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Negative market breadth provides key "Tell" to equity rally nearing completion

 

May 15, 2018

S&P JUNE FUTURES (SPm8)
Contact: info@newtonadvisor.com

2723-5, 2714-6, 2698-2701     Support
2741-4, 2748-50*                     Resistance


LINK TO TECHNICAL WEBINAR from last Thursday 050818- https://stme.in/7plbipwe92

 

SPX - (1-2 Days)- Mildly Bearish-  Reversal day expected Tuesday-Thursday of this week.  While Monday's highs can be surpassed by a fractional amount, it looks unlikely that 2750 is exceeded, and any move up to 2740-50 should constitute an excellent chance to sell rallies on Tuesday

SX5E- EuroSTOXX 50- Mildly Bullish- Last week has been largely range-bound.  Gains up to 3625-50 should prove to be maximum highs and right to sell into gains.  Unlikely to surpass 3659.  

HSCEI- Neutral- Movement up above 12361 needed for bullish stance-  Ongoing choppy range, but until US Dollar peaks out, this might underperform and trade range-bound a bit longer in the near-term. 

Trading Longs:  XBI, XPH, EUO, SRS, DRV, MRO, NOV, HAL, COP, OXY, ETFC

Trading Shorts:  LL, VNQ, XLU, SMH, VNO, AIV, D, ATVI, UAL, EXC, SRE, ITW, BLL, MAS, ABC, WMT, CAH, KSS


TECHNICAL THOUGHTS


ACTION PLAN-  

Small Short in SPY at 272.98, looking to add  to shorts at 273.50-274 with targets at 262-4
Looking to short QQQ today at 171.50-172.50 targeting 162
Short SMH 106.23, with target 100
Long OIH 27.33 with target 29.50
Long TBT 38.10 with target  39.25
Short XLU 50.19 with target 47.37
Short VNQ 77.42 with targets initially near 72



The fractional gains yesterday briefly turned negative before holding steady by day's end, yet breadth was negative on the day, a likely warning sign that further gains should prove muted this week, and movement to new highs likely will create divergences which could prove to be an excellent opportunity for profit-taking.  Overall, the rally should be stalling out this week and could happen between Tuesday and Thursday, so upside appears limited technically and one should hold off on getting too aggressive with longs into the middle part of May. 

Energy appears to be still one sector which can offer relative strength in the days ahead, yet Industrials, Technology and Financials all look to have limited upside.   The Industrials chart shown below is not all that different from the relative chart in Financials to SPX shown in yesterday's Weekly.  Both remain trending lower and last week's gains have failed to accomplish sufficient upside to think that these sectors are breaking out and/or that this rally is becoming more broad-based.   In addition, counter-trend signs of exhaustion per Demark indicators can appear as early as today to this rally, but ideally, would set up for an attractive area to sell at levels just above Monday's highs.  

Outside of equities, Treasury yields look to be climbing again, and this should offer a chance to sell the yield sensitive groups like Utilities and REITS, which likely won't offer much safety as long as yields keep rising.  As told in yesterday's Weekly Technical Perspective, both groups look likely to turn down sharply and should be avoided near-term.   

Additional charts and thoughts below.

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Industrials daily chart shows one of the main reasons why its premature to think this recent bounce has been all that broad-based.  Prices have not exceeded downtrends, either with regards to the Industrials sector, nor Financials, nor Healthcare and now look to be finding strong overhead resistance near areas that could cause a slowdown.  In the short run, it looks likely that Industrials should stall out this week and pullback after its rally over the last six of seven days.  Stocks like MAS, BLL, ITW, MMM, PCAR, AAL, UAL, R, OC, SWK all look to have weak technical patterns within the group and appear likely to stall and/or reverse in the days ahead.  

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Semiconductors breakout six days ago led to a quick rally in this group, yet now is showing evidence yet again of reaching levels that are important on the upside.  The daily chart structure has seen better days, and the pattern shows prices rallying to a likely lower high than having been made back in March.   Showing symmetry to this prior level from January, SOX will record a TD Sell Setup in Tuesday's trading on any close above the close from four prior.  These types of signals suggest a slowdown and likely reversal to this rally, and it's right to consider taking profits in Semiconductor stocks on this move and for aggressive traders, to consider shorting the SMH as a way to take advantage of Tech stalling out and reversing course.  Technology as a whole, which looked attractive two weeks ago, has now run a bit too far too quickly and looks vulnerable over the next 1-2 weeks.    

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Healthcare has shown a sharp snapback in recent days, with yesterday's advance over 91.90 in the Biotech ETF, XBI, being a positive, and targeting 95-95.85, and DRG index getting up to April highs also being a positive and should allow for another 1-2 days of gains in Pharmas.  However, the relative chart of Healthcare needs to see much more to have conviction that this sector can work and this recent move represents more than just a short-term bounce.  As daily relative charts show of Healthcare to SPX, the group peaked out last September and its October breakdown under support resulted in a fast retreat which thus far has not really been recouped.  This has required a much more selective approach to sticking with strength,  and trying to avoid buying weakness too quickly.   This will be the key chart to watch in the days ahead for this group, the S&P 500 Healthcare index vs the SPX.  Breaking out above this downtrend would warrant overweighting.  For now, one likely should consider selling into this group on Tuesday/Wednesday on movement in XBI, DRG to the levels mentioned above.