the trend from late last week which still points higher.
Treasury yields have begun to pull back in the near-term, with Monday's decline to new multi-day lows definitively breaking the trend from early January. Additional near-term weakness is possible in this scenario, which might prove to be a short-term source of strength for Utilities, REITS while Precious metals can advance a bit higher. Movement down to 2.32-4% looks possible in the next few days, but is likely to hit yield support which causes stabilization, and then yield rallies unless 2.32% is breached.
Europe took a big step lower in relative terms to the SPX in recent days, and as this ratio chart of EZU to SPY shows, broke the uptrend that had been intact since the US Election last November, while adhering to the intermediate-term downtrend that's been in place for years. Bottom line, this looks to be a place to underweight Europe vs the US, and expect to see above-average lagging in most European indices as compared to US equity indices. Technically speaking, one should look to favor SPY, QQQ while avoiding EZU, VGK in the days/weeks ahead.
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