August 13, 2018
S&P 500 SPDR ETF Trust- SPY
282.13, 281.24-281.83, 278.30, 276.43, 268.49 Support
283.85-284.37, 284.52, 285.85 Resistance
As global markets have reached mid-August, it's important to see the extent to which the rest of the world has not joined the US Equity rally of late. This chart features the MSCI All-World EX-US index, which peaked back in January, but yet came nowhere near these levels into May highs, as the rally recouped only about 1/3 of the prior 14-day decline. After then selling off to new multi-month lows into early July, the recent rally into August has only regained about half of the move down from May, keeping global equities in a difficult spot overall. The break from early August highs has now violated this minor uptrend over the last couple weeks, and threatens another retest of lows and now August has been even weaker. Last week's downturn caused this index to break the uptrend from late June, putting even further pressure on how equities are trading when looking at a broad-based global gauge. So the takeaway here is that it's important in these times to focus away from the FANG names near-term, which have been more resilient in August, while carefully scrutinizing how the larger world indices are doing which might have a bigger effect eventually on how the US does.
Summary: The weight of the evidence seems to suggest that stocks have begun a correctional phase, and while most of the selling has occurred thus far in Europe and Asia with the Emerging markets having been hit particularly hard this past week, developed Equities have also begun to stall out and turn down, which happened for the World indices on July 26. Growth has been increasingly shaky vs Value and has broken uptrend lines on respective indices, while the Bond market has been much stronger than anticipated, with rates having given back much of the yield rise into mid-July. Trade tensions boiling over between the US and other countries, one by one, which seems to be increasing by the day, has coincided with extraordinary weakness in the currency markets of many Emerging markets, and slowly but surely seems to be affecting Equities as well. While the world didnt't care much on Russia tension, despite a 10% decline in the Ruble, when the attention turned to Turkey, most developed Equity markets finally began to show some evidence of turning down. Last Friday saw the rare combination of Equity, Treasury, and FX volatility and while Emerging market turmoil might be seen as something that's been ongoing, one should note that warning factors for this equity rally have also been present for the past couple weeks with a few added areas of concern just in the past coupe days that have seemed important.
Specifically, the following seem important and negative
1) Treasury yields broke down on the long end late last week, with 10 and 30 year yields cracking support and directly coinciding with Financial weakness. Yields directly led Equity movement into mid-June for highs and then early July as lows.
2) Europe broke down, as per SX5E severing uptrends of the last month and we're still seeing quite a bit more weakness in global equities than US
3) Technology's main SPDR ETF, XLK, rolled over to new four-day closing lows, confirming a TD Sequential sell signal in the process on daily charts. Tech has been slowing down in the last month with the NY FANG index having peaked out in mid-June and making two consecutive lower highs.
4) Emerging market weakness has begun to show capitulatory parabolic declines in most currency markets with outsized declines in USDRUB and USDZAR while USDTRY got most of the attention late last week.
5) The Defensive trade still looks to be in place, with a few minor days of weakness last week in Staples; However, Utilities are outperforming Technology in the rolling 30-day period with returns of 1.71% vs 1.70% for Tech
6) Seasonally speaking, the month of August tends to be the 2nd worst for the NASDAQ, and averages -1.9% in mid-term election years. (1971-2017) The S&P and DJIA typically also fare worse in mid-term election years, averaging -0.4% and -0.7% respectively
7) Implied volatility seems to be firming, and VIX closed last week at the highest weekly close since July 6, higher than the prior four weeks.
8) NYSE only showed 64 new 52-week highs last Friday, way down from early July and also well off peaks seen in January (340+)
9) Momentum is showing negative divergence on NASDAQ with RSI having peaked out in June, while DJIA and SPX both showed peaks in late July
10) Summation index still shows breadth having peaked in June, and while Advance/Decline did move back to new all-time highs, the dropoff in hotels, casinos, Financials, Industrials last week is a concern to the broad-based rally narrative.
The following factors make it seem like perhaps a snapback rally might happenMonday-Wednesday before the pullback gets underway but that any minor rally likely would be short-lived
1) Breadth wasn't all that strong on last Friday's decline, although finished at 2/1 negative
2) Demark counter-trend exhaustion failed to signal "Sells' as of Friday, (No completed 13 countdown) and ideally, a small recovery rally into Tuesday/Wednesday would help these to materialize, creating a stronger sell
3) Seasonality for August, according to Stock Traders Almanac, tends to see most of the month's gains made in the 8th-13th trading days of the month, whereas the balance of the month is historically flat for DJIA, S&P and NASDAQ, though decidedly worse for mid-term election years
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Leaning Bearish- Monday will be a critical day- Followthrough on Friday's selling under 2833(Under as of Sunday evening) means that a pullback down to 2800 is underway (which can't be said just yet given that S&P managed to rally up from early lows to stay above this level) The ability to trade higher Monday likely means 1-2 days of rally attempt during a seasonally positive week for August before selling gets underway. However, the action in US indices on Friday coinciding with Europe, EM weakness which doesn't seem to be ending, likely will cause a pull lower for the US into end of August. (As of Sunday evening, Futures were down 9 ticks.)
Intermediate-term (3-5 months)- Bullish- While there remain ample reasons for concerns in the short run, now that markets have entered August with little to no evidence of any real downturn, the period between now and end of year will likely only suffer minor pullbacks between now and into early October before rallying into end of year, postponing the larger decline yet again. Specifically, the fact that Advance/Decline for All-stocks pushed back to new all-time highs into early July is thought to be a bullish factor. The fact that Small-cap and Mid-cap indices have rallied back to new highs is also thought to be constructive, as most bear markets start with a serious dropoff in Small and mid-cap performance. Though some of that did indeed happen in July with the Russell2k, most intermediate-term chart patterns remain constructive. Overall, the 2 month bias is more negative for a 3-5% drop. However, on a 4-5 month timeframe, it's likely yet again that markets exhibit seasonal strength. so given that markets have been able to absorb the relative underperformance in Tech lately with little to no damage, we'll need to see S&P drop under 2700 to have any real concern, and given the tariff taunts which have been ongoing, the sentiment is likely to reflect fear much faster these days than normally which bodes well for the bulls into year end.
5 Technical Long ideas and 5 Technical Shorts:
LONGS: TLYS, M, EXC, CLX and NI
SHORTS: ITW, LVS, AMBA, HLT and EXEL
Tilly's (TLYS- $16.33) Bullish long-term pattern breakout- One of the more compelling long-term breakout structures of any of the stocks screened in recent weeks. This small-cap Online Specialty Apparel maker has a market cap of just 480 million, but has EPS growth of over 47% in the past year and is expected to continue growing Earnings at over 17% on average over the next two years. Technically speaking the price action has been compelling of late as TLYS has advanced by more than 50% in just the last three months alone but its consolidation from June has kept the stock from becoming excessively overbought. The reason for near-term optimism is based on TLYS advance to new 2018 highs just last week, on the verge of a giant 5-Year+ base breakout. TLYS is within 10 cents of reaching the highest levels since 2012. The pattern resembles a giant Reverse Head and Shoulders pattern which are rare to see on stock patterns longer than five years in length. This move above $16.20 should help TLYS begin a lengthy intermediate-term advance, and is thought to be quite positive technically. While volume has not yet risen to sizable levels above prior averages, it looks compelling technically to own here and looks right to add to upon moving above 16.50, for the start of a move to the $20's. Only declines below $14.70 would change this thinking and postpone the advance.
Macy's (M- $39.97) Cup and Handle pattern is bullish for further gains. Heading into earnings this week, Macy's looks appealing to own for an upcoming breakout above its Neckline resistance at $41 for a move up to $45.50. The stock has enjoyed some decent momentum in the last eight months, more than doubling, yet still lies more than 50% off its all-time highs made back in 2015. The rally from this past May makes it particularly attractive technically given the sharp rally followed by bullish consolidation. This churning in the last couple months has taken the shape of a Bullish Cup and Handle pattern, with Neckline resistance at $41, at the highs from two weeks ago. Exceeding this should help the stock rally sharply to test the prior swing highs made just after the US Election, and the upcoming earnings could be a catalyst for a move of this sort. Overall, the Cup and Handle tends to be a very favorable pattern following a sharp rally for a chance for a stock of this sort to continue its advance, and one should consider positioning long, looking to add above $41 for a chance to reach the mid-$40's initially. Only a pullback under $37.83 would postpone this move and would be a stop for trading longs.
Exelon (EXC- $43.13) Exelon's ability to exceed the highs of its own Cup and Handle pattern since last November bodes well for further gains to targets near $50.70 which represents a 38.2% Fibonacci retracement of the decline EXC made since 2008. This Utility has been undergoing consolidation for the past eight+ years, so this recent surge in strength which began back in 2017 is seen as a very welcome development. The initial breakout to new annual highs led to some mild consolidation, but now the stock has turned up again in the last six months and has just not only July 2018 highs but also highs from November of last year. This brings EXC up to the highest weekly closing price since early 2012, making this appealing to buy with initial targets at $45.45, but eventual movement to $50.70. Given that Treasury yields have just broken down again, defying most investors futures bets for higher yields according to CFTC positioning, Utilities look likely to continue to outperform in this environment. EXC looks like one of the better to favor given its move to new 52-week highs and is considered a technical overweight.
Clorox (CLX- $140.21) Pullback last week represents buying opportunity- CLX has been the top performer of any of the Consumer Staples stocks in the last month, returning 5.83%, and outperforming all other 31 stocks within the S&P 500 Consumer Staples index. Its breakout two weeks ago has been followed by a big pullback last week, which makes this far more attractive to buy dips. Pullbacks are not likely to violate 136 before turning back higher to challenge 150, making this an attractive risk/reward to consider during a potentially tough time for equities. Overall, CLX has been a leader in relative strength among this group, and technically speaking its move to the highest since early January is considered a bullish move and should allow for further strength to challenge and surpass early year highs. Only a move down under $135 would postpone this rally.
NiSource (NI- $26.61) Bullish, and recent consolidation should allow for a move up to test late November 2017 highs near 27.68 and then higher. NI has shown its own signs of forming a Cup and Handle pattern since early July and the rally into early August failed to show too much consolidation but remains within striking distance of early July highs. Overall a very strong name within the Utility complex, and expect this to further its gains in the weeks again during a potentially tough time for Equities. The drop in Treasury yields should only add to the allure of this stock within this defensive, yield sensitive group. Bullish, looking to buy dips.
Illinois Tool Works (ITW- $136.47) No sign of relief for this ongoing downtrendThis stock's break of the minor uptrend from July lows suggests further selling is in store, and it's right to avoid buying dips and/or consider shorting for a pullback down to test and break recent lows on its way to $120. While many in the Industrials space have been able to snapback and rally in the last couple months since early July, ITW has shown exactly the opposite. The gap down into July failed to gain much ground and has just violated the early August lows which makes further weakness likely Momentum has risen a bit from early oversold levels given the recent consolidation, so this recent rolling over shouldn't run the risk of shorting into an extremely oversold state. The ongoing decline makes buying into this very much premature and last week's break in particular suggests that further weakness should result between now and October.
Las Vegas Sands (LVS- $67.85) Bearish break of Head and Shoulders pattern-While this stock was touched upon in the Weekly Technical Perspective back in mid-July, it's still right to mention again given the additional weakness seen in last week. The snapback rally attempt after the initial break of this Head and Shoulders "neckline" failed to offer much relief, and held right where it needed to for a continued bearish stance. The last week has seen this pullback and now should begin its decline to the low to mid-$60's in this seasonally weak time. Most of the Casinos remain in poor shape technically, but LVS stands out given its large Head and Shoulders pattern since January of this year, making this particularly negative for those considering buying. One should avoid and/or short, technically for further losses in the next 3-5 weeks.
Ambarella (AMBA- $38.72) Consolidation during a bounce in Technology is not encouraging AMBA's last four weeks have failed to participate in any of the snapback rally in Technology and appear like a Bear trap which should result in this pattern being violated to selloff down to the low $30s to test prior lows made last Spring. AMBA has shown very poor relative strength all year long, yet doesn't show any meaningful signs of trying to carve out a low of any sort. The last few weeks should have shown far more evidence of rallying off the lows during a month when Equities have moved higher. Prices lie under lows from last Fall and little support is present until the 2016 lows, which lie about 10% lower. This looks to be a logical target for further weakness in the weeks and months ahead, and breaks of the most recent six-week low would represent a green light for technical shorting and/or to avoid buying into this weakness.
Hilton Worldwide Holdings Inc. (HLT- $75.65) Breakdown likely leads to additional weakness in an already weak sector. The break of June lows for HLT also represents a violation of the uptrend that has held since the US Election for Hilton, and is considered a bearish development that likely will lead lower in the weeks to come. The entire Hotels space has been hit hard since earlier this year, with many stocks such as MAR, WYND having peaked out in January and have dropped off every since. Most of these have been tied to the housing slump that seems to be slowly materializing, as per data since January. Last week's decline warrants avoiding buying dips and/or considering shorting the stock for aggressive traders. Movement down to near $70 looks likely in the short run, with intermediate-term targets in the mid-$60's.
Exelixis Inc (EXEL- $20.40) Lackluster consolidation should be sold into- EXEL looks ripe to turn back lower after a lackluster consolidation following its decline from late last year. The last two weeks showed prices closing down right at the lows after early week rally attempts. Looking at weekly charts, the breakdown earlier this year violated nearly a two-year uptrend in the stock. This resulted in a quick pullback to the 50% retracement of the prior advance. However, the resulting recovery attempt has proven to appear counter-trend in nature, not the start of a rally that should carry EXEL higher in the weeks ahead. The decline from two weeks ago in particular represented a key reversal that engulfed the prior six weeks of trading. Declines look likely to test $18.15, the 50% area that had held on the prior decline. However, this should represent only minor support before a break of this level to reach technical targets at $14.75, which is right near the 61.8% Fibonacci area of support. Overall, this looks like a good risk/reward short for a selloff that could prove to be 15% or greater between now and late October.