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XLI breakout & Advance/Decline push back to new highs constructive, yet Financials, Tech need to start performing

May 21, 2018

S&P JUN FUTURES (SPM8)
Contact: info@newtonadvisor.com

2700-2, 2654-6 , 2648, 2630-1  Support
2739-40, 2748-50, 2765-7         Resistance

 

A daily S&P Futures chart shows prices pushing up above the highs of the last few trading days as per Sunday evening.  Given that the last week was lower, but not meaningfully so, and grinded sideways as opposed to showing real technical damage, this move Sunday in Futures is bullish, and unless immediately erased Monday morning, likely paves the way for a push back to 2750 and then potentially the larger 1x1 price/time angle off the January 2018 highs.  It was right to come in bearish last week, but we just didn't see enough technical damage with indices.  Overall, the bears require a move down under 2700 for June futures for the negative trend to gain traction.  

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Summary:   Stocks have largely remained resilient, not showing much pullback after having peaked again in mid-month, similar to what's been happening over the last few months.  The breakout in Industrials while Advance/Decline pushes up to new all-time highs are thought to be positive factors which might keep prices afloat a bit longer, but its still not unreasonable to think weakness can happen into end of month, which is what happened in February, March and April.   Bond yields broke out in bigger fashion last week, so stocks very well could follow yields in the short run.  The Dollar meanwhile has not yet turned lower but is getting very close from both a price and time perspective.   Given that Tech and Financials were both lower by 1% last week, this remains a market that has to be watched carefully in the short run.  While trends from early April still seem positive (along with Sunday evening's Futures gains) some evidence of upward thrust in breadth and momentum is going to be necessary along with Tech turning higher and Financials showing breakouts above the key XLF- 29 level to have real conviction about the quality of this advance.  Small-cap breakouts along don't guarantee a broad based move back to new all-time highs for the indices during a seasonally weak period.

Given that the price action was largely unchanged for most of the week, with SPX closing down just a few ticks from levels hit last week, it's important to see what exactly happened "under the hood" and whether this was a reason for more optimism, or more negativity.  As has been the case in recent weeks, it's not terribly lopsided and compelling interesting arguments can be made on either side.  Let's start with the positives:

1) Small-caps broke back out to new high territory, with Russell 2000 joining the move seen in the Small-cap 600 index while Small-cap advance/decline also hit new highs. Small-caps and Mid-caps have now outperformed the broader market since February, after a lengthy pullback. 

2) Industrials Sector SPDR ETF, XLI, broke out meaningfully above key trendline resistance.  Stocks within the Rail sector like CSX and UNP outperformed, while the Aerospace and Defense group, led by BA, also snapped back in strong fashion.  GE has now managed to lift to $15, and plays a large part of XLI given its weighting at 5%.. 

3) Advance/Decline has pushed back up to new all-time highs when watching "All-stocks" A/D.  It's been rare to see a broader market peak when Advance/Decline is back at new highs.  For the intermediate-term Bears, , it's worth noting that both 2000 and 2007 peaks were prefaced by a meaningful dropoff in longer-term breadth of at least six months, and in the case of 2000, this started two years prior.

4) The consolidation over the last week has helped to work off some of the divergences, while prices largely didn't go anywhere.  To see a downturn, prices will need to start to turn down into end of month fairly quickly.  While this could be put off this week, one would expect a bearish bias into end of month.  Note, the last four months have all begun from lower prices where stocks bottomed out in the first part of the month and rallied into mid-month.  This happened in February, March, April and now May.  (Though the decline thus far from May peaks has proven brief. ) 

5.  Europe has been trending higher along with many Asian indices without much stalling out and it's important to see when the rest of the world has been moving higher, and analyze price action globally vs just the US to gain some perspective as to when indices start to peak out in unison like what happened back in late January.  At present, peaks in other indices like SX5E, and NKY still look a bit early. 

6.  Demark counts had an imperfected Setup last week, which as practitioners know, creates less than an ideal "top" when bar 7 is the highest bar of the Sell Setup as opposed to bar 8 or 9 of the Sell setup.  This could invite further gains until TD Sequential and/or TD Combo 13 countdowns are in place before this peaks.  

The negatives:
1) Breadth remains sub-par on this rally.from early April and from early February, when looking at smoothed breadth gauges like McClellan's Summation index which is roughly half the level it was back last October.  The Percentage of stocks trading above their 50-day moving average is 58, certainly not in the 80's like last year.   Momentum has been negatively sloped per MACD since early February.

2) Both Financials and Technology were down over 1% this past week and for leading sector participation, we saw Energy and Materials.  While it's refreshing to see rallies in these sectors, they don't account for much of the market, while XLF was down 5 of the last 6 days, and Technology showed clear signs of rolling over this past week, and NDX has stalled out below its own all-time highs.  Charts of the SOX have been under pressure

3) Interest rates spiked up sufficiently to breakout of long-term downtrends in yields stretching back since the 1990's.  Given that there remain ongoing concerns regarding Productivity and wage growth, seeing short term yields escalate rapidly while the FOMC doesn't talk down plans of continuing to hike rates, a rapid move up in rates which could happen into early June given these breakouts this past week could put pressure on High yield again at a time when LIBOR-OIS has pulled back to attractive near-term support. 

4) Cyclical concerns remain an issue for markets, and similar to mid-April, Mid-March and Mid-February, equities have reached areas where the rally from early month seems to have stalled out and could face downward pressure.  The 20-week cycle seems to be nearing a time when it should exert downward pressure on indices.  If we don't turn down into end of month, like what's occurred over the last few months, then its possible that the rally could prolong into mid-June (which was initially thought to be a bottom for stocks)  But then a likely sharp pullback down into late July would be likely.  

5) Equity put/call ratios were showing readings in the 50s for most of this week, not typically the area where large rallies back to highs begin.  When two calls are being bought for every one Put, 

6) Seasonality suggests that this time should be particularly Sub-par during mid-term election years from now til October.  While there could prove to be a choppy time and overall no serious declines until September into October, it would completely go against the grain of most seasonal studies to see sharp rallies during this time of year in the 2nd term of of a presidential cycle.



SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:

Short-term (3-5 days):   Bullish- (With Stop and Reverse on any move under 2700)  Last week's bearish stance provided little to no real overall deterioration in the market, and while prices were lower by week's end, this turned out to be more of a grinding sideways than any true setback.  Additionally, the Advance/Decline pushed back up to new highs, which is thought to be constructive.   Industrials broke out , as per XLI's move late last week, and Demark's Sell Setup never truly registered a proper TD Sell Setup sign.  Movement back over 2732 would create a short-term bullish scenario which could led up to 2750.   The key concerns revolve around Tech and Financials starting to show more strength, and both sectors were down 1%+ last week, so this is important.  However overall, the stalling out last week didn't lead to pullbacks thus far, and momentum and breadth have improved a bit in the short run.  While not necessarily leading to a move back to new highs, it is a short-term positive development.

Intermediate-term (3-5 months)-  Bearish-  Trends and momentum remain negative and markets are entering a seasonally bearish period for mid-term election years that normally sees trends turn lower into September/October before late year strength.  While Technology is indeed a positive, other sectors like Financials, industrials and Healthcare have all been dragging substantially and are a problem for a market desperately seeking leadership.  The lack of breadth and market momentum suggest this market still could be vulnerable to a late Spring "shock" given that sentiment isn't all that pessimistic while the participation and trends remain in less than optimal shape.  Movement down under 2550 would be a concern for a test of 2450, but this likely proves to be appealing initial support to buy into on any correction over the next couple months.    


TECHNICAL ANALYSIS of INDUSTRIAL SECTOR- What's driving the XLI Breakout? 

This week we'll take a look at some charts of the Industrials sector as XLI has broken out per last week, yet many stocks remain under pressure, and sub-sectors like the Airlines certainly haven't matched the bullish structure of stocks within the Rail space.  Additionally, Aerospace and Defense has begun to trend higher again, but yet not all these stocks are all that positive from a structural perspective.  Key to note, the top 5 stocks within the XLI make up about 25% of the ETF:  BA, GE, MMM, UNP and HON.   Of these, BA and UNP appear best technically, while MMM remains under pressure, as does GE on an intermediate-term basis, despite its rally over the last month.  Also it's important to point out that from an Equal-weighted perspective, Industrials have not matched the breakout seen in XLI, necessitating a more selective stance vs thinking the entire group is bullish.  Below i'll run through some of the popular Sub-sector charts and then go over some of the charts of the stocks that are driving this rally, ones that still look to have upside and that investors should consider.  I'm skeptical that a broad-based rally is occurring, however, so thinking that mean reversion should work might not pay off.  At present, it looks best to stick with the leaders


LONGS within Industrials
Rails:   CSX, UNP
Aerospace/Defense:  BA, COL, TXT
Electrical Components: ETN, ROK, EMN
Industrial Conglomerates: HON
Air Freight & Logistics: FDX, EXPD(Long small, & buy weakness)
Machinery: CAT, DE
Construction & Engineering: JEC
Airlines: DAL


SHORTS within Industrials
MAS, ITW, AAL, BLL, R, OC, MMM, SWK, CMI, AYI




XLI - Industrials ETF broke out, and further progress here looks likely

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XLI- Industrials Sector ETF-$75.33-  Bullish Breakout bodes well for further gains- It's thought that last week's breakout of the downtrend from January highs is a positive development for this sector that's been under pressure over the last few months.  While stocks like GE have accounted for a good part of the rally since early May (and remain trending down overall and not bullish)  stocks like BA, CSX have also led this higher and still look to make further upward progress.  Until/unless this is given back right away, XLI should be overweighted, and this move is considered bullish and should lead higher to $76.50-$77 in the near-term. 
 

Equal-weighted Industrials vs SPX looks far less bullish than SPX-   This relative chart of the Equal-weighted XLI relative to SPX broke down hard in April which took Industrials to the lowest levels relatively of the year.  While this has bounced in the last couple weeks coinciding with the market pushing higher, it needs more progress to think this bearish breakout has been negated.  While a certain amount of stocks within this group certainly are quite positive, others look far less bullish and should be ones to concentrate on avoiding and/or shorting this week on rallies as this ratio chart reaches the prior uptrend from the downside.  

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S&P 500 Rails index-   Rails breaking back out to new highs bodes well for this group to strengthen further.   While this index contains just four of the prominent Rail stocks, CSX, UNP, NSC and KSU, the breakout back to new highs should allow for further strength out of this sub-sector, and is thought to be constructive.   Specifically, one should look at CSX and UNP should outperform and are the most bullish within this group.  However, stocks like KSU and NSC have not shown the same degree of performance and technically are sub-par when compared to the first two.  
 

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DJ Transportation Avg.  Push back to highs of its three-month range bears watching closely-   The Transports as a group have not shown the same degree of breakout as might be expected when viewing the Rails and some of this can be explained by Airline weakness.  Currently, prices will need to break out above April highs near 10900 before thinking this can join in the Bullishness like what's being seen in XLI and the Rails.  Overall, any strong reversal from here would be important, as would a breakout above this upper trend.  But this bears watching closely as the markets finish May, as the leading tendencies of this group are widely known.  
 

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Aerospace & Defense ETF-  (ITA- $199.10) Last week's Friday breakout makes this group bullish near-term, suggesting further upside for this Aerospace and Defense stocks.  Bottom line, the Aerospace and Defense stocks have shown mixed performance since January, and despite two different tests of highs, have failed to make meaningful upside since late January.  Weakness into early May proved to be buyable, coinciding with TD Buy Setups a couple weeks ago, and last Friday's ability to clear early May highs is quite positive technically.  Further gains look likely up to 202-205 in the next 1-2 weeks, and Aerospace/Defense should be overweighted for additional upside.  Stocks like BA, COL and TXT  in particular are quite bullish technically, and should be owned technically, looking to buy dips.  

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Boeing (BA- $351.22)  BA's advance above the highs from the last month is quite positive technically and makes for a bullish case for this to rally further in the next few weeks above $360 to targets near $370-$375 to test prior highs.  Momentum has been positively sloped for the last couple weeks and the broader pattern from late February resembles a giant bullish base which could lead to these highs from a couple months ago being tested.   Overall, long positions are recommended, unless/until this gets down under 339 near last Wednesday/Thursday's lows.  Breaks of this level would postpone gains, but for now are not expected right away.  

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CSX Corp (CSX- $63.76)  CSX is bullish and counter-trend counts are premature to think any peak is at hand. While the daily charts are nearing overbought territory, the structure of the weekly chart is very constructive given the breakout of the sideways consolidation stretching back since last Spring in 2017.  Movement up to $67.50-$70 looks likely before this stalls out, as the pattern breakout means more than the near-term overbought conditions, and bodes well for further gains.  CSX remains one of the best within the Rails and should be overweighted in the weeks ahead.  

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Union Pacific (UNP- $143.185) UNP's structure is quite positive technically and bodes well for further gains to near 150-155 in the weeks ahead.  Looking back, the breakout of the highs from Spring 2015 was a big positive development for UNP which happened late last year.  The stock consolidated this breakout and has now rallied back to test these prior highs at $143-4.  This pattern is quite bullish to own UNP here and add on the ability of this to get over the highs made into early 2018.  Overall, along with CSX, remains a very bullish stock to consider owning within the Rails and one of the better patterns within Industrials.  

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Fed-Ex Corp. (FDX- $248.37) FDX is an attractive risk/reward given the consolidation since February while near-term structure shows higher lows since late March.  Rallies back to 257-9 looks likely in the short run and moving above this level argues for a larger rally.  FDX has taken backseat to UPS in the last few weeks, but has a more bullish longer-term relative uptrend and is thought to be the better of the two to own.  Buying here at $248 given the breakout in the XLI, expecting a move up to test and break out above monthly highs looks likely in the weeks ahead, and it looks attractive to position long here ahead of the move.  

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Emerson Electric (EMR- $73.14) Similar to UNP,  this stock managed to breakout above a high made a few years ago and has recently been consolidating gains.  Now a push back higher to test former highs is ongoing and near-term progress up to $75 looks likely which could be important as near-term resistance.  However, the larger structure for EMR is quite positive and movement over $75 is anticipated on an intermediate-term basis which could allow for a quick move up to $80.  Structurally this looks quite appealing within the Electrical Equipment stock group, and should show further gains in the weeks ahead.
 

Weakness likely into Mid-May before any upside breakout

April 30, 2018

S&P JUN FUTURES (SPM8)
Contact: info@newtonadvisor.com

2654-6, 2638-40, 2584-5, 2549-53, 2524-5, 2474-6    Support
2697, 2739-40, 2753-5, 2781-2       Resistance

 

NASDAQ Comp- Increasing signs of rolling over as indices break to multi-day lows, violating uptrend from late March

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Foreword:  April set to close with marginal gains after early month gains were rebuffed and then led to just a partial retracement before moving higher last week.  The problems center on trends being broken from early April, while the broader triangle/downtrend remains intact from mid-April, March and January.  Weekly momentum remains negatively sloped, so these kinds of patterns ordinarily are quite difficult to expect much trend-like behavior and a tactical Hit-and-Run mentality is needed.   One should use movement up to the recent April highs as a chance to sell gains, while pullbacks to the base joined by February and late March/early April highs near 2550 are likely a good spot to buy dips.  For now, given the gains in the last week into this key time for potential trend change, the risk/reward favors selling into this move, expecting weakness into either 5/8-9, or 5/18-21 before a rebound into early June. 

Summary:    Increasingly poor breadth and defensive posture combined with lack of meaningful upside momentum thrust likely results in US equities pulling back to test lows before gains into Summer can occur.  A few cycles suggest weakness in early to mid-May, so a defensive stance remains prudent, while increasingly looking to bonds to snapback along with Commodities in the months ahead. 

As April comes to a close, indices have managed to claw back yet again to likely close out the month positive after what seemed to be a big reversal near 4/18 that threatened to test and break lows. Trends remain choppy and in consolidation mode over the last three months, and despite the vicious swings we've seen lately, prices remain largely unchanged from levels which were seen two months ago when March got underway.  Yet, equities have taken backstage lately to bond yields, as the global fixed income decline seemed to get back underway in the month of April.   The US 10Yr. Treasury sold off sufficiently to break briefly above the psychologically important 3% level and stocks and bond yields have trended in fairly positive correlation this past month.  Yet not only Equities and bond yields have lifted, but Bitcoin managed to turn back up from late March as well as WTI Crude oil.  The Dollar meanwhile seem to have traded exactly opposite of Equities from mid-April, as the peak in equities coincided with a short-term trading low in the Dollar. 

Sector-wise, Energy, Healthcare Equipment and Services, Retailing, Autos and Software stocks outperformed this past month, while Household and Personal Products, Semiconductor names, Media, Capital Goods and Tech Hardware all underperformed.   Energy's outperformance was staggering, rising over 9.4%, leading the next best sector, Healthcare, by over 500 bps just in the month of April alone.  Quite the change from last year.  Industrials and Staples however, look to finish the month lower, with Staples having suffered a huge decline of over 2%, thanks in part to PM and CLX, both which declined more than 10% this past month.   Overall, for the year, only four groups lie in positive territory:   Healthcare, Energy, Technology and Consumer Discretionary.  Yet the Discretionary move could be a mirage given the outperformance of Netflix and Amazon, with YTD performance of 62.41% and 34.47% respectively.  As shown last week, Equal-weighted Consumer Discretionary is flat for the year, trading within 0.50% of where it began the year, having lagged the broader market since 2015.  It's been said that Discretionary typically tends to peak out 2/3 into the economic cycle as rates start to rise, so this time might be no different, and the outperformance cited by many of Consumer Discretionary outperforming looks to be largely due to the performance of just a few leaders.

Looking back at this past week, there were several reasons to be concerned, despite the week finishing largely unchanged while the month set to finish on a moderately positive note:   First, markets are increasingly starting to shift back to a defensive tone.  Groups like Financials, Technology and Industrials were all down on the week, which is important given that these three groups represent nearly 50% of the entire SPX.   Meanwhile Utilities and Real Estate led in performance, despite 10yr yield shooting briefly over 3%.  It's odd that groups like Consumer Staples outperformed Tech and Financials, but news like this was largely overshadowed by reports of yet another "stellar" earnings season underway, while geopolitical tension largely seemed to be thawing given North Korea's historic conciliatory measures.  Second, breadth has been lackluster during this whole bounce from early April while volume also has left something to be desired.  Chaikin's Money flow remains negative on S&P.  Third and finally, markets look to be rallying into what should be another important time for trend change.  This is seem by the downward bias of the 20-week cycle over the next month while this coming week has cyclical angles for a turning point tied into Gann's Square of 9 chart based on the duration of the decline fro 1/26 into 2/9.  Finally this week stands out as having importance also cyclically based on Gann's Permanent cycle as potentially being important for a top into the first week of May.  Given the lackluster price action in Financials while Semiconductors have steadily deteriorated, this could very much turn out to be a cautionary time over the next couple weeks before any counter-trend rally gets underway.  

Overall, heading into May, it remains right to have a defensive stance, primarily for the following reasons:

1) Markets seem to be stuck in a rut, despite good earnings and less geopolitical uncertainty  (While details of the North Korea disarmament need to lead to actual action, the news itself seemed to be a breath of fresh air to most of the world) One has to look no further than Financials, which saw constructive earnings out of the Banks, but saw its shares underperform, and this sector has lagged the S&P this last month
2) Breadth seems to be very lackluster, and not showing the kind of upward thrust needed to have conviction that a rally back to new highs is around the corner.  We've seen eight 90% DOWN days thus far in 2018 while none of the first four months has produced a 90% "UP" day.  Advance/decline activity has taken a bit of a breather, and market breadth has been steadily dropping since last October, but both rallies into March peaks and into late April have seen markedly lower positive breadth.
3) Trends themselves are negative from late January, along with from mid-March and mid-April highs, and momentum is negatively sloped (MACD) on weekly charts
4) Leading groups like Semiconductors have rolled over in the last few weeks, with both Hardware and Semis showing increasing signs of distribution.  The pattern on the SOX from late last year increasingly resembles a Head and Shoulders pattern which would be confirmed under 1200.  The shape of the SOX chart, however, given its deep retracements on corrections over the last six months, is increasingly bearish.  
5) Technically, the uptrend from early April was broken definitively early last week, and has not been reclaimed
6) A defensive tone seems to be increasing, as seen in outperformance in Utilities and REITS, despite the yield rise, while Staples outperformed both Tech and industrials last week
7) DJIA, SPX and NASDAQ Composite all show completed monthly exhaustion signals per Demark which have been confirmed via TD Sequential and TD Combo while the DJIA shows a completed quarterly 9-13-9 pattern.
8) Growth looks to slowly but surely giving evidence of peaking out vs Value and has underperformed since mid-March
9) Cycles from 3/20 along with the 77-78 week cycle which have correctly given turning dates for the US Election in November 2016 along with May 2015, October 2013 and late March 2012 along with correctly pinpointing the post 9/11 lows, 2003 lows and 2000 highs center in on the first week of May as being important.   We've just past a time also which stretched 90 degrees from the late January peak and 45 from the mid-March high, both focusing on 4/27-9, but both 4/30-5/1 also have significance, as does 5/7-9 based on several Fibonacci related cycles from 4/18, 4/2, 3/23, and 2/9.  We'll see if this has any importance for this coming week.

SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:

Short-term (3-5 days):  Bearish -This past week's late counter-trend rally should likely hit resistance and turn down sometime this current week, and remains right to have a selective stance and favor defensive positioning, expecting sectors like Technology and Financials to experience further weakness.   S&P looks to have a maximum of around 50 points of upside, while the downside could cause pullbacks to 2550, or below to near 2450, so the risk/reward favors selling into this bounce given weak breadth and volume.  

Intermediate-term (3-5 months)-  Bearish-  Markets very well might have completed their run-up from early April, and the low volume rally with Financials not participating is a particular concern for this move, while Semiconductors have now shown evidence of also beginning to turn lower, violating trends vs Technology and forming a very ominous near-term pattern since last October.  While breadth and momentum did improve a bit from late March, prices remain structurally challenged when eyeing the ongoing pattern from late January and will require far more evidence of upward thrust to expect gains during this seasonally challenging time for stocks between now and October.  


Technical longs to consider:   GDX, M, TJX, CAKE, PANW, GOOS, CAR, FLR, NDAQ, SPLK, WYNN, GMED, TWLO

Technical Shorts to consider:  SMH, AMAT, LUV, JBLU, TRCO, DISH, GPS, XRT, IBM



For those that prefer ETF's for diversification purposes, i've listed 10 below across various asset classes which offer an attractive risk/reward for longs and might help to look at something outside US Equities



TLT- Daily-  Rally looks likely

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TLT- Ishares Lehman 20yr Treasury Bond ETF- Bottoming out-  Just at a time when investors unanimously expect bond yields to continue rising in the indefinite future, Bonds likely have a chance of bottoming out and turning higher to start the month of May.  Sentiment has turned the most bearish on Treasuries as has been seen in at least the last 20 years and last week's about-face near prior February lows looks to result in gains in the weeks and potentially months ahead.   Momentum on daily TLT charts is well higher than levels hit back into February lows, while 10-Year Treasuries never really experienced any real breakout despite yields getting up temporarily above 3.00%.  Gains in Long bonds look likely, and TLT can benefit technically.  It looks like an attractive risk/reward to buy TLT and look to average down on any pullback if given the chance in the weeks ahead.   
 

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DXJ-  WIsdomTree Japan Hedged Equity Fund ETF-Attractive technically  Japan looks attractive following its pullback in recent weeks, and DXJ looks to be an attractive vehicle to consider given the recent weakening in the Yen.   Prices got back to near recent highs before backing off and this minor consolidation should provide a good opportunity given that momentum remains positively sloped and this pullback still remains within striking distance of highs.  Structurally speaking given the many highs up near this same level, a rally back to these levels likely should result in acceleration that could reach the low to mid- $60's.  
 

IHI- Ishares Medical Devices ETF-  Attractive ascending triangle pattern bodes well for gains back to new highs.  GIven that Healthcare has begun to stabilize lately and show above-average relative strength over the last month, IHI looks to be a particularly attractive vehicle technically which could offer outperformance in the weeks/months ahead.  While many look to Biotech or Pharma as being key ways to invest in Healthcare, the Devices and Service stocks have been consistently outperforming other parts of Healthcare for the past couple years and look to be something to continue to overweight.   This ascending triangle pattern in IHI should produce a test of upcoming highs as this pattern slowly moves towards the apex of this triangle.   Long positions favored here, looking to add on ability of this to exceed recent resistance highs.  

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IYZ-  Ishares Telecommunications ETF-  Attractive risk/reward after selloff to support- Telecomm might not immediately come to mind as an attractive area to invest these days, but the sector has shown recent ability to stabilize near former highs while giving some evidence of attempting to bottom out.  Given the attractive yield along with pullback to what looks to be attractive support, this looks like an interesting area to consider this group given that yields have begun to show evidence of trying to peak out. Given excessively bearish sentiment on Treasuries, bond rallies look more likely than selloffs in the upcoming weeks and months, and a pullback in yields should drive demand towards high yielding sectors like Telecomm.  Evidence of positive momentum divergence has been present for the last month, while counter-trend tools such as TD Sequential from Demark's toolbox have recently confirmed weekly TD Countdowns which bode well for this sector trying to bottom out.  Gains which exceed this downtrend would invite chances to add to longs for a more substantial rally.  Overall, small longs are favored until this trend is exceeded but IYZ looks to offer a good technical risk/reward after this pullback to support over the last 16 months.  

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DBC-  Powershares DB Commodity Tracking index fund-  Further gains likely as Dollar reaches tipping point-  Commodities experienced a breakout into early April before consolidating the last few weeks.  However, technical structure remains attractive and gains up to $18-$18.50 look likely before any meaningful resistance.  Given that WTI along with Precious metals have pulled back over the last couple weeks, this sets up for a good opportunity to buy dips and favor commodities for a push higher in the weeks ahead.   The US Dollar has rallied in the last two weeks up to an area that's considered strong resistance based on the downtrend which has carried prices lower largely since the Election.  When USD starts to turn lower, this should help commodities start to gain ground as Rates also weaken.  While Energy commodities have soared lately, Metals and Grains have gradually been starting to lift and should be areas to favor in the weeks ahead.  
 

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DBA- Powershares DB Agriculture Fund- Further gains likely with Corn, Soybeans and Wheat all starting to firm up of late and DBA starting to make headway in recent weeks.  Daily DBA charts show prices having bottomed at higher levels than were made back in December and now have turned up aggressively to the highest levels since mid-March.  Momentum has continued to build in recent weeks, setting up for an upcoming test and break of the downtrend line from early 2017.  Overall, a move back up to the low 20s is likely as the commodity rally starts to gain ground a bit more quickly in the months ahead.   
 

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VanEck Vectors Gold Miners ETF- Gold miners should begin to steadily gain ground in the weeks ahead, as this consolidation has provided  a good risk/reward for buying dips for an upcoming push higher.  Gold's rise has proven elusive of late as several different attempts at pushing higher have been met with resistance at 1365-70.  Yet the recent consolidation from 1320-70 since January has provided a very tight consolidation which bodes well for an upcoming breakout.  Gold mining shares should follow suit and momentum has turned positive for an upcoming push higher which likely can reach and exceed former highs.  

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IAU- Ishares Gold Trust- Attractive area to buy dips-  IAU has reached areas of support which bode well for this to stabilize and start pushing higher to test and surpass recent highs of the last few months.  Price has pulled back over the last couple week to test the lows which were made back in February.  However, the ongoing base-building from last Fall bodes well for this to push higher, as the initial test in late January and subsequent sideways churning over the last couple months resembles a giant Cup and Handle pattern, and a rally and push up through recent highs looks likely in the weeks and months ahead.  While a minor pullback to 12.50 could happen, it's unlikely that prices pullback down under 12.40 and should represent a great risk-reward to buy into recent weakness for above-average gains.
 

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OIH- Outperformance likely into May before WTI peaks out, and Energy follows suit- Gains have been difficult to come from as Energy largely has not followed suit to WTI Crude to the same extent of the rise in recent months.  Yet the last month has shown some definite improvement with Energy having outperformed all other sectors by at least 300 bp in the month of April.   Technically OIh has gradually shown signs of turning back higher, and this last month has helped the near-term technical picture strengthen.  Overall, further gains look likely into mid-May before any stalling out, and OIH should be likely to move to 30 before any meaningful resistance.  WTI Crude should be able to reach $72 as gains continue into May, so Energy likely follows suit, and this could turn out to be one of the better longs to favor sector-wise, as Tech and Financials show increasing signs of weakening. 
 

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Ishares IBoxx High Yield Corporate Bond ETF-   Attractive yield while credit deterioration is still not a big factor.  While the near-term underperformance to SPX has been highlighted for the last couple months, much of the lagging has occurred with Yields having pushed higher, something which very well could reverse in the weeks ahead.   HYG still pays more than 4% yield and virtually no evidence of any real credit deterioration has occurred thus far in 2018 which is likely necessary before avoiding High yield and/or expecting any meaningful spread widening.  Even if a minor downdraft were to occur into mid-May, this likely should rally back to the high 80s into late Summer, and yields are high enough to warrant owning this at a time when bonds are starting to gain traction again while no evidence of credit deterioration is present.  Overall, pullbacks down to 84 should be buyable and rallies back to the high 80s would be something to sell into.  Bottom line, this looks to be an interesting area to consider for those hungry for yield until/unless credit woes become more evident.  

Uptrend from April increasingly looks complete; Sell Rallies this week

April 23, 2018

S&P JUN FUTURES (SPM8)
Contact: info@newtonadvisor.com

2654-6, 2638-40, 2584-5, 2549-53, 2524-5, 2474-6    Support
2697, 2739-40, 2753-5, 2781-2       Resistance

 

NASDAQ Comp- Increasing signs of rolling over as indices break to multi-day lows, violating uptrend from late March

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Foreword: NASDAQ looks increasingly weak given the rollover in recent days, which makes the pattern from early year start to resemble a possible giant Head and shoulders pattern.   This won't be confirmed until/unless prices violate the lows at 6800, but this would also violate the entire uptrend from 2016 and something to watch for in the event prices near early month lows.  Note the extent that momentum began to diverge negatively at the peak in mid-March, failing to reach late January peaks despite prices being higher. Patterns overall have turned sloppy to say the least and volatility has begun to pick up.  Overall, 2018 is shaping up to be quite different than 2017 or 2016, and more volatility looks likely in the months ahead.   Breaks of the intermediate-term trend would go a long ways towards suggesting this entire rally from 2009 is beginning to peak out, which for now, can't be said based on declining breadth and momentum alone.  One should watch for indices breaking February lows as a key to a greater than average likelihood of weakness in July-September.  

Summary:    Bottom line, it's looking increasingly likely that this rally from early April is coming to an end, and its right to be defensive again, thinking that last week's crack was the start of a pullback to test late March/early April lows and even February lows before any sort of counter-trend rally can continue. 

The following are concerns at current levels, which argue against this recent rally continuing into May:

1) Uptrend from April lows broken last week for SPX, NASDAQ and DJIA
2) Semiconductor weakness which threatens to take down Technology as a whole after very weak performance last week
3) Financials underperforming dramatically over the last week and month, despite last Thursday, Friday rally
4) Low levels of breadth compared to prior peaks in March, or in January or last October
5) Pattern from late January still negative with lower highs from late January into mid-March highs
6) Weekly Momentum still negative per MACD while RSI has gotten cut in half from late January, the extent of the drop is troubling
7) Equal-weighted SPX and Mid-caps, Small-caps continue to drop relatively vs the Capw-eighted SPX
8) Longer-term Demark sells are now present (but not confirmed) on monthly charts and quarterly charts of DJIA, SPX and NASDAQ

While it was right to enter the month of April on a positive note, the downturn in Semiconductors which has turned many within that sector's charts back to bearish, is a concern.  Semis have violated relative trends vs other parts of Technology and now have begun to reverse the recent Tech sectors bounce attempts vs SPX relatively.  Given this sectors leading qualities, it's always important to keep a close eye on the Semis.  However, it was thought that above-average earnings out of the Financials could help to lift this sector, but exactly the opposite happened, with the Banks weakening in recent weeks.  While some might pin the blame on Special charges, the lagging in this sector is a concern when the market is in sore need of leadership after Semiconductors start to waver.  The rally in Energy stocks unfortunately doesn't do a whole lot of good in terms of helping to lift the SPX.  


SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:

Short-term (3-5 days):  Bearish - (Use rallies into 4/25-4/27 to sell) The market looks to have shown its hand during last week's 4/17-4/19 window, coinciding with both two year anniversaries of minor highs and five year anniversaries of former lows.   While markets might bounce early in the week, similar to last week- Monday/Tuesday, I expect that last week's breach of its uptrend line from early April is important, and upside should prove limited.  Pullbacks to test early April lows look possible given the current structure and ongoing Downtrends from late January intersect just above current levels, while weekly momentum remains negative.  The action in Semiconductors last week was a concern as markets head into the 90 day cycle from late January.  Minor trends were broken on Fridayin SPX, and its thought that equities might yet again be vulnerable heading into May.

Intermediate-term (3-5 months)-  Bearish-  Markets very well might have completed their run-up from early April, and the low volume rally with Financials not participating is a particular concern for this move, while Semiconductors have now shown evidence of also beginning to turn lower, violating trends vs Technology and forming a very ominous near-term pattern since last October.  While breadth and momentum did improve a bit from late March, prices remain structurally challenged when eyeing the ongoing pattern from late January and will require far more evidence of upward thrust to expect gains during this seasonally challenging time for stocks between now and October.  


Technical longs to consider:   SQ, TWTR, NDAQ, SPLK, WYNN, GMED, TWLO

Technical Shorts to consider:  XRT, IBM, BBBY, GPS, EXPE, SIG, LUV, 




SPX- Daily

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SPX -  Trend slowly but surely looks to be turning back lower-   SPX had a sufficient enough reversal from Wednesday morning last week to breach the minor trend from early April, and while this daily SPX cash chart looks to have held ever so slightly, the trend was in fact violated when considering Futures contracts.  Sunday evening trading shows mild bounces ongoing for US Equity futures and it looks likely that a small rebound might occur Monday-Tuesday before reversing back lower later in the week.   I suspect this past week was in fact important given the Technology weakness, and prices should not get back up above 2750 before turning lower to test late March lows.  

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SOX-  Philadelphia Semiconductor Index-Weakness becoming more pronounced-  Last week's decline proved to be much deeper than desired for this daily chart and while prices thus far have held where they've needed to, momentum has rolled over to negative per MACD and the chart is growing increasingly more bearish structurally speaking.   To think this is mere consolidation, SOX will need to hold 1260 and turn up sharply to get back over 1360 and exceed 1400.  At present, exactly the opposite looks like its playing out, and a break of 1260 looks likely in the weeks ahead which should lead down to more important support near 1200, which lines up with quite a few former lows.   Relatively speaking, Semis have broken trends vs Hardware and Software ETF's, and vs the broader market have pulled back to the lowest levels since mid-2017 relatively.  Any violation of 1260 would breach the uptrend from 2016 and argue for a lengthier decline most likely to at least 1070, but finding temporary support near 1200 in the process.  
 

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Financials have gotten worse not better in the last month and this underperformance is a concern given their weighting in SPX-   The Financials managed a brief two-day snapback late last week which undoubtedly helped the market to hold up in much better fashion than it would have otherwise, given the group's representation in SPX.  However, Financials now have underperformed all but two major SPX GICS Level 1 sectors in the rolling 30 days, even considering the degree of last week's snapback rally.  As relative charts vs the SPX show, Financials broke down in March and still remain bearish even with the minor gains from last Thursday/Friday.  Monthly charts of XLF to SPX show recently confirmed TD Combo sell signals on the group vs SPX , making this group not all that attractive after the breakdown of its six-month uptrend line.  Within the sector, Regionals have outperformed the Commercial banks and still look to show better relative strength.   Additionally, many of the Exchanges and E-brokers also appear technically sound.  However, the failure of this group to show more strength and resilience during a time of market shakiness is not comforting when trying to see what sector might have the ability to lead in the weeks ahead.  
 

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US 10-Year Treasuries-  Yields closer to resistance, than thinking a larger breakout is happening-   Treasuries look to have resumed the selloff that began late last year and yields managed to push to new highs for 2018 last week, rising to the highest levels since early January 2014 intra-day highs at 3.05%.  Structurally this chart remains bullish on a short-term basis, but the monthly chart tells a whole different picture given the 20+ year trendline channel which remains in place for 10-Year Yields.  Additionally, there remain a high level of Treasury Spec shorts given CFTC Futures data.  This might limit the amount of further gains in yield as many continue to bet that yields have to go higher.   Finally, Daily TD Sell setups will trigger as of early this week, so counter-trend measures suggest this recent bump in yields might present chances to buy Treasuries as well as Sell German Bunds while Buying Treasuries, expecting the spread to contract.  

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Equal-weight Technology ETF by PowerShares for Technology, the RYT, looks to be in far worse shape than most other Tech gauges which have a higher weight in the large cap sector.   Daily charts of RYT look more negative, with prices having made a definite reversal last week which now could extend lower.  The Daily chart has taken the shape of a large reversal pattern that would be confirmed on movement down under 145, and would argue for the start of more Technology weakness, which would be a concern for the market.  Bottom line, the extent of last week's selloff is a negative in the short run, so for tech bulls, its a must that near-term weakness be contained near March lows.  

 

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Consumer Discretionary quite weak over last few years in Equal-weight terms.   Consumer Discretionary looks very different when eyed in Equal-weighted form, and in relative terms to the SPX.   When stripping out Home Depot, Netflix, and Amazon, this group has been weaker relative to the market for nearly three years, and peaked out nearly around the same time as many European indices in May of 2015.   It goes without saying that this chart represents a far weaker picture of Discretionary than many would believe is happening in recent years, and given some of the Retail woes, is definitely a more accurate portrayal.  
 

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Growth vs Value: The start of weakening-   When looking over relative charts of IVW to IVE, (or the S&P Growth ETF vs S&P Value), we see the runup into this year looks to have reversed fairly sharply in the last few months.   Uptrends from early this year have reversed course, and momentum has begun to rollover.  While the uptrend from the US Election remains in place for Growth vs Value, this pullback over the last couple months looks important.   In the coming 4-6 weeks, Value likely should outperform Growth and this uptrend line could be tested, if not broken.  

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Developed markets look to be breaking out vs Emerging for the first time since early last year.   Weekly charts of MXEF index vs MXWO show confirmed TD Buy signals in the last few weeks, which has been the first time these have appeared in over a year's time.  Downtrend lines look to have been exceeded in recent weeks, which bodes well for Developed markets to outperform the Emerging.   Given that the Dollar has consolidated and has not really fallen of late, but has shown mild gains vs many of the Major and emerging market economies, a sliding Emerging market picture makes sense, particularly when volatility seems to be returning to asset markets.  
 

CCI-  Continuous Commodity index- Breakout in Commodities still looks very near-   Prices have now rebounded sufficiently to test the highs of this two-year base, and argue for long positions in DBC, the Powershares Commodity ETF, expecting strength in the weeks ahead.   Many of the Energy markets and Base metals have rebounded, while the Precious metals have also begun to perk up.  The multiple peaks in price since early this year right near the "Neckline" of this pattern are encouraging for the bullish case, arguing for an upcoming breakout and higher prices.  
 

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CBOE Volatility index-  Some firming in implied vol is evident after reaching former lows, and technically this turn up late last week argues for considering owning implied volatility after.  This VIX chart appears like a good risk/reward after vol has nearly been cut in half over the last month.  the area near former highs just below 15 appears like attractive support to buy the VIX, thinking the next couple months offer the chance for above-average volatility.   After Friday's VOL spike lifted this up to 16.88, it's right to own/buy VIX here with stops at 14.88 and upside targets in the low to mid-$20's making this a good risk/reward.  

5 Technical Longs, 5 Technical Shorts to consider

April 16, 2018

S&P JUN FUTURES (SPM8)
Contact: info@newtonadvisor.com

2584-5, 2549-53, 2524-5, 2474-6    Support
2697, 2739-40, 2753-5, 2781-2       Resistance

 

Markets remain resilient as Air-strikes, geopolitical unrest have failed to damage trends

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Foreword: Markets continue to show signs of resilience in the fact of real uncertainty, with tariff concerns, trade policy unrest, POTUS investigation and Geopolitical worries having little to no effect on the trend in recent weeks.  The pattern remains quite symmetrical and much more technically sane than the news would have investors believe should be the case.  While the consolidation since late January and mid-March remains intact and has not shown any evidence of giving way, markets have attempted to bottom out and try to head higher in the last couple weeks.  This bounce as of Sunday evening 4/15 still looks to be in play with futures having rallied around 0.50% in late night trading given what appears to be a quick coordinated strike, thus far.  Additional gains look likely over 2700 for Futures in the days ahead, and it looks right to stay long tactically until price shows sufficient signs of rolling over again (which could happen as markets enter the month of May)  Unfortunately this pattern simply doesn't inspire much confidence of anything more than just a bounce at the time, and weekly momentum remains negatively sloped which makes this trend tricky in the near-term.   Look for Technology to turn higher this week, while the bounce in Yields could put pressure on Utilities and REITS. 

Summary:  

An odd week to say the least.   Bullish price-wise, but with breadth not really showing all that much conviction that a meaningful bounce was underway.   SPX managed to achieve the best weekly performance in over five weeks, yet prices fell during every final hour of every day last week (Bespoke)  ( As of Sunday evening there's been little to no effect on stock futures despite an unanticipated coordinated missile attack on Syria)  From a sentiment perspective, markets seem to be "knee-deep" yet again in disturbing global news which has served to turn attitudes towards stocks a bit more skeptical.  From Trade policy rhetoric, to the FBI investigation of Trump's lawyer, to the uptick in geopolitical fears, there's no shortage of news these days to make investors a bit uncomfortable with the idea of owning stocks.  However, its a MUST to separate out the noise from the price action, as charts still show very well defined patterns and its imperative to obey these formations vs allowing news to shake us out of existing positions.   Overall, the pattern in stocks seems to have improved in the short run over the last couple weeks, while bond yields look to be turning back higher again (even if short-lived) and this former negative correlation between stocks and bonds seems to have returned.  Commodities meanwhile have begun to turn higher, while the Dollar has largely been even more range-bound in the last two months than either stocks, or bonds.  One thing that's remained in place is the ongoing level of heightened volatility which has caused many to begin "overtrading" in order to balance risk and avoid excessive drawdowns, with stocks certainly going in all different directions these days.  

Overall, it's right to enter April expiration week on a positive note given the following factors:

1) Bullish short-term momentum (MACD crossing to positive on daily charts) 
2) Inability of Equity indices to pierce intermediate-term trendline support (As of yet) 
3) Signs of Technology turning back higher, relative speaking to SPX after having held exactly where this group needed to at longer-term trendline support
4) Former positive momentum divergence at April lows
5) Elevated concern/start of pessimism creeping into the market
6) Bullish seasonality the last half of April, starting on Day 10 of the month(StockTradersAlmanac)

What's still a concern in thinking indices can make major headway higher on any bounce:

1) Weekly momentum still negatively sloped given the extent of the drawdown from late January
2) Pattern from January highs and mid-March highs still negative, making rallies something to consider selling into
3) Breadth has been lackluster on bounce attempts in the last couple weeks, despite the positive price action on this move
4) The majority of world indices remain well off their 52-week highs (7-10%)  while on average most stocks are down 15% from their highs
5) Equal-weighted SPX continues to fall vs the Cap-weighted SPX and Small-caps, and Mid-cap indices have a decidedly negative bias in recent months

What else has been going on of interest outside of Equities that could be impactful this coming week?

1) The Dollar's range-bound action technically is thought to have a final pullback lower into May, though that might be a buying opportunity.  Hedge fund short exposure to the USD is the highest since 2013.   Near-term, its weekly loss under prior weekly lows looks mildly negative, but EURUSD needs to show more strength to argue for extreme Dollar weakness and the pattern in USD/JPY has improved in the short run.   This will need to change to cause a big dollar decline, but for now, that still seems more likely in the next 4-6 weeks than a major advance

2) Treasury yields achieved a minor breakout in US 10-yr Treasuries, in getting over 2.81%, which tilts the odds for short-term bond weakness (yield strength) up to 2.90-3% in the days/week ahead.  Stocks and bonds have begun to exhibit their former negative correlation again where yields and stocks seem to be moving in tandem

3) Commodities have begun to show real strength as per the recent grain bounce, the Energy breakout with crude at the highest level since 2014 while Precious metals are "on deck" for their own breakout.   It should pay to overweight commodities in the next 4-6 weeks as Gold wrestles with a larger breakout above 1365 while Crude oil could rally into the low $70s into mid-May before a peakout.  

4) Bitcoin looks to have broken out after a lengthy period of disinterest and/or negative sentiment in the last month, and Ethereum is moving up at an even quicker pace in the short run. Other Cryptocurrencies have begun to stabilize and might be something to watch carefully in the weeks/months ahead given that there remains a real sense of apathy and skepticism now compared to mid-December 2017, while investors have been given a fairly major pullback.  



SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:

Short-term (3-5 days):  Bullish-  When news of tariff woes and geopolitical unrest can't take markets down, one knows that the trend has become increasingly more resilient in the near-term.   The coordinated Syria attack this past weekend was shrugged off by Equity markets late Sunday night, and last week's progress looks to continue into this week, as April expiration week remains seasonally speaking the most bullish week of the month.  Time targets near 4/28-29 stand a serious chance of derailing this rally, and while minor time counts near 4/17-9 do look to have some importance, it remains right to stick with this bounce tactically for a move higher to 2730-50 before considering fading this move and taking profits on the rally.   This remains a short-term rally as part of the larger consolidation decline from mid-March and late January, yet still seems early to abandon this bounce given favorable momentum and breadth developments, while Technology has begun to show increasingly more signs of trying to bottom out in the short-run.  Movement under 2616 would cause longs to be abandoned, thinking a downturn should take prices back to recent lows.  Yet for now until this happens, it's right to be bullish, expecting a bit more gains this week, while keeping vigilant as to the possibility of trend failure sometime in mid-to-late April.  

Intermediate-term (3-5 months)-  BULLISH into late April/mid-May-   The selloff which began in mid-March looks to found at least temporary stabilization and now embarking on its first real counter-trend rally which looks to have more upside in the short run.   Sentiment has turned more pessimistic in the last few weeks (AAII shows more Bears than Bulls, CNN Bulls/Bears Poll now shows extreme fear)  While it can't be ruled out that markets peak into end of April and attempt to turn back down into May to retest lows, even on a minor breakdown at this point, this will cause positive divergence, allowing for dips to be bought with a bit more conviction.  Intermediate-term trends remain very much intact and suffered very little overall damage on recent pullback attempts which would alter the bullish view, despite a big drop in momentum  (which eventually will prove problematic)  So the combination of heightened fear with counter-trend Demark buys at lows from early April, while prices have tested key troughs from February  and weekly uptrends remain intact suggests that this first leg down very well could be complete.  Given the lackluster breadth during this first few weeks of rally, a sharp thrust in breadth and momentum will be needed into end of April to give more confidence that lows won't be retested, and failure to do that could allow for yet another retest.  For now, the uptrends being intact along with heightened concern  despite market resilience argue for a positive stance.

5 Attractive technical longs,  5 attractive technical shorts

LONGS:   SPLK, WYNN, GMED, WIX, WING
SHORTS: TSCO, EXPE, LUV, SIG, BBBY





LONGS

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Splunk (SPLK- $104.15)  SPLK is attractive technically and still likely that this can lift to test and exceed recent highs at $112.66 on its way to $120.  Momentum has begun to turn higher again via MACD on daily charts, while the pullback from March never managed to cause much deterioration in the larger structure.  Counter-trend signs of exhaustion on both daily and weekly charts are premature to form, and March's pullback should give a chance to buy at levels more than $10 lower than it peaked last month.  Any early week pullback down to $100-103 would offer the chance to buy at an even better risk/reward opportunity, and only a move down under $94 would threaten the larger trend. For now, this attractive chart has improved given the stock's ability to have rallied up sharply off the lows last week, and should set up for further gains.  

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Wynn Resorts Ltd (WYNN- $183.81) WYNN looks to be putting its problems behind it as the late January plunge has given way to an attractive technical base over the last few months.  WYNN looked to have successfully gotten above the key area of concern on the upside near 187 and should set up for further gains in the weeks ahead up to $215 up to $225 before any serious stalling out.   The pattern resembles a bullish triangle with high volume gap acceleration higher in March resembling an Island type reversal higher on heavy volume.  the resulting month of consolidation has allowed for attractive buying opportunities technically while last Thursday seemed to be signaling that a return back higher is likely.  Movement over last Thursday's $188 highs on a closing basis argue for adding to longs, and leading to a retest of highs made during late January at $203.63.   Declines back under $173, while not expected right away, are necessary to change this structure and postpone the rally.  
 

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Global Medical (GMED- $50.66)  GMED's stalling out following the run-up from last Fall should provide the optimal entry for this stock to continue higher on its next leg up, and Last week's success in exceeding prior highs likely has jumpstarted the beginning of this upcoming rally.  Counter-trend weekly exhaustion signals are premature to show "Sells" using Demark techniques by at least 3-4 weeks, which bodes well for additional upside to test and surpass March highs at $52.18 on its way to $55.   Pullbacks early in the week to $48.50-$50 would allow for even better entry and only a move down under $47.87 postpone this rally.   At present, another 7-10% upside looks possible Technically as part of this ongoing uptrend, making GMED a technically sound candidate to consider.  
 

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Wix.com Ltd (WIX- $84.50)  This Israeli Web-based platform operator has been quite bullish for the last couple years after making highs above $86,  retracing an exact 50% of this former run-up before rallying up this year to challenge this high yet again.   The act of consolidating over the last four weeks before lifting up last week to make a new three-week high is convincing to thinking this move back to new all-time highs is underway.  Last week's $84.50 close represents a new all-time high weekly close, and should allow this to accelerate up to targets at $90 into May before any real stalling out.   Overall, WIX remains one of the more attractive stocks in its space given this retest and push higher, and longs are recommended, looking to use any minor weakness to buy dips.   

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Wingstop Inc (WING- $48.20) - WING is quite bullish here technically after having formed an attractive bullish base from January which showed very little backing off during the entire pullback into early February.  The stock doubled from last March and its consolidation over the last 2.5 months is seen as very constructive to this intermediate-term pattern in allowing the stock to alleviate its overbought conditions before moving up further.  Last week's close successfully finished higher than any one of the prior three weeks, which should set the stage for an upcoming breakout that carries WING up to the mid-$50's with intermediate-term targets near $60.   Overall, this remains very favorable technically and largely under the radar, but setups like these often present attractive opportunities to position ahead of the breakout.  Any daily close over $49 would warrant adding to longs, suggesting this rally is underway.  



SHORTS

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Tractor Supply (TSCO- $58.32) Ongoing deterioration and underperformance make TSCO one to avoid and/or consider shorting, technically speaking, with downside targets found initially near October 2017 lows at $54.76 with further targets at Summer 2017 troughs found just under $50.   This stock's January break managed to violate the steep uptrend from last October which had seen nearly a 50% parabolic rally to peaks over $80 before reversing and crashing back down to earth on heavy volume.  Last week's break of March lows suggests this stock remains a timely technical short and no immediate support lies in the high $50's for TSCO in all likelihood.  Until/unless TSCO can rise back over $62.25, further declines are likely in the weeks/months ahead, and it's right to hold off on buying dips, and/or avoid for now, as this ongoing correction continues.   Intermediate-term weakness which violated 2017 lows would make TSCO vulnerable to a larger decline down to $41.53.  At present, that doesn't seem to be imminent, though can certainly not be ruled out given this stock's deteriorating structure.  

 

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Expedia (EXPE- $107.20) The stocks has experienced two high volume "Gap-downs" since peaking out in mid-2017 and its rally attempt from this past February lows is quite unconvincing with minimal progress since this bottomed out just shy of $100.  The stock broke a five-year uptrend line from 2013 lows early this year and momentum has been negatively sloped on weekly and monthly timeframes given recent deterioration.  While the churning since mid-March might be seen by many as encouraging towards signs of a bottom, the stock remains a relative laggard, and looks likely technically speaking to pulling back and testing (and in all likelihood) breaking early February lows in the months ahead.   Weekly closes down under $104 would be a chance to add to shorts, and any break of February lows at $98 should lead to at least another 10% lower, with initial downside targets near the 50% retracement level of its 2009-2017 rally which intersects near $83.79.  Overall, this looks like one to avoid and/or consider shorting, with minimal evidence of any real bottom at hand, technically.  

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Southwest Airlines (LUV- $55.07) Increasing signs of weakness out of LUV this year with this stock violating a trend which had held lows going back since Summer of 2017.  LUV has now taken over the dubious honor of being the worst performing stock within the 20 members of the DJ Transportation Avg. this year, with returns of -15.86% compared to TRAN -2.29% in data through 4/13/18.   Airlines overall have shown evidence of weakening relatively in the last month, with XAL breaking relative trends vs SPX going back since the '08/09 lows, and LUV's structure looks negative given the ongoing failure of this to mount any kind of rally after deep retracements lower in the last six months.  Given the stock's rolling pattern since last year, it has increasingly started to show evidence of peaking out as part of its longer-term uptrend which began five years ago.  Pullbacks down to test this uptrend line at $47-$50 look possible over the next six months, and momentum remains negatively sloped per MACD on weekly charts.  Initial pullbacks to $47 would likely constitute an area to cover shorts, while any larger break of $47 would have intermediate-term bearish consequences in all likelihood for LUV.
 

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Signet Jewelers Ltd.  (SIG- $38.63) The 16% rally seen in SIG since early April two weeks ago should present an excellent area to consider fading the stock technically given its sharp downward momentum and lack of progress in sufficient rallies to suggest lows have been put in.   The stock remains in a steep downtrend from last November's highs, and momentum is very sharply downward biased on weekly and monthly charts, while the daily rally has helped to bring this up to levels which now can hold as resistance.  Given the lack of daily and/or monthly Counter-trend buys present, there seem to be precious little evidence to think this stock has bottomed out on anything more than just a near-term basis.  Therefore this minor counter-trend rally should present opportunities to short the stock technically with ideal areas found at $40-$41 near late March highs.  Movement back down to test lows appears likely in the weeks ahead, and SIG would require a weekly close back up over $43.85 to change this perspective to more constructive, technically.  
 

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Bed, Bath, & Beyond (BBBY- $17.28) Last week's decline brought BBBY to within striking distance of 2008 lows, breaking the entire consolidation phase from last November.  This keeps the intermediate-term trend from 2015 highs bearish, and suggests it's still premature to buy dips, despite this being down over 75% off its all-time highs.   Last week's pullback will certainly begin to create some positive momentum divergence on this drawdown but MACD is curling back to negative territory on weekly charts and structurally the pattern remains quite negative with what appears to be a new leg down.  Volume expanded on last week's decline, while no counter-trend evidence of Demark related exhaustion is present to suggest buying dips.  Overall, while BBBY could hold $16.23 over the next couple months, that remains down more than 5% under current levels, and should be reachable before even minor stabilization.  Violations of $16.23 would argue for a prolonged bearish move to continue, and offer a far dimmer forecast for the stock.  
 

Consumer Staples starting to turn higher; 5 Stocks to consider, Technically

April 9, 2018

S&P JUN FUTURES (SPM8)
Contact: info@newtonadvisor.com

2584-5, 2549-53, 2531-3, 2481-2, 2461-70    Support
2619-21, 2642-3, 2670-2, 2697, 2739-40       Resistance

 

This kind of volatility this early in the year is rare for Bull markets

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Foreward: This kind of volatility we've seen over the last few months has been quite the wake-up call following multiple months of very little volatility which had set numerous records for the amount of time without a 1%, 3%, 5% drawdown.  What's interesting is that after three weeks thus far with multiple 2% down days, this has been quite rare for markets that aren't in bear markets by the traditional 20% definition.  Of the last eight highest occurences since 1950, seven of those had experienced 20% drawdowns.  Furthermore, this year ranks first so far in terms of the percentage of calendar weeks that we've experienced such a drawdown as a percentage of the whole, nearly 21.5%.  While this data is not set to prove that our current market is in fact a bear market, it makes it difficult to think that prices could simply rebound in a way where things could "go back to normal" at this point after what we've experienced.  Even on a sharp rally into late Spring, momentum would in all probability not get back to highs seen in January, thus creating meaningful negative divergence heading into Q3. (Chart courtesy of OddStats)

Summary:  

After finishing three of the last four weeks lower, Equities have now produced a more meaningful pullback to test early February lows which has served up as much uncertainty as we've seen since early February.   While trends remain negative from mid-March, last Friday's pullback has still not violated February lows, and could provide a likely attractive area to buy dips as equities near the start of a bullish seasonal part of April.  This volatility has certainly been worthy of the record books lately , equally as much as last year's lack of volatility had set records.   Each day thus far in April has moved more than 1%, and 2018 now shares the dubious honor of having produced three weeks with two days of 2% or greater declines thus far.  An incredible achievement for many years, but even more remarkable in that we're only 14 weeks into 2018.  Volatility, which was non-existent in recent years, looks to be here to stay.  That's good news for traders and for technically oriented investors, yet incredibly unnerving for most fundamentally oriented folks who are seeing prices show tremendous volatility lately without much rhyme or reason.  It's important to note that this volatility started back in late January in the US and most of the world, and isn't just a new development which came about as a result of fear of a trade war and/or tariffs.  

For now, heading into the second full week of April, there are several positives to be highlighted which go directly against the notion of an immediate Tariff fueled crash, and need to be revisited.   While momentum and breadth have been weak for the last couple months, we have yet to see meaningful trend violation on weekly charts.   Most indices maintain uptrends from 2016, while near-term momentum has actually improved in the last week, specifically based on the ability of prices to turn up sharply last Wednesday.  So, despite the late week plunge, momentum actually is in better shape, while indices maintain their intermediate-term trends.   Furthermore, the unpredictable nature of the verbal sparring towards China has fueled uncertainty, which has caused sentiment polls like AAII to flip Bearish, with more Bears than Bulls over the last week.   While fear certainly has not reached the levels seen back in February, we've seen sufficient concern to warrant looking for lows in this market, vs thinking a panic selloff is inevitable.  Additionally, volume as of last Friday reached nearly 12/1 into Declining vs Advancing stocks, causing the TRIN to register above 3.  Historically this has proven to be a time to buy into stocks, particularly when prices have not violated February lows and maintain ongoing uptrends.  Furthermore, markets are nearing the middle of April which has shown far better returns in the back half of the month seasonally speaking going back since 1950, and as Stock traders Almanac reminds us, following the 10th trading day of the month, April tends to be quite positive.  Finally, Demark signs of exhaustion were present in the SPX last week(based on TD Sequential and/or Combo indicators), while QQQ showed some evidence of hourly and 2-hour charts reflecting exhaustion which could fuel a bounce in the weeks ahead.  Whether its healthy and broadbased or not, is tough to tell, but it seems right to cover shorts technically for those that are 4-6 week or longer tactically oriented traders and look to buy dips early this week.  


SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:

Short-term (3-5 days):  Bullish-  Stock indices seem close to short-term lows given a combination of better near-term breadth, momentum, while sentiment has worsened given last Friday's -2%+ decline.  A capitulation in volume to the downside caused TRIN readings to register >3 often can allow for prices to stabilize in declines and turn back higher, particularly given that US indices have held up above February lows.   While a negative week with multiple 2% down days like last week often tilts the odds for Monday weakness, this likely can set up for gains into one of the more seasonally bullish parts of April.   Look to cover shorts Monday and start to assume longs, thinking that a counter-trend rally is right around the corner.  

Intermediate-term (3-5 months)-  BULLISH into late April/mid-May-   The selloff which began in mid-March looks to be near completion, and suggests that a counter-trend rally is right around the corner.   Sentiment has turned more pessimistic in the last few weeks (AAII shows more Bears than Bulls, CNN Bulls/Bears Poll now shows extreme fear) Meanwhile, hourly charts reached oversold levels early last week and have been consolidating near February lows.  Even on a minor breakdown at this point, this will cause positive divergence, allowing for dips to be bought with a bit more conviction.  Thursday'ssurge also showed very impressive breadth of nearly 4/1 positive, a major tell that stocks in general have begun to turn back higher (regardless of the whipsaw like nature of the indices)  Additionally, Demark's TD Sequential and Combo indicators showed confirmed Buys on Thursday for SPX, while the NASDAQ formed a perfected TD Buy Setup, which often are important in correlating with near-term market bottoms.   Finally, the key reason for why stocks could bounce concerns the lack of any material damage to the larger trends, be it S&P, DJIA, or NASDAQ, after what looks to be a successful retest attempt.   Weekly charts show the uptrend from 2016 very much intact.  So the combination of heightened fear with counter-trend buys, while prices have tested former lows and weekly uptrends remain intact suggests that this first leg down very well could be complete.  Look to buy any early Quarter weakness in the first week of April, with thoughts that stocks should turn higher for at least a more meaningful bounce than what we've seen thus far.

This week's Weekly Technical Perspective covers some of the key charts surrounding our latest selloff and rebound attempt in equities over the last few weeks.    

SPX- Hourly charts show last Friday's 2%+ selloff to be a bit more positive from a risk/reward perspective when seeing how this fits in with the prior week's pattern.  After the rise from Wednesday helped to turn short-term breadth and momentum higher, last Friday's decline resulted in prices testing support where lows were possible.  Momentum based on RSI has made a steady upward slope since late March and bodes well for this recent dip to be bought.   Hourly charts show what looks to be the start of a potential Reverse Head and Shoulders pattern which would be confirmed if prices can manage to turn back over last Thursday's highs at 2672.  Initially key areas of importance lie near 2620 and this would be a stop for Shorts heading into Monday.   Declines back under 2584 would suggest a full retest of 2558 and then 2532-3.   However, given some of the positives mentioned above, this would be thought to be an area to cover shorts and/or attempt to buy into this weakness. 
 

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The TRIN, or Arms index, registered a very high reading north of 3 last Friday, representing an abnormally large amount of volume flowing into "Down" vs "UP" stocks compared to its overall Advance/decline. These types of extreme readings in the Arms index often are part of the thinking that stock indices could be near trading lows, and coupled with improvements in momentum, could help S&P bottom out without much further damage early in the week.  

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The Equity put/call ratio spiked during last week's drawdown, yet even after two 2% loss days, still isn't producing readings above .80, and as this chart shows, this is nowhere near levels seen back in early February, nor last Spring/Summer when readings above 0.90 were seen.   This would seem to indicate that while some sentiment polls have clearly retracted and are showing signs of concern, overall some have definitely not shown the same degree of fear that would mark stock market bottoms.  The AAII for example has contracted to levels where more Bears are present than Bulls.  Yet, the Investors intelligence still shows a healthy spread between Bulls and bears which makes a difficult case calling for any type of meaningful low.   This put/call ratio is similar in this regard.  While a spike from 0.50 to .75 is important, it still hasn't reached former peaks, suggesting that fear might have a ways to go before reaching levels seen in the past. 

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McClellan's Summation index has shown evidence of turning higher over the last few weeks, so this recent pullback back down to the lows likely represents a short-term buying opportunity and could lead to at least a minor bounce.  Charts above show the Summation having bottomed at a lower low back in early February, while having shown successively lower peaks since last October.   Overall, this represents a short-term optimistic scenario, while the intermediate-term picture is more of a concern.  The steady drop in market breadth since last Fall gave some important warnings when this plunged as much as it did into early February, and won't be able to be recouped anytime soon.  Thus, while a minor bounce does look to be near and could get underway this coming week, the longer-term picture needs quite a bit of work to show improvement.  

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BUY STAPLES-   Consumer Staples index showing evidence of Exhaustion on this decline for the first time in two-years.  Monthly charts of Consumer Staples vs the SPX has shown pretty severe underperformance in the last two years, as might have been expected as the stock market rose to new heights, yet now is indicating that a turn back higher is imminent.   Oversold conditions on relative charts coupled with counter-trend Demark indicators pinpointing Exhaustion not unlike what happened back in 2006 (1 year early) and 2014 at the lows, along with 2009 at the highs suggests that this group should be poised to turn up in the weeks ahead.  On an absolute basis, Consumer Staples has been the 2nd worst performing sector this year, down over 8% in absolute terms.  Yet the last week has begun to reflect outperformance with the group losing just 0.28% vs an SPX return of -1.38%.   Stocks like MO, ADM, CVS, HRL, PM all rose more than 1.50% last week, and Staples looks particularly appealing given this new era of volatility the market seems to have entered this year which has produced three weeks thus far with 2 or more 2% down days.  While this group of "safe" stocks might seem pricey to some Fundamentally oriented analysts, technically its two -year underperformance looks ripe to end this year and turn higher.  

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Food Beverage and Tobacco has begun to turn up sharply over the last two weeks, which bodes well for further outperformance in the weeks ahead.  This group has been trending down within the Staples complex since mid-2016, and while a minor period of stabilization happened last Spring, this recent upturn looks to be on more solid footing to succeed.  Both weekly and monthly charts show the presence of counter-trend exhaustion per Demark indicators when plotted on ratio charts of the Food Beverage and Tobacco index relative to SPX (S5FDBT index/SPX index) as shown above.  The last time these were present on weekly charts occurred as Sell signals and right at the highs two years ago.  The act of breaking the downtrend relatively speaking vs SPX should create an attractive risk/reward scenario for this sub-sector of Staples after TD Combo and TD Sequential buy signals were confirmed, allowing this group to outperform the SPX in the weeks/months ahead.  




5 Consumer Staples Stocks to Consider

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Constellation Brands (STZ- $227.19) One of the more attractive stocks right now from a risk/reward perspective within the Staples complex, STZ has formed what many would refer to as a Cup and Handle pattern following a strong year of outperformance in 2017.   This area from $230-2 near early March highs has been hit three times now in the last month, and the recent pullback should provide a buying opportunity for an upcoming breakout back to new highs.  The longer-term structure remains in very good shape, while the churning in the last few months shows very little of the technical damage that's affected other stocks.  The slope of ascending troughs since late March should allow for a push back higher to challenge $232 in the weeks ahead, which this time around likely gives way for a move up to $240 initially.  Technically one would buy vs the $222 lows from early April, with a move under there stopping out longs.  At present, this looks to rally back to new all-time highs, and is seen as bullish technically.  

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Philip Morris (PM-$101.02) PM looks attractive to buy, technically after having lost nearly 20% of its value over the last 10 months since peaking last June in 2017.  However, at current levels, the decline has not breached meaningful trendline support from 2009, and the bottoming in the Food Beverage Tobacco sector should help to lift this off its lows in the weeks/months ahead, as the "safe stocks" within Staples begin to show more outperformance.   Bottom line, the risk/reward is attractive to buy this dip between $95-$102, while any move under $95 would postpone the rally.  Upside targets lie near $110 up to $112.84 initially on rallies. 

Archer Daniels Midland (ADM- $44.33)  ADM looks attractive technically given its recent ability to exceed the downtrend which has been in place since mid-2015.   Technically this stock has been a relative laggard over the last few years, but the recent uptick in the stock looks meaningful structurally, and might lead to additional  strength up to the upper $40's in the weeks ahead.  Last week's weekly close not only surpassed this three-year downtrend, but managed to close at the highest level since this time last year in mid-April.  While the pattern of gains in the last few months has appeared choppier than normal, this stock should begin to trend higher more meaningfully given the uptick in momentum as price looks to have made meaningful progress.
 

Campbell Soup Co. (CPB- $43.73)  CPB looks technically appealing after nearly a 35% decline in the price since last July.   Not only has this stock retraced 50% of the rally since 2002, but also a perfect 61.8% retracement from the 2009 lows.  Additionally, at current levels hits the long-term trendline from those 2009 lows, making this an attractive area to consider buying dips.  Finally, technical momentum gauges like RSI have begun to show evidence of positive divergence lately on the recent stock decline under $45 to current levels, as RSI has improved and is higher than late 2017 when the stock was trading at higher levels.  Overall, this looks like an attractive area to fight this downtrend since last Summer as numerous factors support buying dips near current levels.  Upside lies near $52.50 which represents the lows made near the US Election.  Structurally this represents the first meaningful area to consider lightening up on a bounce.  Weekly closes under $41, while not immediately expected, would postpone the rally, allowing for a likely test of late 2013 lows near $38. 

Hormel Foods Corp (HRL- $34.93) HRL looks appealing to buy after its late year breakout in 2017 was consolidated, and has now begun to turn up yet again.   The stock has been one of the top performers within the Staples complex in the last six months, returning 10.17% making it seventh-best out of the 34 companies that represent the Consumer Staples index.  Its appeal technically comes from the fact that its symmetrical downtrend that lasted nearly two years was exceeded last November, and helped momentum to begun turning up sharply.   Last week's weekly close finished the highest since mid-January, and bodes well for a continued rally up to test and exceed late December 2017 highs near $38.  This represents a 50% retracement of the decline from 2016 while additional technical targets lie a bit higher near $39.62, and then $41.95.   Overall, one should consider HRL at current levels, while using any weakness back down to $32.50 to buy dips.  Only a weekly close back under $31.71 would negate this bullish pattern, and for now, looks unlikely right away. 

Five technically attractive stocks to consider after recent weakness

April 2, 2018

S&P JUN FUTURES (SPM8)
Contact: info@newtonadvisor.com

2564-8, 2549-50, 2531-3,                    Support
2614-6 (PIVOT), 2642-3, 2670, 2697  Resistance

 

Bloomberg World index manages to hold intermediate-term  trendline support, for now

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Foreward:  Given that US stocks and many global indices have not really moved much in tandem of late, with most of the world lagging the US, this Bloomberg World index chart illustrates that stocks have still largely bottomed where they need to on an intermediate-term basis, with pullbacks holding the trendline from the US 2016 Election.  Until this changes, it's worth noting that intermediate-term trends remain intact, despite the downward turn in momentum lately.  If this changes dramatically, than it would add conviction to the thought that January's highs might remain in place as highs for 2018.

Summary:  

Volatility has returned to the market with a vengeance, with last quarter's dismal performance putting to an end many of the former records which had been intact with regards to lack of volatility heading into this year.  Not only did last quarter break the string of nine consecutive "up" quarters, but also finished worse than any quarter in the last couple years, as might have been expected.  The real question in many people's minds at this point is naturally. "Have we begun a new bear market??"  "Has the market finally snapped its bull market run from March of 2009, turning trends from up. to sideways, and more recently, to down?"  My answer to these in short and sweet form given that none of the longer uptrends have been violated is, well.. "Maybe"  While the media waits until a 20% decline has been hit on the indices to claim that a bear market has begun, we see that NONE of the major 11 sectors are down less than 7% from all-time highs as of last Thursday, with most fitting into the range of -7-11% with Energy being the outlier, down over 26.6% from its all-time high close.  Our streak of four straight +1.5% moves up and down since March 23rd was unusually rare to see in "bull markets" and 80% of the time, since 1950, this kind of action has happened in bear market declines.  Looking back, there have only been 5 years since 1985 that have seen 4 or more 2% declines, with each of these years associated with above-average volatility, and not necessarily on the upside: 2000(7), 2001 (7) 2003 (4) 2008(8) and 2009(16)  Finally, 9 of the 11 sectors are now lower than their 50-day moving averages, and we've seen persistent underperformance in Mid and Small caps vs the broader market since the 2016 election while the Equal-weighted SPX has also dramatically underperformed.  

This tells us in no uncertain terms that a handful of stocks have been leading the charge.  We've also seen a huge decline in momentum on weekly and monthly charts since late January.  This is important and negative for the intermediate-term, as even on snap-back rallies in April into May, a push back to former highs would very likely fail to carry momentum back to these former peaks given the degree of deterioration in the last couple months, (hence, setting major market indices up for Negative momentum divergence, similar to what occurred ahead of former prominent market peaks)  The key message to all of this is as follows:   Bull markets take time to break, and peaks sometimes can take a few years, where the stock deterioration begins first with Small-caps and then Mid-caps, only finally extending to Large caps.  When most major indices have set their actual price peak, most stocks are already down well off their all-time highs in the neighborhood of 10-20%.   So it pays to watch Market breadth compared to 2015-2017, the percentage of stocks trading above their 50/200 day moving averages, and the performance of Small and mid-caps very closely in the upcoming months.  Failure of stocks to mount a strong rally in terms of breadth and participation in April/May followed by a break of 2500 in the SPX would suggest that this topping process for a new bear market has begun.  Naturally, long-term trendlines from 2016 and from 2009 need to be broken to have real conviction that a bear market is upon us, but this often can require substantial technical deterioration to have real proof, and for SPX alone, requires a move down under 2175, or nearly 18% down, (which breaks the uptrend from 2009)  just to have proof that markets will then be able to weaken (likely) a whole lot  more based on historical standards given momentum, trend damage, and of course, gravity.  This speaks volumes as to how extended prices have gotten above long-term trends, and the return to volatility should be a very meaningful "shot across the bow" at the very least, that needs to be paid close attention to, regardless of the optimism surrounding earnings growth, economic progress, or Fed policy.

Overall, heading into the new quarter, much of what was highlighted last week remains very much the same.  In the short run, we've seen sentiment start to wane and become more fearful (contrarianly Bullish) while intra-day charts became oversold, after many indices and sectors came within striking distance of February lows.   Counter-trend signals of exhaustion were triggered on the SPX and NASDAQ Composite, while breadth has begun to stabilize and turn higher (Last Thursdays move was key in this regard)  Meanwhile the longer-term trends remain very much intact for indices, which is seen as a big positive, given a general lack of trend damage to the indices themselves on an intermediate-term basis.  On the flip side, we have seen triangle patterns broken to the downside now only in SPX, but also major sectors like Industrials and Financials.  Short -term borrowing costs have also been surging, giving worry about a possible funding crisis (Libor-OIS)   This last part seems to have correlated directly with much of our recent equity weakness, and is a concern for markets most likely in the months ahead given how rapidly this has begun to accelerate.  This last point underscores the need to study markets outside of just equities, as this correlates far better with why equities are weakening than trying to pin the Ebb and Flow of market movement on DC Dysfunction, or Trade policy fears.   However, the key worry at this point, technically speaking, going forward is more intermediate-term in nature and centers on two key words:  Momentum deterioration.   The severe drop we've seen in momentum from very high extended peaks should be a concern to anyone who's studied markets over the years.  Plunges in RSI coinciding with an uptick in volatility aren't easily recouped, and often do set the stage for future intermediate-term declines (even if a trendline break has not yet occurred.) 





SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:

Short-term (3-5 days):  Bearish- Last Thursday's sharp rally was impressive from a price point perspective, but failed to exceed the downtrend from mid-March.  While breadth was higher than average, the end result doesn't suggest that trends should turn up just yet.   The late day selloff from 2659 down to 2637 on Thursday afternoon happened right near the key downtrend from two weeks ago.   Moreover, the last four days have shown consolidation near the lows, but these types of configurations often lead to one final pullback to new lows from where a V-shaped Bottom can emerge.  TD signals failed to produce a perfected TD Setup last week for SPX, and while counter-trend buys were in fact confirmed by TD indicators by end of week, there hasn't been sufficient progress off the lows to have conviction that a new uptrend is yet underway.   Finally, most important to highlight perhaps is that hourly momentum reached overbought conditions, while daily and weekly are bearish and negatively sloped.  Conditions like these often set up with great risk/reward opportunities to sell.

Intermediate-term (3-5 months)-  BULLISH into Mid-May-   The selloff which began in mid-March looks to be near completion, and suggests that a counter-trend rally is right around the corner.   Sentiment has turned more pessimistic in the last few weeks (AAII shows more Bears than Bulls, CNN Bulls/Bears Poll now shows extreme fear) Meanwhile, hourly charts reached oversold levels early last week and have been consolidating near February lows.  Even on a minor breakdown at this point, this will cause positive divergence, allowing for dips to be bought with a bit more conviction.  Thursday's surge also showed very impressive breadth of nearly 4/1 positive, a major tell that stocks in general have begun to turn back higher (regardless of the whipsaw like nature of the indices)  Additionally, Demark's TD Sequential and Combo indicators showed confirmed Buys on Thursday for SPX, while the NASDAQ formed a perfected TD Buy Setup, which often are important in correlating with near-term market bottoms.   Finally, the key reason for why stocks could bounce concerns the lack of any material damage to the larger trends, be it S&P, DJIA, or NASDAQ, after what looks to be a successful retest attempt.   Weekly charts show the uptrend from 2016 very much intact.  So the combination of heightened fear with counter-trend buys, while prices have tested former lows and weekly uptrends remain intact suggests that this first leg down very well could be complete.  Look to buy any early Quarter weakness in the first week of April, with thoughts that stocks should turn higher for at least a more meaningful bounce than what we've seen thus far.

This week's Weekly Technical Perspective covers some of the key charts surrounding our latest selloff and rebound attempt in equities over the last few weeks.    

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SPX- As of last Friday's close, prices had not travelled sufficiently higher to think meaningful lows had yet been put in place, and the trend remains susceptible to a more meaningful retest this week before stocks likely can begin working higher.  As the Daily chart shows, momentum remains negatively sloped given the severe dropoff since March 12/13 highs.   The break of triangle support held where it needed to, and then attempted to bounce last Friday.  But intra-day momentum is now overbought, while both daily and weekly are negative, which is a concern when hoping that last week's late rise might now continue. The positive breadth shown last Friday was indeed a bullish sign.  Yet, trends have not yet shown any positive ability to breakout, while momentum is bearishly sloped.  The next week's price action should answer quite a few questions in this regard. 

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New York Composite- McClellan Oscillator-  Readings have improved as of late last week, with Fridays' gains helping the oscillator now approach the Zero level while it managed to bounce this past week at a much higher level than what was seen in early February.  This bodes well for some kind of larger bounce likely taking place in the month of April, and while near-term weakness might persist early in the month ,the last few weeks should be positively biased.  
 

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LIBOR-OIS Spread-  This has been one of the more negative developments of late that the stock market actually has been paying close attention to.  Given that Short-term borrowing costs have spiked dramatically, this rally in LIBOR vs the Swap market often is a good gauge for signs of funding stress in the market.  This charts breakout above both 2016 highs as well as 2012 is seen as pretty bullish technically for this chart, which might be a larger negative for the markets and economy in the months ahead. 

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2/10 Treasury Spread- Flattening back down to new lows for 2018 - While Short-term rates have held up resiliently, the back end has been pulling back hard lately, and the yield curve has broken down further into the 40s, which at this point seems to be on a steady course towards possible upcoming inversion.   Given that the 2/10 curve has broken down under last year's lows, a move to the high 30's looks like the next stop before this can stabilize.  So further flattening looks imminent after this breakdown. 

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AAII Sentiment- Back to levels which support buying Stocks, as complacency has been reigned in-   The latest AAII poll shows bearish sentiment continuing to grow and now has exceeded the level of bullishness by nearly 4 bps.  This is a far cry from the former levels shown in January when Bulls had widened out to over 40 bps vs the Bears.  While the near-term progress has been lacking in the last week, this poll would suggest markets are certainly growing closer to a tradable Buys which should breakout of the downtrends. 


5 TO CONSIDER, Technically

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lululemon Athletica inc (LULU- $89.12) -  LULU looks attractive given last weeks' breakout back to new all-time highs, and this symmetrical triangle pattern had been going literally sideways for the last five years, so this breakout is a welcome change to this pattern, and suggests higher  prices in the near future.  The area near the base breakout should be good to buy dips-  $85-$86, while further upside should help LULU reach $100 before any kind of meaningful top.  The duration of this pattern is an important factor in gauging the importance of this formation and what might be in store. 

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Five Below Inc. (FIVE- $73.34)  FIVE also is quite attractive technically, and more so than LULU from a near=term risk-reward perspective.  The stock broke out initially near $50 a few months back, but the consolidation from that move lasted the last month before this broke out yet again just last week.  This suggests an upcoming rise up to $80 can't be ruled out, and FIVE remains one of the more attractive Stocks within the entire Retailing space given the strength in the last year.  Pullbacks that take place in the market early in the week that cause any kind of pullback back to $70 should represent an even better risk/reward opportunity to buy dips for a further push higher.  
 

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Twitter Inc (TWTR- $29.01) TWTR pullback in the last couple weeks should represent an above-average Technical buying opportunity for most investors and downside should prove limited, while the upside could allow for this to move (eventually) back to the low $40's.  The breakout last year was memorable, and this consolidation in the last couple weeks simply allows for a better suited buying opportunity given the positive sloping momentum..  Any dips in the week ahead likely should be contained near $27.50-29 and present a good buying opportunity.  

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Micron Technology (MU- $52.14) Buy Half position here, with balance at $50 with upside targets at $63.50 near former highs .  MU has been one of the top performing SPX stocks this year along with in the last 12 months, so it pays to stick with a name like this until there is evidence of pretty strong lagging behavior.  Just in the last week we saw a very steep dropoff in the stock, yet it failed to do much deterioration and prices have pulled back to an area which should be bought, Technically.  The decline since mid-March has totaled over 10% but has failed to violate any of the key areas of support (shown on chart) while structurally this remains in good shape.  Technically any further weakness Monday/Tuesday should be bought near $50, thinking that a rally back to near $63.50 is very possible in the next couple months. 

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Seagate Technology (STX- $58.52)  Buy with targets at 67.50-  STX is another stock which was relatively unaffected by the pullback a few weeks ago, and still lies short of targets to sell, having rallied up well above last Falls highs, yet still above levels hit back in 2014.  Movement up to the mid-to-high $60's is likely before any real peak, and one should buy currently, using any pullbacks in the next week to add to longs for a larger than expected April rally.  Momentum is positively sloped and overbought, yet no real evidence of any weakness since last Fall has transpired, despite the selloff from late January as well as March.  Therefore this remains an attractive technical buy candidate for gains to the mid-$60's.  

Newton Weekly Technical Perspective: 3/26

March 26, 2018

S&P MAR FUTURES (SPH8)
Contact: info@newtonadvisor.com

2564-8, 2549-50, 2531-3,                    Support
2614-6 (PIVOT), 2642-3, 2670, 2697  Resistance

 

Time counts from Gann's Square of Nine chart suggests short-term lows should be near

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Foreward:  For those utilizing Gann's Square of Nine Chart, we see that the 14-day decline from 1/26 into 2/9 also allowed us to pinpoint turns that might be approaching in the near future.   For those that make use of this chart, one way of utilziing it involves converting price to time and allows one to mathematically determine where the course of future highs and lows might arrive based on a certain high, or certain low, or Low to High range, etc.  By taking price and converting it to an angle of the circle of 360 degrees, we find that the initial decline of 14 calendar days in early February equates to an angle of 67.50 on the Square of Nine.  Running this 14-day count forward initially allows us to find our next prominent high in late February, while other prices at 90 or 180 degrees in time can often pinpoint areas where price can turn.  In this case, our studies found that both March 2/5 lows as well as March 12/13 highs occurred on prominent angles related to this initial decline.  Finding other numbers also on this 67.50 angle equated to 59 Calendar days, which from 1/26 peak in January, arrives at 3/26, or Monday.  Thus, based on our recent symmetry of highs and lows, we should be at a low for this current move.  Yet in the larger scheme of things, bounces would still be within a bearish trend, purely technically speaking.  For those wishing to study the Square of nine chart in more detail, i highly recommend the work of Daniel Ferrera, Carl Futia, and/or WD Gann's early work itself.    

 

 

Summary:  

The extent of the deterioration in Equities is very much a concern given the combination of near-term Technical damage, along with the decline in longer-term momentum after having reached record overbought conditions into late January.  This has negative implications for this coming month of April along with the typical bearish Third quarter seasonality from July-September.  Overall, the reversal in Technology looked to have been very much a catalyst at a time when US markets were struggling for leadership.  Bearish factors like the intra-market divergence between the US and the rest of the world, along with the NASDAQ's divergence to SPX and DJIA also were certainly important for those paying attention.  Perhaps even more important was the breakout in Libor-OIS spread which gave many concerns about a possible funding crisis down the road given the extent that borrowing costs have been surging in recent weeks.  At present, it's right to mention that the Triangle patterns having been reported in SPX along with XLF, XLI and others recently have all been violated as of this past week.   Furthermore, the formerly strong NASDAQ (which had pushed up to new high territory while other indices languished) has now broken back down to join the others, not vice versa.  The peak in Technology which began a couple weeks ago looks very much real, and stocks like FB and AAPL are still undergoing short-term declines which haven't yet arrived at areas of importance, from a price, or time perspective.  The VIX, meanwhile looks to have broken out to the highest levels since early February which was expected, but has a very bullish intermediate-term pattern that looks to be emerging yet again.  Momentum indicators based on MACD on daily and weekly charts have rolled over to negative on daily and weekly timeframes.  These are all negatives for stocks along with the market on the verge of entering the most bearish part of the year over the next six months.  

Potential reasons for near-term Optimism
1) Long-term trends intact-  Importantly, this recent correction has not yet violated longer-term areas of trendline support, which lie near February lows for SPX.  As stated in our Annual report, if 2500 is breached, it's likely that the market has peaked for the year and likely will experience a more serious correction that would represent the first bear market , therefore ending the bull market run from 2009.   So after last week we now have prices nearing these longer-term levels of support while fear has elevated.  The initial response after a severe couple weeks of decline is to look at buying back into the market, although with close stops under 2500.

2) Fear looks to be starting to come back into the market-  There was some brief signs of optimism waning into early February, but after last week we saw both the CNN Fear and Greed index go to levels that suggest Fear, along with the Total Put/call ratio finishing up above 1.5, or the highest level we've seen since 2015.  However, the Equity put/call still hovers at .76 and below levels seen both in early February at .88 or last August, and both of those times saw higher levels of Put/call ratios than present.  So a mixed picture but still the Put/call (all inclusive) suggests this pullback has gotten a bit ahead of itself.

3) Divergences with the spikes seen in early February with stocks hitting new 52-week lows  and also the VIX which is far lower than the inverse volatility blowout back in January.   Despite there being definite reasons for VIX having spiked that high in February with the inverse Volatility ETF liquidation, it's still notable that our current levels are far lower than what's been seen over the last couple drawdowns.

4) Demark indicators have begun to line up again to suggest signs of exhaustion, this time on the Downside, not upside like late January.  Daily charts along with a multitude of intra-day charts all seem to suggest the next few days should prove important for at least a minor trading low.  

Reasons to still think Markets might be in trouble after a minor bounce
1) We're continuing to see the rest of the world indices in very poor shape, while US has just turned down to join.  SX5E along with NKY late last week both violated February lows, and have traded far worse since late January.  IF anything, last week's decline simply helps the SPX join an already growing chorus of weak global markets near-term

2) Triangle formations have been broken-  Structurally, the breakdown of recent symmetrical triangles in indices and sectors is problematic.  These aren't normally patterns that can be formed over the course of 2-3 months, broken, and then simply snapback.  Structurally we've just begun to see more serious signs of technical deterioration that really has not been present for the last few years.

3)  Breadth was quite weak on the bounce from February, and as McClellan Summation index readings show, the peak of March 12/13 was far below levels seen back in January, or last Fall.  Thus, we have an ongoing pattern of weaker and weaker breadth, and momentum has turned down sharply.  While uptrends are intact, we've arrived at the first intersection of the last couple years where increasingly these might look to be broken.   

4) Weekly momentum on the markets two highest percentage sectors, Technology and Financials, have rolled over substantially to bearish after recent negative divergences, and have seen RSI break down severely.   

Bottom line, the evidence suggests that the last week's selling should be near at least minor support.  However, on any signs of a bounce into early April, one would need to adopt defensive positioning again, and prepare for the possibility of additional selling and implied volatility increasing.  

Appealing Risk/Reward ideas:
-Consider Defensive sectors like Consumer Staples and Utilities for the next six months as areas to favor, given the market's volatility.  XLU had gotten down to key make-or-break support to the uptrend stretching up from 2009, and looks apt to show good strength if yields continue to trend lower in the next six months given the bearish tendency of yields typically during this time.  (TNX peaked out last year in March)  Heightened equity volatility while investors are bearish on Treasuries typically sets up for a good one/two combo for owning Utilities.   Staples vs SPX in relative terms shows Demark counter-trend exhaustion BUYS on both a weekly and monthly basis, so this should be given consideration

Metals stocks should be favored given the decline in both US Dollar and Treasury yields along with massive uncertainty surrounding Trade policy. Price trends have grown more constructive from a risk/reward standpoint in the metals

Technology seems to be down near initial support on an absolute basis, given XLK's brush with $64, and stocks like AAPL also look to be just above key support (but not quite there)   On a relative basis, Tech  might not offer the same degree of outperformance as in the past, regardless of long-term uptrends intact.  The severe deterioration in momentum seems important for this group, and makes selectivity essential for the next six months.  

- Using strength in the US Dollar index to consider buying EURUSD and GBPUSD, as the Dollar should be on the verge of some seasonal weakness in April while technical trends remain bearish on the Dollar.  

- Getting long Bitcoin with stops at 7500, and adding to longs over 10,000 which could drive the first meaningful rally in XBTUSD since late last year




SHORT-TERM/INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:

Short-term (3-5 days):  Bullish for a Bounce-   Prices have gotten down to levels right above February lows, while signs of fear have begun to creep into the market in the short run.  Near-term oversold conditions combined with Demark signs of exhaustion are also present which might be effective in creating an early week low.  While the intermediate-term prognosis is currently negative for the month of April, prices look to be near areas to buy, and how far the bounce can carry will depend in a large part on the degree of breadth and momentum acceleration on rallies in the next two weeks.  At present, looking to take advantage of covering shorts on this recent pullback down to under 2600 looks correct, while potentially selling out and taking profits potentially as early as 2680-2700.

Intermediate-term (3-5 months)-  Bearish-  The selloff which began again in earnest on March 12 looks to be a concern to the bullish case for this Spring, and breaks of 2500 would suggest that the Bull market from 2009 likely has peaked out in Late January.   We've seen troubling lack of breadth and momentum keeping up after the bounce from February, and Europe and Asia have acted far weaker than US in the last two months, not showing any of the exuberance that the NASDAQ showed in early March when it rose to new highs, yet few other indices followed suit.  Now given the worst weekly decline in two years time, momentum has moved sharply lower and has made very bearish patterns on RSI for various sectors like Financials and Technology, and MACD remains negatively sloped on daily and weekly charts.   While the larger uptrends from 2016 are still intact at this time, it's worth watching carefully if these should be broken, as this could lead to a much larger selloff in the months ahead.   The positives in the near-term involve Fewer stocks hitting new lows while sentiment has gotten rightfully concerned, as per the Total Put/call ratio hitting 1.5 last week.  Yet, as stocks begin to move into this period of bearish seasonality during the worst six months of the trading year, it's worth keeping an eye on momentum given now negatively it's pushed lower of late.  Bounces this coming week could serve as a chance to lighten up in early April.  

This week's Weekly Technical Perspective covers some of the key charts surrounding our latest selloff in equities over the past week.  While many charts show prices nearing initial areas of importance, additional weekly problems remain that have surfaced.  

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SPX-  BUY this DIP Monday/Tuesday for a bounce-   As can be seen in this daily S&P chart, prices are now nearing important near-term levels of support which likely should hold on this first pullback from 3/12 highs for three important reasons:   First, prices are nearing former lows from early February while coincidentally nearing the 200-day moving average as well.  While the 200-day doesn't necessarily always represent serious support, it did manage to hold on the last test in February and also coincides with the two-year uptrend line support from 2016 which has much more importance.  Second, Demark's TD Sequential indicator will reflect a "13-countdown" likely in the next 1-2 days, while intra-day signals are also very close to forming on hourly, Two-hour, Three-hour and four-hour charts, which represents a huge confluence of downside exhaustion.  Third, cyclical lows based on the initial 14-day decline, per Gann's Square of Nine chart, shows 3/26 as having importance, which should represent at least temporary support.   Bounces from this level though, given the degree of damage suffered by the break of the triangle pattern from early February are problematic for Bulls, and prices have sold off much more severely compared to February lows than what would be expected to think this was just a normal pullback.  We've seen breaks of triangles in several ETF's and should now likely result in further downside acceleration into the month of April after a minor bounce.   However, at present, prices are nearing February lows, and from a trading perspective for SPX and other Sector ETF's, it looks right to consider covering shorts and buying in small size as this final week of March gets underway.   If price fails to hold February lows, that would be a much more negative sign for the months ahead, and the area at 2500 would serve as a stop for any buys Monday/Tuesday.  For now, given this volatility, a hit-and-run mentality is necessary given these swings, and enough seems to be there to suggest buying early this week.  
  

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XLF- $26.82  Financials near initial weekly Trendline support, but momentum downturn is a big concern-   Financials look to be also at an interesting juncture after the weakness of the last two weeks.   While prices did in fact violate the daily Triangle pattern from February, they've now arrived at key trendline support on weekly charts since the 2016 lows.  This should help this group to stabilize and start a small bounce of its own.  However, despite the long-term chart being intact, there are a couple warning signs worth mentioning.  Momentum has taken a steep slide given the degree of price weakness in the last couple months.  As seen in weekly MACD, the momentum indicator under price, it turned very bearish in the last two weeks with its breach of the signal line and is diverging down sharply.  Additionally, the extent of last week's decline reaching former lows of February makes for a very different pattern in the short run than what's been seen in recent months.  It's doubtful at this point that prices can form any type of symmetrical triangle pattern given how deeply prices fell last week.  While the area at $26.18-$26.75 should be considered initial support to this drop early this week, it would be problematic structurally if this level is broken, and should be watched carefully in the weeks ahead for any hint of violation.  

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US 10-Year Treasury Yields-  The extent to which Bond yields peaked out ahead of the FOMC meeting has been a question for many lately, and the reversal likely stem from two key reasons.  First, yields had failed to get up above 3.05% that marks the 25 year channel highs and was thought to be major resistance to yield rallies.   So, despite the FOMC hiking short rates, the long-rates simply have not responded with the same force.  Second, sentiment remains quite negative on Bonds, and CFTC data shows Speculative shorts at the highest levels on Treasuries since last March.  At that time, yields peaked out at 2.60 on the 10yr and travelled down to 2.00%.  Such a pullback could very well repeat this year given that Bond yields and equities have begun to move in unison again in the last few weeks, while there definitely seems to be a near-term need for safety given equity volatility.  In the bigger scheme of things, TNX likely gets down to 2.65% before stabilizing and turning back higher.  At present though, yields have been churning between 2.79-2.92 and the path of least resistance very well might not be the upside like many think.  Breaks of 2.79% would be important and an area to watch carefully on any further yield weakness. 

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Utilities- Recent strengthening served as a "Tell" regarding potential market weakness-  This relative chart of the Utilities vs SPX shows the relative strength which has resurfaced in the Utes after a very sharp downturn from November.  This recent strengthening began in January, but really started to pick up in the last few weeks,  and stocks started to turn down nearly coincidentally with strength in this group.  In the short run, this might stall out and back off a bit until the market enters April, but one should look to buy weakness in the Utilities into April as this group likely can strengthen as equities pullback further, which is looking increasingly likely.  

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Consumer Staples should be poised to turn higher given the presence of both weekly and monthly Demark "13 Countdowns" in place on relative charts of Consumer Staples vs SPX, while Daily charts now also show Counter-trend signs of exhaustion after a very steep drop from late January.   The XLP, or Consumer Staples SPDR Select ETF, has neared the lowest point since the US Election in late 2016, having pulled back over 13% within the last two months.  This relative chart above paints a similar picture after severe exhaustion not just from this past January, but from early 2016, having underperformed substantially.  While a breakout above the downtrend is necessary to suggest the start of intermediate-term outperformance in this group, the short-term severe carnage looks sufficiently worn out heading into late March.   Furthermore, this looks to be sufficient to argue for buying dips in this group heading into April, thinking that it very well might offer better safety in the market than putting money in Technology or Financials over the next six months.    One should look to buy XLP at $50-$50.50 and consider overweighting Staples as a trade over the next week.  

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CBOE Volatlity index- VIX - Implied volatility is on the rise yet again.  The VIX looks to have made a structurally bullish breakout last week with its move back over 20.  As daily charts show, it's managed to eclipse the former peak from March and from February, and shows no impending counter-trend "Sells" on daily charts which would think volatility should begin to reverse back lower immediately.   One can make the case for a spike up to 27 initially Monday or Tuesday which would coincide with a TD Sell setup, but this very well just might lead to consolidation, and a mild pullback only before a larger move to the mid-30's.

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Weak breadth levels provided clues to downturn, and remain a source of concern- McClellan's Summation index turning lower again looks problematic, and additional weakness looks likely in the coming months.  This daily chart provides a very visual perspective on how breadth has been starting to show greater and greater amounts of deterioration.   This started back in January when the Summation index peaked at a much lower level than back in October, despite stocks having pushed well above levels seen last Fall.  This represented the first warning sign.  Then the snap of this two-month uptrend in mid-January coincided with the breakdown in equities, and breadth had been slowing largely in the two weeks prior to this trend violation  Lately we see that the pullback into February caused the Summation index to go well below prior lows from both November and also May.  What's interesting though is the weak rally attempt from early February, which as can be seen barely recouped half of the prior selling from late January.   While the NASDAQ was smashing former highs and making records, breadth for US indices was at a much lower rate, and we still had less than 60% of all issues above their 50-day moving average in early March.  That figure has dropped now to under 16%, while the percentage under their 10-day m.a. has fallen to 6%.  Extreme short-term conditions, but yet greater reason to have concern about April-October of this year given how lackadaisical breadth and momentum have been lately.  
 

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Fewer new lows than February is mildly encouraging.   NYSE New 52-week lows (Bloomberg)  Somewhat refreshing, however is the extent to which stocks hitting new 52-week lows are but a fraction of levels seen back in February.  While this can change very quickly, at present we see just 114 New lows as of last Friday, which is less than half levels seen at the prior stock market bottom.  This would seem to be an encouraging sign of it could hold these levels, and begin to turn lower.  With price nearly at similar levels, this does represent some positive divergence that could be helpful for stocks.  However, given the prior charts showing lackluster breadth, it might just be a matter of time before these former peaks are indeed tested and taken out.   One should watch charts of New Lows carefully in the days ahead, along with the VIX.  

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Gold looks to have begun a surge back to test early year highs after the last few days produced a downturn in Treasury yields along with the US Dollar concurrently.  This chart continues to grow more bullish by the day, and should lead to an upcoming test of the important 1360-5 area which has marked the highs of a multi-year consolidation in Gold, but might finally be broken out in the weeks ahead as the Dollar embarks upon its pattern of traditional seasonal weakness in April.  Given the relative outperformance in Gold vs Silver since 2011 that is part of a 20+ year long-term base, one should favor Gold over Silver for precious metals strength, and expect that Gold should lead in performance in the weeks and months ahead.   At present, it's right to be long gold, looking to add on strength above 1365.  ETF's like GLD, IAU will give exposure to the metal, while ETF's like GDX can give exposure to Gold mining stocks.  

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Facebook (FB-$159.39) FB looks unattractive heading into this week considering the large breakdown seen in shares last week that undercut February lows on heavy volume.  As daily charts show, FB has made minimal progress since last Summer when this began to trade sideways, underperforming some of the other "so-called FANG stocks"   Looking specifically at last week, this break on over 100 million shares which brought this down to the lowest level since last Summer is problematic to the structure since last July, and should result in FB continuing its decline in the short run.  Downside targets lie near the weekly uptrend line at 145 and would be the first real area to consider buying dips.  For now, despite its intermediate-term appeal, the near-term prognosis is bearish, and one should hold off on buying dips just yet, and even consider shorting, Technically speaking.  FB will require a move back over $170 to consider this trend repaired, but even in this case, the extent of the weekly momentum drop looks to potentially be a bearish overhang in the months ahead. 

Top 6 Signs that a correction should be right around the corner

 

 

January 29, 2018

S&P MAR FUTURES (SPH8)
Contact: info@newtonadvisor.com

2867, 2860, 2853-5, 2844-6        Support
2878-81, 2886-7, 2898-2900       Resistance


  

Goldman Sachs Risk Appetite has hit new all-time highs

 

 

Goldman Sachs Risk Appetite index has now reached a record high extreme, and notes the highest optimism on record since 1991.  This is notable and definitely a concern after this rally, as it appears everyone's "Jumping on board"  at what appears to be some of the most overbought readings seen in over 20 years. 

 

 

Summary:  

What a year it's been for stocks, and we're just 19 days in.   As fellow colleague Filippo Zucchi pointed out on Social media last week, "we're creating a new breed of traders who haven't even seen a down day, much less a bear market".    Equity indices continued (of course) to set records this past week for its vertical blowoff parabola, making the largest number of days of new all-time highs (SPX) in a month in over 60 years, along with setting a new record for the longest span without a 3% correction (446 Trading days as of today) while being just 18 days away from besting 1959's record for the longest 5% rally without a 5% correction (575, vs 593 record- Data from Urban Carmel)   Data shows the eight times that DJIA has been up more than 7% in January (8 in total), seven of these ended in gains for the full year, with an average gain of 17.49%.    Given we just have three days left in January, the Stock Traders Almanac's January Barometer suggests that "As January goes, so goes the year"  STA has shown the nine occasions when this has proven wrong amounts to an accuracy rating of a whopping 87%.    

As we know, however, the Election year cycle along with the degree of overbought conditions both point to a less likely chance of repeating last year's gains at this stage of the economic expansion.  Yet, we've seen no evidence of weakness.   We're constantly reminded that breadth tends to drop off precipitously before most major market peaks, such as was the case both in 2007 and the 2000 peak.  Yet, advance/decline line continues to scale to new record heights, and over 84% of all stocks are above their 10 and 50-day moving averages, with the majority of sectors hitting new all-time highs, outside of the Defensive Utilties, REITS, Staples and Telecom.   Many seem perplexed at the lack of drawdowns, as complacency and market greed this time around have proven futile as gauges of market vulnerability.  The sideways trend markets which we observed for a few months in the middle of 2015, 2016 and last year all managed to emerge higher, accelerating to new record heights, as a stair-stepping type uptrend continues.  As market history has shown, these types of starts to a given year and for the duration of the market rally itself really aren't unparalleled, but yet they certainly "SEEM" extraordinary for most market participants who have witnessed this low volatility rally continue uninteruppted for months and months.  Below i list 5 key reasons why this rally looks close to at least a minor top in prices.  However, until sufficient deterioration occurs in this tape, it will be difficult to make the case that this just proves temporary, despite being seemingly unprobable.  

Outside of Equities, Treasury yields continued their upward assault last week, and 10-year Treasuries look likely to test 2.68-2.75% range before even a minor peak is in place.  This relentless bond selling follows of course the recent breakout in bond yields which occurred in US and also in Europe, and resulted in severe underperformance in yield sensitive stocks from last September through January.   The US Dollar's massive selloff, however, has been the biggest story, hitting the lowest levels in over three years.  Whether or not Treas. Secy Mnuchin and Trump agree about the best path forward, it was apparent that Mnuchin refused to walk back earlier comments, but recognized how sensitive a topic this had become by end of week.   The dollar's decline doesn't seem likely to reverse until mid-February (given lack of confluence of Demark exhaustion) and this continued weakness should boost commodities even further in the month of February, at least until mid-month.  Overall with regards to bonds and US Dollar, further declines look likely for both this coming week, though TNX looks close to levels where it might pause and briefly reverse (upon exceeding 2.68%) 



6 Reasons that Markets might peak this coming week:

1) Momentum has reached parabolic heights-   Traditional Technical gauges like RSI have now exceeded 90 on weekly charts, while Daily and monthly gauges show 87% and 88% respectively.  Monthly RSI has only exceeded 80 on three other occasions since the mid-1950s:  1996, 1986 and 1955. 

2) Sentiment has gotten even more bullish than prior readings:   While Market Vane, Consensus, AAII, and DSI data had all shown signs of speculative excess, Investors Intelligence shows the Spread between Bulls and bears at the highest spread in over 30 years.   The Percentage Bears dropped over the last couple weeks down to 12%, which is extraordinarily low.   The Equity put/call ratio now sits at .49 or more than two calls being bought for every Put.  Meanwhile the 13-week moving average has slid to .55, the lowest since early 2014 and similar to levels seen back in early 2011 over seven years ago.  

3) Defensive issues have begun to gain ground.  Utilities, Real Estate and Telecom all outperformed Technology and Industrials last week, the only three sectors that have turned in negative performance in the rolling 30 day period ending 1/26/18, yet have all begun to stabilize, with XLU, VNQ and the S&P Telecom index all having made the highest weekly close in the last three weeks.  So extreme weakness in week 1 of the year, but persistently strong of late. Often times these rotations to defensive sectors are major "tells" that the market has reached exhaustion.

4) 20-week cycle along with Gann projections from last August's lows both pinpoint the next week as having importance for a change in trend.  The 20-week cycle showed lows back on 8/24/15, 2/11/16, 6/27/16, 11/4/16, 3/27/17, 8/18/17, and has not yet peaked to form this current cyclical low, which looks to be inverting and could turn out to be a HIGH this week.  

5) Signs of stress in leading sectors like Semiconductors and Transports began in earnest last week, with both sectors cracking uptrend lines from late December (Semis managed a brief recovery last Friday)  while ETF and Sector dominant leaders like AAPL fell over 4% in the last six trading days.  Airlines had been persistently weak in the past week, but actually topped out in relative terms vs the Transportation space late last Fall.  This suggested that the Rail stocks might be favored vs Airlines.   


6) Markets have shown a slide in breadth in recent days, that can be directly seen when studying indices like McClellan's Summation index, a smoothed version of the Advance/decline, which peaked in mid-January.  This index is on the verge of breaking down below the 13-day simple moving average of the Summation index for the first time since last November.    Last week's surge Friday barely had more advancing stocks than declining and was largely negative for most of the day until the final hour.  Most of the days last week failed to show breadth gains surpassing 3/2 positive, not the 3/1 or 4/1 positive breadth which might show a more broad-based balanced rally.  Signs of thinning breadth following a 6-7% move in the first 19 days is definitely something to watch carefully, and normally will precede at least a minor correction from severe overbought levels. 


Overall, the coming days should be important, and given these warnings, could produce a trend reversal by Wednesday or Thursday of this week.   While earnings rarely can be pinned as a catalyst for market turns, there are some heavy hitters report earnings this coming week, which could prove to be pivotal.  Microsoft (MSFT), Facebook (FB), Amazon (AMZN), Alphabet (GOOGL) and Amazon (AMZN) all report this Wednesday and Thursday.  Combined these stocks make up 26% of the NASDAQ.  All of them outside of AAPL could potentially show counter-trend signs of exhaustion per Demark indicators this week on a daily basis, and are very overbought, which could be important.   


  
SHORT-TERM/INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:

Short-term (3-5 days):  Bearish-   An end to this parabolic state looks likely in the following 5-7 trading days, given the reasons we've mentioned above, a combination of excessive sentiment, very stretched momentum, while sector splintering has started to appear as Defensive sectors begin to stabilize.   For near-term conviction, dropping under the 5-day Simple moving average, which hasn't occurred all year, is a good first step towards taking on a defensive stance for those wishing to short the market vs just buying implied volatility.  Defensive sectors should be favored between now and March, and most Tech , Discretionary, and Industrials stocks should be avoided for 4-6 weeks until consolidation has occurred, as the risk/reward is just simply too poor in the near-term.  While picking spots seemed foolish heading into 2018, after 7% gains in 19 days, we're clearly seeing some evidence now that it looks proper to lock in gains on some of the sharpest moving stocks.    given For now though its right to hold off on getting too defensive until 2769 is violated.   Once this occurs, one can expect a swift move down to at least 2700 in the short run. 

Intermediate-term (3-5 months)-  Bullish  It's still thought that a snapback pullback of 3-5% or greater awaits stocks in the month of February and potentially into March as well, but the next 3-5 months should likely have a tough time being lower given how strong momentum has been in the last two months.   Given that 14 days of new all-time highs have been made, markets have only closed down three months later on one occasion historically when 12 or greater New all-time highs occurred.   Furthermore, data on daily RSI closes above 87 (from @Twill01) show that while markets typically suffer in the short run, the returns three months later have been positive on every occasion except 1 over the last 25 years.  Furthermore, momentum getting over 80 (RSI) on monthly charts historically has never led to immediate tops for stocks since the early 1950's.   Overall, we'll need to see the extent to which markets can pullback to have any sort of confidence of a bearish intermediate-term outlook, and this likely takes shape in 2H, vs thinking that the first half is negative.   Initial pullbacks of 5% or even 10% would certainly seem likely given the combination of very bullish sentiment during very overbought conditions

 

 

This week's Weekly Technical Perspective covers 10 charts and commentary regarding some of the warning signs mentioned above, covering sentiment, indices, and sectors which have been showing deterioration and others which present good risk/reward opportunities. 
 

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SPX has stretched higher in parabolic fashion, causing weekly RSI (14 period) to reach over 90, a level that hasn't been seen in a least 20 years.  Even by bullish standards, prices have risen too far too quickly in recent weeks, and look to be entering a key time for trend change.  Sentiment concerns along with shifting sector rotation and recent breadth woes suggest this coming week very well might prove important in this regard, in finally producing at least some evidence of slowdown and/or trend reversal.  Evidence of S&P getting under the 5-day ma would provide some evidence of this finally turning down, and a few cycles suggest that could come about by end of January, i.e. this week.  

 

 

 

 

Equity Put/call ratio has reached very low levels, under .50 as of last Friday, so more than 2 calls are being bought for every one Put, a condition that often coincides markets peaking out and starting to backtrack.  The 13-week moving average has also plummeted to the lowest levels seen in over three years.   This dramatic pullback in equity put/call should be noted as it directly coincides with some of the other sentiment signs which have cropped up lately with giant spreads between Bulls and Bears.  This makes the upcoming longevity of the near-term rally far more questionable and makes it imperative to utilize stops and/or not be complacent.  

 

 

 

RSI , the Relative Strength index for SPX, on a  monthly basis has now exceeded 85, a condition which formerly hadn't been seen since 1996, and proved to be nearly four years early before the larger market peak.  Prior to that, 1986 and 1955 both had prices elevated sufficiently to show RSI readings above 80, but in each case, they proved early to producing market peaks.   Overall, this strong surge in momentum looks to be a potential powerful force for helping rallies continue in 2018, despite near-term momentum likely coinciding with a short-term correction in February.   (Chart courtesy of Oppenheimer)
 

 

 

 

McClellan's Summation index, a smoothed version of the McClellan oscillator to measure breadth, turned lower nearly two weeks ago and has failed to keep up with the recent surge in prices.   This often can serve as an early warning sign for extended rallied that should turn lower for at least a minor correction.  Demark's Counter-trend indicators, when plotted on this Summation index, also have just triggered TD Sequential and TD Combo 13 Sells, a condition which normally suggests  a trend reversal and in this case, argues for additional downside.  

 

 

 

DJ Transportation Average has broken the uptrend which carried Transports higher throughout the first few weeks of January.  This deterioration looks important given the weakness in both Airlines and Rails and the fact that Transports often are a leading sector.  Both the Semiconductor group and Transports have split from major averages in the last week, and at present are areas that suggest further selling and/or underperformance can happen.  
 

 

 

 

Airlines broke down from Transportation nearly six months ago and began underperforming, a far cry from what many investors believed only happened recently with the possible Far wars happening in the Airline industry.  Technically speaking, this breakdown of the five-year uptrend suggests Airlines likely continue lagging performance of the broader Transports space, and it's better to overweight Air Freight and/or Rail stocks than attempt to buy the Airlines.  This break isn't too extended from the area of the trendline, arguing that additional near-term underperformance is indeed likely.  
 

 

 

 

Utilities look to be bottoming in the short run after showing the worst performance in January thus far, which largely occurred in the first two weeks as Treasury yields were rising.  At present, the break of this downtrend in XLU argues for a larger then normal bounce following this recent selloff, and Yields also look to be nearing areas of resistance right near 2.70%.  Stocks like PNW, NI, NEE, AEE, CNP all look to be above-average candidates for a bounce in the weeks ahead, and shorts in this area should be covered given that the Utes look to be bottoming, on a short-term basis only.  
 

 

 

 

Investors Intelligence polls continue to show some of the more complacent sentiment conditions that have been seen in years, with Bull bear spreads of over 50 Percentage points with Bulls at 64.7% while the Bears weighed in at 12.9%.  This is extreme bullish sentiment, and doubtful that this rally carries through into February/March without a meaningful pullback and/or consolidation to bring some bearishness back to this market.   

 

 

 

CBOE Volatility index continues to show a very constructive base-building effort and the recent equity rally has had little to no effect on implied volatility which is normally a warning as volatlity holds up despite rising prices.   Implied volatilty levels have risen from under 9 at beginning of year to over 11 and look to be consolidating in a manner technically that can lead to an upcoming breakout.  Movement back over 13.50 would break this longer-term trend in Vol, suggesting a further lift lie ahead. 

 

 

 

Bloomberg Dollar index-(BBDXY)  Finally, we'd be remiss to not comment on the Dollar's plunge back under last September lows, which has served to fuel the commodity rally as well as Emerging markets and China.  While near-term stretched, no evidence of any counter-trend exhaustion is present and makes the case for additional US Dollar weakening in the weeks ahead.  This index has far less exposure to the Euro, but EURUSD still looks probable to test 1.26 if not get slightly above before peaking.  Counter-trend buys for USD along with sells for EURUSD are still 2-3 weeks away, which suggests in this case, further US Dollar weakness.  
 

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: FIVE.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

 

10 Technically Attractive Ideas between now and Year-end

December 11, 2017

S&P DEC FUTURES (SPZ7)
Contact: info@newtonadvisor.com

2547-8, 2639, 2631    Support
2670-2,  2679-81        Resistance


 

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Three more weeks in the year and the Bloomberg World index has gained over 23% for 2017, with the majority of the acceleration this year coming between August and October.  As daily charts can show, the rhythmic uptrend from early in the year led to a dramatic surge to overbought levels, which has recently leveled off a bit, with prices now that much higher than levels achieved back in October.   Momentum has been tailing off since October despite mildly higher price levels, but this far, the slowing in momentum has not proven to be negative.  Overall, higher prices look likely over the next couple weeks, but unless there is a noticeable jump-start to momentum, this could prove to be a selling opportunity early in 2018.   November lows at 235 will be important going forward, and cant' afford to be broken without causing a pullback down to 230.

 


SUMMARY:

Stock indices have largely pushed back to new high territory this past week, outside of the NASDAQ, while many global indices have shown evidence of bottoming out and turning higher, with noticeable strength in the last couple days out of Emerging markets, and most of Europe and Asia.  Technology looks to be starting to bounce yet again, while Industrials and Financials have also continued higher, with no real peaking out which was thought to be possible.   Additionally, weaker groups like Healthcare have also shown some signs of turning back higher after recent underperformance, while the Defensive sectors like Utilities and Real estate have both lagged over the last week.   Treasuries remain locked in tight trading ranges which have been ongoing since mid-October, while Commodities weakened, and the US Dollar index's gains from late November continued.  

Overall, markets have only three more weeks in 2017, and the final two tend to be quite positive seasonally speaking, as the Santa rally gets underway.   At present, a few technical improvements have occurred which are worth mentioning and present a more positive near-term picture than what was seen at this time last month.   For one, momentum has snapped back in the US with strength back to new highs for SPX, DJIA, SML and MID, while the NASDAQ lies just fractionally below.  While overbought conditions remain a problem on a weekly and monthly basis, the daily pullbacks in mid-November and early December helped the daily situation to improve.  Additionally, price trends remain very much intact from both August and even from November lows, while sentiment has largely been optimistic lately.  Bullish sentiment tends to be less of a negative in December given typical bullish sentiment this month, but will turn negative for the market likely in January.  

The sector rotation has also been a largely positive force, with recent surges in Industrials, Discretionary and Financials not showing much consolidation and generally still trending higher.   The recent push into Defensives also looks to have played its course, and we're now seeing flows back out of Utilities and Telecomm, Real estate which i feel are bullish for the market.   Important to also note the degree that Demark's TD Sequential and TD Combo indicators failed again to confirm any type of sell after having been triggered in late November on both daily and weekly charts.   The counts have reset for Daily charts (after 9-13-9 patterns produced a mere 3 days of weakness), while "Weekly TD 13 countdown Sells" were never confirmed.  Many of the cycles which had given warning signs for early October also failed largely to trigger any real selling in the US,



SHORT-TERM/INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term (3-5 days): Bullish- The breadth and momentum improvement have been helpful to trends in the last couple weeks, showing some of the participation from Industrials, Financials and also Healthcare, while Technology also showed signs of snapping back as of end of week.   While the NASDAQ will need to join the SPX and DJIA back at new high territory to have greater conviction about the course of equities for the weeks ahead, the act of pushing back to new highs is constructive for most US indices, while Europe and Asia have begun to follow suit.  Additionally, markets are now entering the most bullish part of December over the next couple weeks which should help to postpone any meaningful drawdown until early January.  Overall, while pullbacks could happen at any time if Technology's bounce were to prove short-lived, SPX will need to get back under 2620 to think a test of 2600 should occur, which is thought to be more important support to buy dips.  we'll need to see evidence of trends being broken to have concern.  Until there is at least minor evidence of trend damage, it should pay to stick with a bullish stance, and buy dips

Intermediate-term (3-5 months):  BearishStill likely that January/February should be a wake-up call for stocks, and persistent bullish sentiment/complacency, coupled with the start of Technology weakness in extreme overbought territory should offer limited upside. Breadth and momentum have snapped back, which is a temporary positive, but it remains very difficult to expect the market to continue up in the next few months even more given that Industrials and Financials are nearing extremes, and coupled with Technology these make up 50% of the market.   At present, it's thought that the intermediate-term prospects are unattractive given these risk factors, and a defensive stance looks prudent.  Rallies into mid-December are thought to be something to sell into, vs just expecting uninterrupted gains into end of year, and January should prove to be much more difficult than September into early December.   


10 Attractive  Risk/Reward ideas worth considering for the final 3 weeks of the year

 

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1)   Long BIOTECH -- Biotech looks to have turned the corner after the last couple months of consolidating gains.  While the rally into October was technically positive, the move played out at a far steeper angle than was sustainable, and a corrective pullback ensued to bring prices back to life.  Now after having touched key trendline support from the rally which began from last US Election lows, a breakout back higher looks to have happened in Biotechs which has helped the XBI to exceed the minor downtrend from October.  Stocks like GILD, CELG, ALXN which have all underperformed, look to be attractive risk/reward longs within Biotech, while others like BIIB, AMGN which have shown 20-25% returns for the year but have also lagged since October also appear to be trying to stabilize and push higher.  Overall, a test of former highs looks likely.  

 

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2) Long European Financials- This group has largely lagged the US Financial move over the last month, but now we've seen some sharp rally from minor trendline support in the Euro Banks ETF, while stocks like CF, BCS, and DB have all begun to push back to new weekly/monthly highs.  These three are attractive for additional gains, and it's thought that some of the recent outperformance in the last week from the European Banks can continue.  
 

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3) Long Transportation Stocks - Transports showed very little sign of stalling out near prior highs, but managed to break out above this area of resistance that had held the last three occasions.  Stocks like CSX, UNP, KSU all have demonstrated very good sign of Technical progress while breaking out, while Airlines have also participated, turning in some of the strongest performance in the last month after jumping up above five month downtrends from July.  Overall, this group still looks to strengthen further into end of year, and the Rail and Airlines stocks look like overweights near-term, as does the IYT in general.

 

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4) Long Emerging Markets & China for a Tactical bounce-   Pullbacks in Emerging markets have been severe in the last month and China ETF, the FXI pulled back to attractive near-term support near its one-year uptrend which makes this attractive to buy dips for a counter-trend bounce.  FXI which is shown above could rally to 47, and potentially $48 with stops at recent lows at $44.48.  

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5) Long Crude oil and Energy ETFs for near-term strength into end of year-   WTI Crude managed to strengthen up to former highs hit back in January 2017 and has consolidated over the last few weeks.  Yet this pattern remains bullish, and this consolidation should lead to a further rally up to the low to mid-$60's before any seasonal weakness takes place in January.   XLE and XOP have outperformed on this recent Crude strength and still look to be better longs than OIH.   

 

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6) Favor GROWTH over VALUE-      Growth vs Value- (IVW vs IVE- Favor GROWTH (IVW)  for a snapback bounce after recent underperformance.  This ratio chart of Growth vs Value has contained this uptrend for Growth during the entire course of 2017, and recent underperformance since early November now looks to be stabilizing and turning back higher.  Given the rebound over the ratio chart of IVW to IVE, IVW should be able to steadily outperform into year end, and looks to be a better technical choice than favoring Value, in the near-term. 
 

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7) LONG JAPAN for a move back to new high territory- (DXJ preferred for Yen Hedging purposes)   Japan's TOPIX, like many Asian and European indices, pulled back in early November, and threatened to break the two month uptrend before the late week surge helped prices regain this weakness.  Overall,  this chart remains very much intact, and should allow for a resurgence in Japanese equities over the final three weeks of the year.  DXJ, the Wisdomtree Hedged Japan ETF, is a preferred choice given the recent Yen weakness, which very well might weaken further in the weeks/months ahead.   
 

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8) Play for a Steepening in the Yield curve into/after FOMC-   The 2s/10s curve has flattened out substantially in the last few months, but now is at levels where further flattening looks unlikely into year end.  So the 2yr note very well might weaken to allow for a relative steepening with long rates stabilizing, (which already have been largely range-bound in recent months)  

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9)  Long Precious Metals- Initial Half-unit entry, looking to add on any weakness over the next week, or adding to Gold on a move above 1263-  Precious Metals index looked to have broken down last week, though both Gold and Silver are now showing completed Counter-trend signals of downside exhaustion per Demark indicators from oversold levels which could lead to a bounce in the weeks ahead.  The ability to hold above 1248 by this Wednesday's close would confirm Counter-trend buys, helping to lift Gold, while a move back over 1263 could result in real upside acceleration.  This level represents prior lows from late October and getting back above would help Gold accelerate to test late November highs.   Overall, Gold/Silver futures, or IAU, GLD, or SLV are all ways to play the precious metals.  The Gold stocks themselves remain under severe pressure, but likely should bottom out by 12/21 and turn up as well. 
 

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10)  Short Retailing -  XRT charts show prices having pushed higher in recent weeks, which largely has gone hand in hand with seasonal times of strength.  Yet, now that prices have reached mid-December, heading into a weaker time for this group, strength should be used to consider going the other way for Retailing, as the XRT hits a "brick wall" near longer-term trendline resistance.   December has been negative for XRT over the last 4 of 5 years, while January has averaged more than -1.0% lower, so this area near $45 hits resistance from two different sources and looks appealing to take profits and/or consider shorting, for those looking.   Stocks like FOSL, BBBY, M, JWN, URBN, FL, ANF are all stocks to consider avoiding, and/or for Technical shorts in the weeks ahead. 
 

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: FIVE.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

 

Rotation, Rotation, Rotation- 5 Technical Longs to Favor, 5 to Fade

 

December 4, 2017

S&P DEC FUTURES (SPZ7)
Contact: info@newtonadvisor.com

2547-8, 2639, 2631    Support
2670-2,  2679-81        Resistance


 

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The parabolic rise continues, as Sunday's electronic session open coincided with a quick burst higher to the tune of 0.50% for S&P futures, of 15 handles as of 8pm Sunday evening.  At the time of this writing, prices did not look to have run its course.  While the reconciliation between the two tax bills could be a complicating factor which brings uncertainty to markets, there needs to be some evidence of prices pulling back to multi-day lows and holding on a close before thinking any sort of consolidation is getting underway.   While prices could easily fill the gap at 2643 before pushing on to 2670-5, a breakdown below the 50% retracement from last Friday's lows alone (2634) is necessary before thinking any sort of pullback is getting underway.  Parabolic moves like this are difficult to join at extended levels;  yet, they're also difficult to fade before having necessary proof.   As we all know in the month of December, prices can get overbought and stay there in the month of December for no rhyme or reason, and this time certainly seems no different.


  

SUMMARY:

Stock indices continue to defy gravity and trade in very resilient parabolic fashion, ignoring the uncertainty of tax reform (even with the passed Senate bill) as the middle of November turned out to be a turning point after all.  Yet instead of being a high, this became a launching pad for a bout of extreme acceleration higher after indices were already overbought.   Since November 15, S&P futures have moved 104 points  in 12 days time, or over 4%, while much of the world has not followed suit.  Europe is down more than 4% in the rolling 30 days, (STOXX50) while both Japan and China are lower than levels made back in early November.  Rotation served to bolster US stocks, as the Industrials and Financials managed to carry much of the load in the last two weeks, while Energy, Consumer Discretionary, and Healthcare all showed sharp gains of 1.81% or more in the rolling 5 day period.   Technology underperformed , with losses of 2% last week, yet this didn't seem to have much of an effect yet on the broader indices.  

Given that only four more weeks are left in 2017, it's difficult to expect any meaningful deterioration, when trends have been going exactly the opposite direction, and quickly.   While the issues of Uber-complacency(ultra-low Equity Put/call) combined with extreme overbought conditions while the largest Sector in the S&P has begun to falter (Technology), we'll need to see evidence of the pullback to new multi-day and/or multi-week lows to pay attention. Some of the problems of waning breadth and momentum have in fact been rectified in the last couple weeks.  Yet the issues of bond yields going in the opposite direction of stocks while the yield curve plummets remain somewhat problematic.  Additionally, (as mentioned previously) much of the world remains in correction mode from October/Early November, with only the US barreling higher. 

Given the composition of Industrials, Financials and Technology amounting to 50% of the SPX, seeing one of these sectors waning, while the other two have ripped to very overbought levels makes for a very difficult spot to consider being long.   Demark indicators have perfected their recent TD Sell Setups on DJIA and SPX as of last Friday which often can lead to consolidation, and from a non-technical perspective, the Algo-led surge in Futures doesn't seem to take into consideration the difficulty which remains on bringing these two bills together to actually achieve some kind of tax relief.  Nonetheless, the trends remain in good shape, despite these other issues, and could grind higher into mid-December before any type of peak to this rally.  The rebound in Small and Mid-caps alone looks encouraging, as these had been lagging for some time.  Overall, it's essential to be alert during this time given the upward volatility as this could easily be quickly erased  (but might be held off until January)  We'll be on watch for signs of S&P possibly reaching 2670-5, as well as trends turning down to multi-day lows.  Given the extent of the rally, this likely would prove important, and worth following in the near-term.   For this week, we'll concentrate on recent developments and then highlight a few attractive stocks which still look likely to continue higher, along with those which have peaked, and/or should move lower, technically.   

The most important Technical Developments of the last week


1) SPX, DJIA, RTY, TRAN all surged back to new all-time highs, furthering the recent parabolic move, and while last Friday attempted an early selloff.. by day's end, prices had recouped this decline to ward off any damage

2) Sector-wise, Financials and Industrials played "catch-up" accelerating back to new highs, which looked to be an important Mean reversion in sector rotation while Technology faltered.   Healthcare looked to have bottomed, while Discretionary extended its gains at new all-time highs, becoming even more stretched

3) Small-caps and Mid-caps also moved sharply back to new all-time highs, as seen by both SML, RTY, and MID, which are often important benchmarks for these groups.  (A few months ago the lagging in both Small and Mid-caps was noted, but this has been alleviated in recent weeks with both pushing back to new highs)

4) Style-wise, Growth stocks had a setback last week with Value outperforming.  While trends of growth to value remain very much intact, the ratio is down near key make-or-break levels from a minor trend formed in July.   Given no trend break, it's likely that Growth could reassert itself, but if this fails, it will be noted.   

5) Europe has not joined the US index move back to new highs, and remains down over 4% from peaks made in October (SX5E),  (Europe still remains below May 2017 peaks) So Europe remains a laggard to US

6) Crude oil managed to rally back to test late November highs which remain at near two-year highs, and trends remain bullish and supportive of further gains

7) Bond yields reversed their recent breakout attempts in dramatic fashion last week, with Bund and Gilt yields snapping back to new weekly lows, while 10yr US Treasury yields also fell back down under the key 2.41% level that had been exceeded the prior week.   Key levels for a breakdown in TNX lie at 2.30%. 

8) Equity put/call ratios got down to the lowest levels since September, with readings as low as .50, indicating nearly 2 calls being bought for every Put.  (This is one concern to the current rally, as everyone seems to be jumping onboard)

9) Percentage of SPX stocks trading above their 10-day moving average(m.a.) jumped to 76%, while the percentage of stocks above their 50-day m.a. 

10) SPX daily MACD moved back to positive territory, while the weekly momentum hit new highs as SPX did, which does not show any negative divergence, nor does the monthly

11) Daily SPX and DJIA charts now show TD Sell Setups (9 consecutive closes where the close is higher than it was four days prior)  In the past both Buy and Sell setups have proven important in suggesting consolidation after a certain move.

12) Financials ETF, the XLF, does NOT yet show signs of exhaustion, and looks to require at least another 2-3 days HIGHER before this will trigger TD signals that might be indicative of some sort of short-term top.  Thus, further gains in Financials early in the week looks likely

13) NASDAQ vs SPX along with NDX both have Daily and weekly counter-trend sell signals presently, while the NDX actually shows Monthly counter-trend sells, (NASDAQ Comp could signal these in January and is one month away)   This could be an important step in the process, as the NASDAQ should be likely to peak out first before many of the other indices and begin to underperform.

14) Semiconductors SOX break of the uptrend from September looked to be an important and negative development which could serve as a headwind for Technology over the next few weeks.  While the pullback became stretched quickly, this sudden downturn in momentum looked serious and suggests that rallies might be used to take profits

15) Emerging markets suffered a sharp setback last week with ratio charts of Developed markets vs Emerging showing signs of having broken out of trends which had been intact all year (Potential China concerns) Near-term, this is a negative for Emerging markets, though looks to have gotten stretched and should attempt to rebound near-term.  Overall, if EEM holds November lows at 45.45 and bounces back to 46.50-47.50 before turning back down under these lows, that would be a larger issue for Emerging markets.  At present, this pullback in EEM looks to be near initial support.



SHORT-TERM/INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term (3-5 days): Bullish- Still quite difficult to fade this market based on price action, (SPX has barreled up through earlier technical targets) and now breadth and momentum have begun to turn upward in a manner that alleviates some of the near-term concerns.   There are offsetting issues of course, with regards to counter-trend signs of exhaustion (Demark) per SPX, Technology weakness, and rampant Call-option buying which all suggest caution at these extended levels.   Yet, given that this is the month of December, and overbought conditions can persist, while sector rotation can temporarily bail out the market, we'll need to see evidence of trends being broken to have concern.  Futures have gapped higher Sunday evening at the time of this writing, and will need to get under last Friday's lows at a minimum - 2605, to have concern.  Until then, upside to 2670-5 looks possible.

Intermediate-term (3-5 months):  BearishStill likely that January/February should be a wake-up call for stocks, and persistent bullish sentiment/complacency, coupled with the start of Technology weakness in extreme overbought territory should offer limited upside. Breadth and momentum have snapped back, which is a temporary positive, but it remains very difficult to expect the market to continue up in the next few months even more given that Industrials and Financials are nearing extremes, and coupled with Technology these make up 50% of the market.   At present, it's thought that the intermediate-term prospects are unattractive given these risk factors, and a defensive stance looks prudent.  Rallies into mid-December are thought to be something to sell into, vs just expecting uninterrupted gains into end of year, and January should prove to be much more difficult than September into early December.   


Comments, targets and Stops of some of the better positioned Technical risk/reward longs and shorts in my opinion at this juncture are listed below, with five longs and five shorts.  For more detailed analysis, email me at info@newtonadvisor.com and i'd be happy to send you more comments that explain my thinking in this regard.


5 Attractive Technical Longs with Targets and Stops

 


Philips 66 (PSX- $97.57) Target 110, 116.85   Stop- 91.40-  Breakout above 3 year Bullish Base
Legg Mason (LM-$40.15) Target 46.10, Stop 37.10- Surge to multi-month highs constructive
Pfizer (PFE- 36.35) Target 40, 44.65, Stop- 32.30- Move back to near last years highs bullish
Nike (NKE- $59.88) Target 67.50, Stop 55- Rally above 2 year Downtrend positive- Move to test '15 highs
Exelon (EXC- $41.83) Target 45.40, Stop 38.75- Giant Double Bottom breakout of base since 2011



5 Attractive Technical Shorts with Targets and Stops

 


Crocs Inc (CROX- $10.75) Target 7,  Stop 12.25  Rally to 5 year Downtrend resistance, Counter-trend Demark Sells
Amazon (AMZN- $1162.35) Target 1070, 1020, Stop 1215- Too stretched, heading into Poor Retail seasonality, Demark sells
Nvidia (NVDA- $197.68) Target 162, Stop 220 Signs of momentum deterioration from very stretched position- Upcoming seasonal mean reversion could be problematic
Urban Outfitters (URBN- $31.32) Target 24.71, $22.70, Stop 34.50 Rally up to near breaking point of 7 year Downtrend
VF Corp (VFC- $71.79) Target $62, Stop $77.55 Rally to near highs of Monthly Bollinger w/ Weekly/ Monthly Counter-trend Sells

 

 

 

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: FIVE.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

 

 

NEWTON ADVISORS WEBSITE

 

 

Newton Advisors, LLC. info@newtonadvisor.com 203-339-2944

Energy looks to be bottoming after recent underperformance

February 27, 2017

S&P MAR FUTURES (SPH7)
Contact: info@newtonadvisor.com

2360, 2354-6, 2335-6, 2327-8, 2300              Support
2370-1, 2375-7, 2390-3                                  Resistance

 

 

SPX's resilience despite the sector rotation should be unable to carry much higher, but for now, will still require at least one pullback under a prior day's lows before attempting to short this on the way up.   Momentum has reached the highest level in years on daily charts, and prices look like a poor risk/reward until at least some pullback has played out. 

 

 

As we enter the last few days of February, this month has played out much differently than many would nave expected.  Given that January performance far exceeded expectations amidst the uncertainty, many had expected the exact opposite for February which seasonality studies had backed up.  Sentiment has only gradually improved since the Election, and while business optimism has increased, and equities have begun to see fresh inflows, there remains a huge amount of skepticism from many who feel the best has been baked into this market ahead of Trump's State of the Union address.   To say last year's big early year meltdown in January/February is still fresh in the memory of many investors is an understatement.  The degree to which this year has amplified the possibility of volatility increasing given the Election uncertainty and upcoming Policy uncertainty is also worth noting.  Furthermore, many still give POTUS and FOMC officials far too much credit for being able to influence the market with their talk and platform.  Thus, many aren't used to the degree of Trump's comments simply being ignored by the market, when most would expect volatility to increase substantially given the level of Unknowns that exists (regardless of whether most are on board with the platform, or not)  Bottom line, the market remains far too resilient even for the comfort of most Bulls this year thus far.  Yet the index trends simply haven't given us much reason to worry.  The negatives of Overbought conditions, seasonality concerns, shifting sector rotation, Demark counter-trend sells, waning breadth/momentum all take second fiddle to market structure.  While the former might argue for a cautious stance, it rarely pays to go against the latter.

That being said, the market over the last week showed a few different colors than it had in the past that bear mentioning.  Four different sectors turned up counter-trend signs of exhaustion in the last week, which HAD NOT been in place in the past, while the indices themselveshad shown these signals (goes a long way towards explaining why Demark signals sometimes WORK in the indices, but also why they might NOT work if none of the sectors are aligned. )  Two of the four sectors in question, Industrials and Financials, turned down to multi-day lows late in the week, causing some underperformance at a time when most of the sector performance in the past week had been dominated by the Defensives anyhow.  (Utilities, REITS, Staples all outperformed strongly)  The percentage of stocks trading above their 10, 50 day moving averages dropped sharply in the last week, from the mid-80%s to the mid-60s.   And the Advance/Decline pulled back as might have been expected, after peaking around mid-February.   However, despite this minor evidence of sector deterioration and/or rotation into the Defensives, indices held up resoundingly well.  The DJIA went on to set new records for its 11th straight record high close, while as we've heard, indices continue to trade in a very tight range, with little to no real volatility in excess of 1% which has held for a record 45+ trading days thus far. 

Additionally, what has been widely reported is that both January and February stand to close positive in US Equities, a feat that's happened 27 times since the mid 1950's, or a little less than half the total years.  Each one of those years has finished positive, which should be put to the test this year in Q3.  For now, still quite a few bullish technical themes in stocks, while the negatives have only recently begun to surface and have done more damage to the underlying sectors than they have the indices themselves.  At some point, something will have to give.  Watching Financials (which have just started to turn down) and Technology (not yet) should provide the real clues

Outside of equities, we've seen one of the biggest rallies in the bond market globally that's been seen in the last six months.  This goes exactly opposite that which has been seen in "Spec" positioning, which might make total sense, as many seem to be still betting on a steep rate rise ahead of next month's FOMC meeting.  Yellen's comments seem to have come across hawkish to investors, along with other FOMC voting members, yet the market simply doesn't believe.   Given that Fed Fund futures remain at 38% Hike percentage for next month and the bond rally has continued, more will have to be done to "ready" the market for any sort of hike.  IF equities start to turn lower in the next few weeks, as has been discussed, this would most likely take a hike "off the table" or else cause real dislocation, as the FOMC has shown from prior abstinence that it's unwilling to hike into market volatility. 


SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term Thoughts (3-5 days) : Neutral-  Bottom line:  It's just tough being short the indices until they give at least SOME evidence of taking out the prior days' lows and make multi-day new low closes.  Shorts were stopped out above 2343 and while the upside here looks limited, we'll need to see the indices turn down to echo what many of the sectors have begun to show.   If Technology and Discretionary turn down in the next few days, as very well could happen, this should put sufficient pressure on the indices to put a near-term Short stance back on the front burner.  For now, despite many individual stocks turning down and appearing like good shorts, the market itself has NOT given sufficient proof.  Yet, the sector damage from last week makes it still likely that upside here proves short-lived and limited.  

Intermediate-term Thoughts (2-3 months): Neutral-  While the intermediate-term trend remains positive and seasonality dictates that prices could hold up into late Spring, it's looking increasingly likely that at least some type of pullback should get underway, which could prove to be 5-10% before a rally back to near highs into late Spring/summer.  Given that weekly and monthly Demark signals have not been confirmed, and have largely begun new counts, (SPX and DJIA.. but not NDX) pullbacks should prove short-term only and constitute buying opportunities.  degree of lift since the Election that has carried prices well above the Bollinger band 2% Standard Deviation on weekly and monthly charts.  Yet the longer-term structure for Equity indices certainly remains structurally bullish, and until there is evidence of some type of technical deterioration, it's difficult to go against the trend outside of making a short-term tactical call based on seasonality, sentiment and overbought conditions.  For now, we look to have either short-term tops, or bottoms in early March which lines up with a couple short-term cycles.  But it's tough putting out bullish thoughts for the next few months when a change of trend is overdue.  Hence, a neutral stance for now looks right until the pullback gets underway. 

 


This week we'll concentrate on some charts within the Energy sector, as we're beginning to see increasing signs that this group can bottom out, despite the recent negative trend

Comments and charts below
 

 

VanEck Vectors Oil Services ETF (OIH- 32.07) OIH has gradually pulled back in the last few months to an area that represents excellent risk/reward support to buy dips given the drop since early December.  The downtrend remains intact, though prices are nearing both early February lows, as well as former highs from last October and June which should now acts as support) The divergence between oil stocks and WTI Crude itself has been striking in recent months, and should represent a good opportunity to buy this sector given that Crude has shown recent evidence of moving higher, while Energy has underperformed all other sectors by a long shot over the first two months of year, down nearly 7%., more than 400 bps worse than Telecom, which weighs in at #9, only down -2.26%.  For now, OIH looks to be getting close, and Energy is increasingly a good risk/reward at current levels. 
 

 

Relatively speaking, Energy also looks to be getting close, and despite its ongoing downtrend, OIH/SPX in relative terms is within 2-3 days of reaching support after a difficult first two months of the year.  This sector has underperformed all others and some of this lagging was evident following the trend break from September of last year.  TD Buy Setups on daily charts should occur this week in Energy, and the group should reverse course and start to act similar to what Crude has done in recent days.  Overall the months of March-August should be far different for Energy than the last few, and even if the S&P begins to trade lower, integrated oil should begin to outperform, providing a good risk/reward sector after its recent lagging.

 

 

WTI Crude has begun to show increasing signs that the OPEC Output cut might be going better than planned and has not been fully factored in by prices in recent weeks.  While inventories remain high, prices have held up in resilient form and are nearing the end of Crude's poor seasonal trend (which appears to have not affected this at all this year.  Higher prices are likely in WTI to the upper $50s and ultimately the lower $60's before any peak this coming Fall.  For now, a move higher looks much more likely than lower in the months ahead given the recent stabilization and ongoing basing pattern.
 

When viewing Crude given Elliott wave's Equal currency Benchmark index, (or BEWI in Bloomberg), we see Crude in a much different and much stronger light than when priced just in US Dollars.  In Multi-currency form, Crude has already exceeded both highs from 2016, as well as late 2015 highs and has begun to trend higher in a manner that should let this move back to new multi-month highs in the months ahead.  This pattern is much stronger than that seen in just US Dollars, but tends to be a more realistic guide of its pattern and often presents a better guidepost when the pattern in US Dollars remains more inconclusive.
 

 

Integrated Oil, when viewed as an index, relative to the broader Energy sector, looks to be trying to bottom out in the short run after pulling back hard since last Winter's market lows, which coincided with the peak in the relative Integrated oil stocks.  Counter-trend indicators by Demark have signaled "BUYS" for Integrated oil just in the last couple weeks for the first time in over a year, and following a huge period of underperformance for this group.  This should help the Integrated stocks stabilize and trade much better in the weeks/months ahead.

 

 


Oil and Gas Drilling, when compared to the broader Equipment and Services index, has shown some definite signs of stabilizing of late after its late year breakout last year which has now been retraced and lies at a much better risk/reward area to buy.  This ratio above comes from two Bloomberg sub-indices, the S&P Oil and Gas Drilling index, and the Equipment and Services index.  In ratio form, the Drillers broke out late last year above the downtrend from mid-2015.   The retracement has brought this down to a key level of support to consider buying.  Thus, the Drillers seem to be improving relatively speaking vs Equipment and Services, but also vs Energy in general.  This should be an encouraging sign given the extent of the damage in this group in the past couple years.  
 

XLE, in ratio form to XLI, is very close to signaling long-term buys that suggest some mean reversion should occur in this ratio after a lengthy decline.  Most of 2016 showed some brief stabilization in Energy vs industrials relatively, but since has given way to a move back to new lows.  For now though, counter-trend buys are evident in a few different timeframes in Energy vs various groups which suggest this recent weakness should give way to some upcoming stabilization.  Crude oil moving higher should help this group and the weakness this year looks overdone.
 

Exxon Mobil Corp. (XOM- $81.08) XOM has dropped nearly 12% in the last two months which has undercut last September lows, bringing this stock down to the lowest levels since last Spring.  Despite this breakdown, the stock is coming into an important area of trend support which is likely to hold prices and help this turn back higher in the months ahead.  XOM has just retraced 50% of the entire rally from 2015 lows, and now is within two weeks of displaying its first weekly counter-trend buy signal since the decline began in this stock last Summer.  Given evidence that Integrated oils might be on the verge of turning higher again vs most of Energy, along with the overbought nature of the market in general, XOM looks like a good risk reward to carry higher as this sector begins its own mean reversion snapback.

 

Chevron (CVX- $110.12) CVX's recent early year pullback should represent a buying opportunity after this has corrected nearly $10 from last December's highs, or around 7.5%, which given its ongoing uptrend from last Fall, looks to represent an excellent buying opportunity as part of this bullish trend from last year.  CVX has consistently been an outperformer within the Integrated space, and given the overbought nature of stocks, combined with WTI Crudes' recent lift, this looks to be a good risk/reward within the Energy space to outperform, even if the broader market does peak out in the next few weeks. 

 

 


Transocean (RIG- $13.75) Given the uptick in most of the Drillers in the last month, it makes sense to look at RIG, which has outperformed all other stocks within the S&P Energy index over the last three months, with returns of 16.82%.  This push higher into December of last year helped to exceed the former downtrend that RIG had traded within since mid-2015.  Last year's bounce broke this trend, and now its minor consolidation has helped to relieve some of the overbought state in this stock.  Combined with the improvement in structure, this represents a good reason to take a further look at this stock, since technically we've begun to see some improvement in both the sector and this name itself in trying to finally turn the corner for the first time in the last couple years.  For now, initial resistance lies at $16-$16.75 while any move back down under $12.88 would postpone the rally.
 

 

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

 

5 Charts showing reason for concern, & 5 Attractive risk/reward technical shorts

February 21, 2017

S&P MAR FUTURES (SPH7)
Contact: info@newtonadvisor.com

2345-7, 2335-6, 2331, 2300              Support
2360-2, 2373-6                                  Resistance

 

SPX's push up above 2340 puts prices in parabolic mode where gains are tough to fight, despite the many warning signs.  Many can attempt to short current levels with stops at 2360, looking to revisit near 2375, but prices should not experience too much more upside in the next couple weeks before giving back recent gains.  Timewise, there are a plethora of time and price based indicators that suggest selling into this rally by early March if prices have failed to turn down, as the period from LOW - to - LOW that has coincided with the last few bottoms since 2015 projects into this time.  For now, the trend is stretched well beyond where it should be based on recent slope of the trend.  Yet, we'll need to see some evidence of trend reversal to have any kind of confidence, which thus far, has been lacking.

 

 

Not a real satisfying week for the Bears, despite many of the mounting signals that a change of trend should be near.  Prices rose to close near the highs of the weekly range, producing the best full week of performance thus far in 2017..   The recent breadth acceleration that arose when SPX, DJIA moved back to new high territory managed to help sectors like XLF move back to highs, while Small-caps also outperformed as Russell 2000 also hit new high territory.  Meanwhile, breadth gauges like Advance/Decline (All stocks) moved back to new all-time high territory while counter-trend indicators continued to mount, with last week's daily charts showing Demark indicators having TD 13 Sell confluence on SPX, DJIA, NDX, COMPQ, VALUA index now being joined by XLK, XLI, and XLU, with XLY, XLV, XLF still 3-4 days away. (Meanwhile, IYZ, XLP, and XLE remain well off last year's highs.)   The Percentage of stocks trading above their 10, 50-day and 200-day moving averages have both risen to the low-to-high 70% range in the last couple weeks. 

Many have attempted to attribute the positive equity performance of late to optimism regarding President Trump's policies despite an overwhelming amount of uncertainty in Washington with the Budget proposal upcoming on February 28th.  This cautious optimism on Business and markets while the anxiety is ever-growing makes for an interesting take on Sentiment, which has gradually become increasingly more bullish.  The Equity put/call ratio last week produced the lowest readings of the year, while Investors intelligence surveys also have widened out to the highest Spread between Bulls and Bears in the last few years.  However, as many who have talked to professional money managers can attest to,  it still certainly doesn't FEEL this complacent.   Most remain begrudgingly invested, and hopeful, despite no end to the mass uncertainty.

Overall, from a directional standpoint, there does look to be a small window for shorting this week with prices having stalled near last Wednesday's highs.  Momentum remains overbought and seasonality is bearish for post-February expiration weeks.  Demark indicators have flashed "13-Sells" on many indices and would just require a minimal multi-day low close to confirm these signals, suggesting ther start of at least a minor pullback.   Yet we still haven't seen any real evidence of a downturn in stocks, but merely a couple days of stalling out.  As the saying goes.. "A watched pot never boils"  For this week, movement above 2360 would most certainly put the focus on later in the week, if not early March, where many advances have encountered serious Time-based resistance.   Movement UP to 2375 in this instance, would be likely, as this would represent a 50% absolute retracement in price of the prior rally from Pre-Election into mid-December.

Interestingly enough, we've witnessed signs of both Treasury yields and the US Dollar index produce minor trend reversals in the last few trading days.  The action in USDJPY along with TNX should always be monitored as they've shown remarkably high positive correlation to SPX in the weeks and months past, and often can serve as a leading indicator to equities.   Treasury yields backed off down to 2.41 from Wednesday's highs of 2.52%, a meaningful drawdown, yet one which had little to no net effect on Financials, which continued to outpace the broader market, leading all other 10 sectors last week, with returns of 2.95%.

So most of what was written last week really hasn't changed too dramatically.  Still quite a few bullish technical themes in stocks, while the negatives have only recently begun to surface and haven't really done too much damage thus far.  The bearish technical reasons of prices being stretched outside of Bollingers, Counter-trend Demark sells, an uptick in optimism, coupled with bearish seasonality have not yet produced any real reversal. 

SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term Thoughts (3-5 days) : Bearish- Shorting last week's gains from a counter-trend perspective looks to be a good risk/reward, though with realization that movement back above last week's highs would likely carry indices higher into early March before any peak.  For now, the upside looks limited, and should be ideal to consider lightening up and hedging gains for at least a minor pullback in the weeks ahead. IF prices move directly above last Thursday's highs, however, this would serve as an immediate Stopout for Shorts, so it's best to keep stops tight until there is evidence of at least some type of trend reversal.

Intermediate-term Thoughts (2-3 months): Neutral-  While the intermediate-term trend remains positive and seasonality dictates that prices could hold up into late Spring, it's looking increasingly likely that at least some type of pullback should get underway, which could prove to be 5-10% before a rally back to near highs into late Spring/summer.  Given that weekly and monthly Demark signals have not been confirmed, and have largely begun new counts, (SPX and DJIA.. but not NDX) pullbacks should prove short-term only and constitute buying opportunities.  degree of lift since the Election that has carried prices well above the Bollinger band 2% Standard Deviation on weekly and monthly charts.  Yet the longer-term structure for Equity indices certainly remains structurally bullish, and until there is evidence of some type of technical deterioration, it's difficult to go against the trend outside of making a short-term tactical call based on seasonality, sentiment and overbought conditions.  For now, we look to have either short-term tops, or bottoms in early March which lines up with a couple short-term cycles.  But it's tough putting out bullish thoughts for the next few months when a change of trend is overdue.  Hence, a neutral stance for now looks right until the pullback gets underway. 

 


This week we'll concentrate on five charts of factors which suggest upside should be extremely limited in the near-term, along with five stocks which look to be attractive risk/reward shorts, largely from a trend following point of view.

Comments and charts below
 

 

S&P futures chart shows the extent of the recent rise following the nearly 10% lift just since the Election into December 13.  This consolidation proved brief before yet another liftoff which has helped S&P gain over 5% just in in the first seven weeks of the year.  Counter-trend sells are present but not confirmed on daily charts, while momentum indicators like RSI, MACD have begun to diverge on intra-day timeframes along with showing minor divergence on daily charts, as RSI is not following price back to new highs.  A 50% price retracement of the first leg up from the Election would target 2375 which should be a maximum amount which S&P would reach over 2360 into early March before falling.  For now, those with a trading bias can short with stops at 2360 and look to reinitiate hedges up at 2375, as this trend has gotten a bit too parabolic in the near-term.
 

 

3 key points to make on the NASDAQ-  First, prices are extending outside Bollinger Bands on Daily, weekly and monthly charts now.  Second, counter-trend sells are apparent on multiple timeframes as well which suggest an upcoming change of trend should be imminent.  Third, momentum has reached overbought territory again per RSI, but as can be seen, is at far lower levels than was reached back in 2014/5 when the Russell 2000 peaked.  This is not considered a healthy advance when momentum thrusts higher again after consolidation, though at much lower levels while price is surging.  Often the combination of these factors indicate that upside should prove limited. 

 

 

This is a snapshot of the breadth of momentum as shown by the Summation index, which sums up the values of McClellan's Summation index.  Often when this starts to diverge substantially it can bring about peaks in stocks, and recent trading deserves to be scrutinized in that regard.   Values currently are far below where they were last Summer, and/or Spring, while momentum indicators such as RSI have begun to diverge negatively given the recent push up in the last two weeks which wasn't followed by momentum.  While many would prefer to wait for actual price deterioration to short, when overlaying Demark indicators on this Summation index, we've just completed TD Sequential sells, which might bring about near-term peaks in price as this turns down simultaneously.

 

 

Ten-year yields and Equities have largely moved in tandem in recent months outside of the last few weeks, where we've seen yields pullback after making lower highs, while Equities continue higher, uninterrupted.  While this can certainly persist in the short run, the correlation between the two has consistently been strong and positive and suggests that Equities might be close to turning down to join the move in Treasury yields.  The last few days of Treasury gains while Equities have gained also has been unusual of late, as seen by the mid-December peak, late Dec low, late January low, while yields peaked out last week and turned back lower in the near-term.  Stocks, however, have pushed higher, while not only Treasury yields have not followed, but neither has most of the world either for that matter, as most Global stocks peaked out in 2015.
 

 

PUT/CALL (Equities) This sentiment gauge tends to be fairly accurate at extremes, as the Put/call on equities has shown just in the last six months, by moving from extreme pessimism ahead of the Election (which turned out to be the lows) to extreme optimism into mid-December, with more than 2 calls being bought for every Put (this in turn, led to sideways action for the balance of the year).  The recent pullback in Put/call failed to get below mid-December levels, but fell to multi-week lows (and the lowest level of the year) which potentially says something about how optimistic or complacent investors have become of late in the last couple weeks with lots of rhetoric which "COULD" have caused volatility, but didn't.


5 SHORTS TO CONSIDER FROM A TECHNICAL PERSPECTIVE:

 

 


United Parcel Services (UPS- $106.90) UPS near-term trend remains bearish following its gap down three weeks ago to the lowest levels since last July, the biggest plunge in two years on six times average volume. Technically speaking, this decline served to violate the uptrend from last January's lows, correcting 50% of that prior advance in the process.  Its subsequent bounce attempt doesn't look to be getting much traction, and last week's pullback towards lows of the week suggests some additional selling to come before this has officially bottomed out.  Weakness down to at least test prior early February lows at $103.23 looks likely, and additional corrective activity could take the stock down to just below $100 at Fibonacci targets at $99.96.  At present, the weekly chart is not oversold and technical structure remains negative, so it remains difficult to buy dips until this can begin to show more signs of stabilization.  Technical shorts over the next 3-5 weeks look more appealing than longs, and the near-term trend remains bearish.
 


Trip Advisor (TRIP- $47.06) TRIP remains a underperformer, and the stock has trended downward since peaking out nearly three years ago at $111.24.  Its ongoing pattern of lower highs and lower lows doesn't look complete, and last week's move back to new multi-week lows should serve as a technical catalyst for this to challenge and break December lows on its way to $41.   While former monthly lows could serve as temporary support, any violation of this level would have little overall support until down near late 2012 lows, and this looks certainly possible from a technical perspective.  Overall this looks like an attractive risk/reward technical short for the weeks ahead and one should avoid buying dips until this selloff has completely run its course.  For now, no evidence of counter-trend exhaustion is present, nor any attempt at bottoming out, which remains premature.
 

Bed, Bath, & Beyond (BBBY- $41.14) BBBY remains a better short than long after having broken down from a multi-year Head and shoulders pattern in late 2015.  Despite the market's 10%+ rip following the Election and a good bounce from the Retailing sector, BBBY has participated in none of this strength.  Its shares lie near recent lows of the past year, and remains an ongoing underperformer which still looks to have downside in the weeks/months to come.  Its pullback throughout much of 2015 into early last year took BBBY down to the 61.8% retracement of its advance since 2009, but its recovery efforts thus far have proven futile.  The recent bounce from early February hasn't helped the stock show any real technical strength, and should prove to be a selling opportunity for a move back lower to challenge and break recent lows near $39 to test last October's lows.  Support lies near $38.60 and under this could allow for a selloff down to near $30-$31 which constitutes a better suited area for trading buys than attempting to jump onboard the recent minor bounce.

 

Fossil (FOSL- $20.73) the recent pullback down to new multi-month lows on about 15 average volume took FOSL down to the lowest levels since 2009.  Its bounce from last Wednesday's lows has helped the stock regain about 10% off these lows, but it remains quite bearish Technically and this recent bounce should be one to sell into for a possible decline down to test 2009 lows just north of $11 up to $12.70 which looks to be a good level of intermediate-term support.  Momentum remains near oversold levels but not as extreme as last year given the attempted consolidation down near recent lows.  Yet, this can't officially be called positive divergence given little to no real advance by this stock in recent months.  Overall, recent strength should be used to sell into for FOSL as additional downside looks likely.

 

Tractor Supply- (TSCO- $72.18) TSCO has corrected now more in price and time than any of the pullbacks since its 2008 lows.   The technical damage which has unfolded since its April 2016 peak has violated the long-term uptrend as of last September, and momentum remains negatively sloped while not too oversold.   The attempted bounce since last Fall looks to have run its course with the monthly reversal seen in January, and this month's drawdown to multi-week lows looks to have more ahead given the ongoing negative structure and short-term momentum having turned back lower.  Near-term resistance lies near $74-$74.50 while support is found at $70, and then $67.80.  Weekly closes under $67.80 argue for a potential full retrace of prior lows made last October.  For now, this is one to definitely avoid in the short run unless TSCO can get back over $75.  Short-term gains in the next week should be used to lighten up and/or short for technical reasons.
 

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

 

Small Caps, Financials break out of recent range, while prices grow stretched

February 13, 2017

S&P MAR FUTURES (SPH7)
Contact: info@newtonadvisor.com

2303-5, 2285, 2273-4, 2262-3              Support
2318, 2323-4, 2329-2333                     Resistance

 

 

SPX's push back to new highs looks to be near upside targets of importance, with 2320 up to 2330 likely holding this first push higher out of this consolidation.  Counter-trend indicators such as Demark's TD Combo indicator shows sells developing within two days, which could bring about a top between Tuesday and Wednesday of this week.  While February expiration tends to be positive, prices have simply run out of upside room to maneuver in the near-term, and it's best to consider selling into this from a counter-trend perspective.

 

 

SPX and DJIA join the NASDAQ, but upside looks limited
THE POSITIVES:
Last weeks' ability of SPX and DJIA to push back to new all-time highs was certainly constructive from a price perspective, and trends have continued to advocate sticking with a bullish thesis, with little or no evidence of any real trend erosion.  While many began to point out the dangers of uncertainty, or Demark signals prematurely, there really has been very little to suggest stocks were turning down structurally, outside of breadth beginning to wane, which largely began in mid-December.  Outside of many equity indices pushing back up to new highs, however, we also saw a few examples of Sector and style breakouts, as Consumer Discretionary (XLY ), Industrials (XLI) Technology (XLK) all pushed back to new weekly closing highs, while meaningful consolidation breakouts happened in both Financials( XLF), and Russell 2000 (IWM), with both of these exceeding lengthy consolidations on a closing basis for the first time since mid-December.  Additionally, we saw the Percentage of stocks trading above their 10-day moving averages (MA) for SPX breakout of a trend that's held from mid-December which is also a clue that prices have begun to push higher across the board after a lengthy consolidation. 

Another noteworthy positive has to do with seasonality, as markets remain in the bullish six-month period that typically delivers above-average gains.  But expiration week in February also has fared fairly well, with a positive gainof 0.17% in the SPX since 1994 with 14 of 23 positive weeks.  Much of the negative seasonality of February tends to play out the week following February expiration which has been down more than half the time since 1994.  

THE NEGATIVES:
1) Overbought conditions: S&P's gains have carried popular momentum gauges like RSI up to near 70 on daily charts, the highest since early December, while weekly RSI is also nearing 70, which constitutes the highest levels since 2014.  Monthly meanwhile, has shown some divergence with prior peaks which occurred back in 2014 and while also showing levels near 70, is substantially below 2014 peaks, despite the fact that price is higher.  Additionally, prices lie above 2% Std. Deviation bands on both a daily and monthly basis.
2) Demark indicators which signal counter-trend signs of exhaustion have again come together on a daily basis for many of the US indices- SPX, S&P futures, NDX and could be in place by Wednesday of this coming week in DJIA, NASDAQ Comp. and others.  While these signals must be confirmed by actual reversals of trend, the fact that indices are beginning to show these sells looks important.
3) Divergence in breadth with push back to new highs- Advance/Decline on NYSE "All Stocks" failed to move back to new high territory last week despite the breakout in the SPX, and remains near, but not above the levels from late January.  Additionally, McClellan's Summation index lies well below levels that marked peaks last Summer.  Despite a rally from last November, the Summation index lies at only around 62% of the highs from last year.

Apart from Equities, we've seen what appears to be a turn back higher in both the US Dollar index as well as Treasury yields, two asset classes which seem to have correlated well with stocks rising in recent months.  The yield deterioration which had occurred back in the latter half of December and coincided with stocks slowing down, now looks to be turning back higher, just a time when the S&P has pushed back to new all-time highs.  While this should prove to be a positive for Financials,  Equities seem to have taken the lead in turning higher this time around, which might lead to some near-term consolidation before both move up in unison.  The US Dollar rally in particular will likely need some time before moving too aggressively back higher, but does look to have begun a bottoming process that should allow DXY to move back to new highs by late Spring/early Summer.

Bottom line, with regard to Equities, still quite a few bullish technical themes still, while the negatives have only recently begun to surface and haven't really done too much damage thus far.  So, positives in Structure, and an uptick participation will eventually give way to buying drying up on this surge, and overbought conditions and counter-trend sells should cause trend reversals that likely should be in place by February expiration.  For now, flattening out certainly isn't wrong given that prices lie outside Bollinger band highs, and selectivity in this rally at this point is an absolute must.  

SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term Thoughts (3-5 days) : Neutral- Upside limited- Use rallies Monday-Tuesday to sell into, looking to establish trading shorts by mid-week, (and if price reverses right away on Monday to multi-day lows than this might happen sooner -  Prices have reached the lower end of upside targets, and while a bit more strength can't be ruled out early in the week, this should be an area to consider lightening up and hedging by mid-to-end of week.  


Intermediate-term Thoughts (2-3 months): Neutral-  While the intermediate-term trend remains positive and seasonality dictates that prices could hold up into late Spring, it's looking increasingly likely that at least some type of pullback should get underway, which could prove to be 5-10% before a rally back to near highs into late Spring/summer.  Given that weekly and monthly Demark signals have not been confirmed, and have largely begun new counts, (SPX and DJIA.. but not NDX) pullbacks should prove short-term only and constitute buying opportunities.  degree of lift since the Election that has carried prices well above the Bollinger band 2% Standard Deviation on weekly and monthly charts.  Yet the longer-term structure for Equity indices certainly remains structurally bullish, and until there is evidence of some type of technical deterioration, it's difficult to go against the trend outside of making a short-term tactical call based on seasonality, sentiment and overbought conditions.  Overall, selloffs should prove muted and bottom into early March before a rally back to highs which could produce no net change over the next 2-3 months.  Thus, the trend for now is neutral on an intermediate-term basis, with the prospects for further rallies looking increasingly dim, despite the breakouts to new highs.

 


This week, given that there remain quite a few positive, while negatives are beginning to creep into the picture, we'll focus on 5 charts that support the Bullish case along with 5 charts of things that are of concern.   Comments and charts below
 


Value Line Arithmetic Avg has just pushed back to new highs, exceeding the base that's been intact since early December.  This index looks quite a bit more bullish than S&P and not as extended, and with 1700 stocks, is a much larger sample as to how to view "the market" vs purely looking at SPX.  Near-term, prices still look to have limited upside this week, but Monday/Tuesday gains would be used to sell, expecting some backing and filling by end of week and the following week.

 

 

 


The chart above highlights the Percentage of SPX stocks trading above their 10-day moving average (PURPLE) which just broke out to the highest levels of the year in the last two trading days.  This, coupled with the number of stocks making new 52-week highs both give a sense of recent breadth expansion in the last couple days that had been largely absent since the beginning of the year.  Given that this peaked out last December at 86% while the uptrend from those highs has just been exceeded, this looks to be a short-term bullish factor which could push prices up even higher in the near-term before peaking. 

 


CBOE Equity Put/call ratio Despite all the rhetoric about sentiment having become ultra-bullish in the last two weeks, the Equity put/call remains very much in neutral territory, nowhere near levels seen late last year when Calls were being bought at greater than a 2/1 ratio over Puts.   Now at a .70 reading, this is very much mid-range, and doesn't confirm the recent bullish readings on seen in Investors Intelligence data which had widened out to the greatest levels seen in years.  This neutral reading tends to align more closely with the mildly bullish readings seen in AAII data which showed just an 8% greater spread in Bulls to Bears.  Overall, this data, given the widespread thinking that sentiment has turned bullish, presents much more of a subdued picture, which in turn, makes for a more constructive view on equities.

 

 


Financials have taken a much needed step higher with XLF's push above the highs of the consolidation that has been intact since mid-December.  This looks to be an important and positive technical development, and given Financials weight in the SPX, is something to consider for those turning bearish too quickly.  The rise in yields looks to have bullish implications for this group, and this entire two-month consolidation looks to be possibly giving way to a push higher for Financials.  This should have bullish implications for the months ahead, regardless of the degree that most indices are stretched.

 

 


Russell 2000-  Similar to Financials, Small-caps seem to be breaking out, which is evident in IWM getting back above the highs from late January just in the last couple days.   While there are various concerns about NDX, SPX having run a bit too far too quickly of late, it looks constructive to see both Financials and Small caps make sufficient headway last Friday to clear recent highs on a closing basis, while giving both a good chance of extending in the months ahead.



THE NEGATIVES:

 

 

 


NASDAQ vs SPX-  Recent underperformance in the last couple days suggests that NASDAQ likely should lag the SPX after a sharp couple months of outperformance.  Counter-trend sell signals are now present on relative charts of NDX vs SPX, which previously were quite accurate in projecting lows in December (though the opposite)  For now, given that NASDAQ has led the market since the election, a sign of this reversing course could very well be negative and should be watched carefully. 
 

 

Quite a few US indices have now pushed up to test if not exceed the higher border of their own Bollinger Bands for a second straight month for the first time in the last couple years.  Given that counter-trend sells are now evident on monthly charts, this doesn't look to be an ideal time to be involved on the long side, thinking that too much more upside is likely.

 


The NYSE "All Stocks" Advance-Decline, remains below levels hit in late January, so despite the push higher to new all-time highs, breadth lagged substantially up until last Friday. 

 


VIX has pulled back to within former lows in late January, but now shows counter-trend BUY signals forming after nearly a full year of selling off down to former lows.  Counter-trend buys for implied volatility looks to be complete this week potentially.  Given the ongoing level of uncertainty, one should look to buy the VIX this week, thinking that further deterioration in implied volatility is unlikely.

 

 

Long-term charts show the extent to which momentum still hasn't caught up what price has achieved this year, which in a normal environment, might have carried price back to new highs.  The former peaks in both 2000 and 2007 showed the extent to which the momentum gradually began to drop off, and this year's push to new highs still failed to carry breadth back to levels hit back in 2015-6.  While the broader trend remains very well intact , prices have become quite strong.

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

 

Top Stocks to Consider Technically

 

February 6, 2017

S&P MAR FUTURES (SPH7)
Contact: info@newtonadvisor.com

2280-2, 2273-4, 2264-5               Support
2300, 2310-2, 2318-20                Resistance

 

SPX's surge back to recent highs managed to help the index close positive for the week and eliminated the short-term concern about this recent consolidation experiencing a downward break.  The ability to close back over the prior week's highs should help S&P push up to at least 2315-20 in the short run, and pullbacks should be used as buying opportunities.

 

What a difference a week makes
Last week's ability to push back to make new all-time weekly closing highs confirms the prior week's breakout as being "legit" and gives much conviction towards the thinking that a rally back up to 2315-2320 is underway.  While volume came in less than prior sessions on the latest Breakout, we did see breadth expand to nearly 4/1 positive.  Financials showed very strong performance, which despite the early Bond strength, still managed to move back to multi-day highs (and by end of day, Rates had moved back higher) Healthcare also managed to further its recent outperformance, and despite the ongoing rhetoric on Drug pricing, sub-sectors like Biotech, & Pharma still have managed to stabilize and turn up sharply.  Meanwhile the US Dollar index's decline still looks to be ongoing, while yields have also continued their recent upward trend.

While there were notable negative reasons of late to think this recent consolidation could in fact lead lower, and many were betting that the low Vol levels coupled with this stallout should in fact lead prices lower, the combination of the structural positives in terms of the pattern improvement coupled with the heightened tension and uncertainty which the Inauguration has brought about, still seems to favor being long for a move back up over 2300. 

When considering the possible negatives, the lower number of stocks trading above their 10 and 50-day moving averages (m.a.) seems to be something that merits attention, as these gauges were at/near yearly highs back in early January and even last March-July while being quite a bit lower of late (2/3/17) value of 65% of stocks trading above their 50-day ma vs 85% back last year.  Additionally, the fact that Small caps have been declining in relative terms since December of last year is also worth mentioning as a concern.    Additionally the Summation index remains lower than it was in late January, and still well off the highs seen last Summer.  What this means is that the momentum of the breadth has slackened off severely in recent months, and despite the Advance/Decline near all-time high territory, the dropoff in participation in some sectors seems to have hurt the recovery effort to some extent.  Despite the fact that indices are at or near all-time highs, we still have fewer stocks participating, which will need to be monitored closely in the weeks ahead.

For now though, last week's breakout looks solid, backed by good breadth numbers while Demark exhaustion counts still remain premature to form on daily charts.  Therefore, movement back to new highs represents a better time to consider selling into this rally than now.  Given that Healthcare has begun to join the fray and Financials are showing some evidence of trying to break out again of the recent consolidation, the combination of these along with a noted lack of weakness out of Tech are definite near-term positives. 

Given that yields continue to be resilient, the key message should be to favor the Financials, Healthcare, Tech, while being more selective on what to own in Industrials and Materials.   The US Dollar index's decline still looks to have a bit more to go on the downside, so this should favor Metals and Mining stocks still showing more outperformance in the near-term. 



SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term Thoughts (3-5 days) : Bullish- Push up over 2300 likely in the near future given last week's surge to exceed the highs of the recent consolidation.  Breadth expanded on the push, and indices improved their near-term structure in a manner that makes rallies much more likely than declines in the next 1-2 weeks.  Use pullbacks to buy with initial targets near 2315-2320. 


Intermediate-term Thoughts (2-3 months): Neutral-  No change- Buy pullbacks for rallies into late Spring-  Overbought conditions combined with counter-trend sells and waning participation all look to be important in signaling that this year might turn out far differently than the Bulls expect.  For February, Equities definitely appear like more of a poor risk/reward given the degree of lift since the Election that has carried prices well above the Bollinger band 2% Standard Deviation on weekly charts.  Yet the longer-term structure for Equity indices certainly remains structurally bullish, and until there is evidence of some type of technical deterioration, it's difficult to go against the trend outside of making a short-term tactical call based on seasonality, sentiment and overbought conditions.  Overall, selloffs should prove muted and bottom into early March before a rally back to highs which could produce no net change over the next 2-3 months.  Thus, the trend for now is neutral on an intermediate-term basis, with the prospects for further rallies looking increasingly dim, despite the breakouts to new highs.

 


Charts of 10 Technically attractive stocks to consider following last week's breakout
 

 


Bank of America (BAC- $23.29) BAC has quickly gone from one of the worst Financial stocks in its sector to one of the best in the last few months, and currently is primed to break back out to new highs in the months ahead.  Financials leapt higher post FOMC this past week, helping BAC to close back near the highs of the range that's dominated since the middle part of December.   BAC's 40%+ gains from Election time into last December look to have been fully consolidated, with momentum pulling back to less overbought levels, while the stock's "flag" consolidation is likely to be resolved by a quick move back to new highs (which could have begun late last week)  Long positions are favored, looking to press longs over $23.55 which should allow BAC to move to at least $25.  Only a move back down under $22.50 would negate this rally potential, which for now, looks to be an alternate and less preferred scenario.
 


Citrix Systems (CTXS- $76.70)  Another interesting risk/reward from within the Infrastructure Software space is Citrix Systems which has just broken out above highs that have held since 2011.  This brings CTXS up to the highest levels since 2000, and should allow $CTXS to move back to the low $80's at a minimum, with intermediate-term targets back near all-time highs in the high $90s from March 2000.   In the short run, momentum has neared overbought levels given the recent surge over the last couple months, and CTXS maintains a steep uptrend from last year's lows.  While many might be concentrating simply on the last few months, it's important to put this move into context of the stock's long-term structure.  Quite often, breakouts of this sort allow for additional follow-through sooner than later, and it's wise to stick with this, rather than holding out for pullbacks.  At any rate, longs are favored and any weakness back to the low $70's should constitute an excellent buying opportunity.

 

 


Norfolk Southern (NSC- $120.46) NSC's ability to weather just a minor pullback attempt since late January and push immediately back to highs bodes well for this to continue its recent acceleration since November, and push higher up to $125 in the near-term with intermediate-term targets at $135.   While the Industrials sector has stalled a bit in the last month, the Rails have consistently shown very good outperformance and structurally remain one of the better parts of this group.  NSC exceeding late 2014 highs looks important, and despite being overbought, should help this continue higher in the short run.  The act of getting back above a former high from 2+ years ago often can serve as a source of near-term acceleration for a stock, and in this case, longs are favored with thoughts that little resistance lies in the way now that NSC is back at new all-time highs. 

 


Union Pacific (UNP- $108.51)  UNP has been a consistent leader since early 2016 but remains still roughly 13% under all-time highs from early 2015.   Its pattern is not unlike other Rail stocks like NSC, but the trend of higher highs and lows has begun to take a steeper rate of ascent of late, and should help this get back to new all-time highs in the weeks ahead.   Initial resistance lies near $111 with movement over leading this up to near $120.   Stops for longs lie near $101, but the path of least resistance for now remains to the upside, and longs are favored.
 


Fluor (FLR- $55.66) The near-term pattern of FLR is more bullish technically than the long-term, but the stock's recent basing following the late 2016 breakout is positive and should let this trend up sooner than later to test and exceed late December highs at $57.77.  Momentum remains positively sloped, and the fact that FLR moved up to the highest weekly closing level since mid-2015 creates an attractive risk/reward situation in a stock which is not terribly overbought.  FLR remains nearly 50% off its all-time highs from 2008 and over 30% off highs made just three years ago in 2014.  Overall, the combination of the near-term pickup in momentum coupled with the lack of overbought conditions bodes well for further gains in the months ahead.  Upside technical targets lie near $61.70 initially with intermediate-term targets between $65-$67.  This represents a 50% retracement of the stock's 2008 high to low range, along with a 61.8% retrace of the stock's decline from 2014.  Overall, FLR looks attractive to buy here and pullbacks to the low $50's would afford better risk/reward opportunities as part of this near-term uptrend from 2015.

 

 


Newmont Mining (NEM- $36.76) NEM looks attractive as a Gold mining stock given the combination of its recent breakout of the range since early January coupled with the fact that it's been such a dramatic underperformer during this recent Gold runup.   While the top-tier of the S&P Metals and Mining ETF constituents are up 24% or more in the last six months, stocks like NEM are down more than 18% during this same time span.  However the jumpstart in momentum of late is noticeable and bodes well for additional gains in the weeks/months ahead.  Its close last Friday finished at the highest levels since November, breaking out of a minor pattern as well as having already exceeded the downtrend from last Summer.  Momentum is not overbought and NEM looks like an excellent risk/reward to continue this recent surge in momentum considering Gold could rally to near 1245-55 before any bounce is complete.  For now this looks appealing.

 

 


AmerisourceBergen Corp (ABC-$89.28) ABC looks appealing technically given the recent improvement in structure and momentum following its breakout of long-term downtrend line resistance coinciding with the gradual improvement in Healthcare in the last couple months.  ABC successfully bottomed out right near its 50% retracement of the runup from 2008/9 into early 2015.  While monthly momentum gauges like MACD remain still slightly negative, they're improving rapidly given this recent breakout and are on the verge of turning back positive.  Given that ABC remains more than $30 off its all-time highs, the stock looks like an excellent technical long for a 3-5 month basis given the jumpstart in momentum of late.  Longs preferred here, looking to buy any dips given the chance, down in the mid-$80s for a move up to $95, then $100.70 which represents a 61.8% retracement of the prior pullback from two years ago. 

 


Merck & Co. Inc. (MRK- $64.29) Yet again, MRK finds itself back up towards recent highs after a recent stalling out on the retest from 2014 levels.  The stock remains quite attractive technically, having formed a massive long base which began over 15 years ago.   The pattern since the late 2007 highs alone represents a massive intermediate-term Cup and Handle pattern and movement over $65 on a monthly close should help MRK to accelerate up to near-term targets in the low $70's.  While many might look at MRK as being still largely range-bound, the near-term improvement in momentum on last week's gains should help the stock to break-out of this pattern sooner than later, given that its made its way back to highs in just a relatively short period of time following the recent stallout.

 


Halliburton (HAL- $56.58) HAL looks well positioned to continue higher in the months ahead following WTI Crude's ability to stabilize during a time of traditional seasonal weakness.  Given that Oil typically tends to turn up into the Summer months, a move higher in Crude should help Energy to continue its recent gains, with targets on HAL up near $70 with July 2014 highs near $74 being important.  The uptrend in HAL has not shown any signs of wavering in the last 12 months, and this remains a solid technical risk/reward within the Oil Service space.  Pullbacks to the low $50s would offer attractive opportunities to buy HAL, and only a move under prior months lows on a close would represent a cautionary sign that could lead to possible weakness.  For now, additional gains look likely, despite some recent signs of waning momentum as the monthly charts still look quite attractive.

 

 


Valero Energy (VLO- $65.51) VLO's minor weakness of late represents a likely good opportunity to buy dips, given the ongoing strengthening in the Refiners in general since last Fall.  This stock's weakness has failed to severe meaningful Ichimoku Cloud support, and the decline looks to be stalling out.  This should represent an attractive opportunity to buy with targets up near $71.40 and then $73.88, the highs from late 2015.  What most weekly charts don't show, however, is the presence of a large Cup and Handle pattern, when going back since 2007 highs, so any move back up through $73.88 would be extremely bullish, and not necessarily the opportunity to sell into the move which investors wouldn't notice who haven't scanned the long-term charts.  Gains back to the low $70s look likely, with a keen eye on 2015 highs.
 

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

 

 

NEWTON ADVISORS WEBSITE

 

 

Newton Advisors, LLC. info@newtonadvisor.com 203-339-2944

 

Breakouts, Breakouts everywhere... Now what?

January 30, 2017

S&P MAR FUTURES (SPH7)
Contact: info@newtonadvisor.com

2280-2, 2273-4, 2260               Support
2296-7, 2300, 2310-2               Resistance

 

 

Bloomberg World index shows the breakout which happened last week to carry this index of 5000+ constituents over prior highs from last Fall and late 2015.  While overdone potentially in the near-term, this is certainly a positive development technically and could help to start some mean reversion to SPX which made all-time highs this year while most of the world peaked in 2015.
 

 

Breakouts, breakouts everywhere..  Now what? 
With two more full days left in the month, January is set to show far better market performance than most believed possible heading into a new year under the uncertainty of new leadership.   Despite cautious optimism on the economy as a whole, there continues to be much more skepticism on the stock market, as shown by the recent inversion of Bulls to bears in the AAII poll.   Uncertainty and uneasiness about the shake-up going on in Washington following the Inauguration and the new refugee ban also seems to have cast a thick fog of worry over the US and the world, yet most equity indices have largely ignored these concerns.  

Yet this year is playing out almost exactly the opposite of last year.  This time last year, equities were spiraling downward towards DOW 15k, not breaking out above DOW 20k.  Yields were about 50 bps lower, while Commodities were hitting new lows, led by Energy, as Crude oil had shed about 50% from its highs the prior fall, and was down about 75% from highs seen back in 2014.  Little did most investors know at the time that Crude was bottoming out at this time last year, and proceeded to nearly double off those lows in the last 12 months.   Sectors like Telecom, Utilities, and Staples were outperforming last January, reflecting the bearishness and Defensiveness of last year's volatility, while this year's winners for January look to be Materials, Technology, Discretionary and Industrials, all up more than 3% for the year.  Far different leadership, yet important to note that last year ended up just fine performance wise despite getting off to a rocky start.  

Yet concerns about this market remain and many have attempted and failed to "top-tick" this bounce from November lows, citing all the right reasons, outside of price alone.  As we all know, US indices continue to be resilient, and price action itself is the single most important factor alone when trying to forecast price Technically, far more reliable than sentiment, seasonality, volume, or momentum.  Looking back, last week's breakout in the SPX and DJIA joined the NASDAQ in moving back to new all-time highs, which looked important.  Mid-caps and Large cap indices participated, while Small-caps failed to keep pace, with this group having underperformedsince peaking out in December.   World indices like the Bloomberg World index, or MSCI World index (MXWO) also broke out to the highest levels since mid-2015, while Advance/Decline for NYSE is back at new all-time highs.  The percentage of stocks meanwhile above their 50 and 200-day ma are treading water around 69%, bullish, yet not nearly as high as what was seen last year, or in 2014/early 2015 when these approached 85-90%.    The fewer number of stocks trading above these gauges might seem like a subtle shift from prior, but yet important nonetheless.

Looking forward, the seasonality for February along with the level of overbought conditions and counter-trend signs of exhaustion in the making (Demark) are certainly negatives.  However, despite price having reached 2300 for SPX, time factors still appears elusive and have not quite lined up properly to signal a top of any magnitude.  Specifically, Demark indicators on daily charts are premature in showing sells for SPX nor NDX, and while present but not confirmed for DJIA, CCMP, would benefit from another 3-4 days of upside, which could take indices up into late this week.   (Note, all indices don't have to move up from here, the start of some divergence would be particularly telling, and confirm thinking that a top should be near)  Sentiment also is very tough to get a handle on these days.  Bullish sentiment per Investors Intelligence and AAII have dropped substantially over the last week, but most seem more neutral than bearish or bullish.  Yet if the anger and frustration being played out given the ongoing marches around the world is any guide, equity market selloffs from here would likely generate fear very rapidly, thereby preventing any type of large selloff of any magnitude from happening.  In other words, a tremendous amount of uncertainty and doubt being felt during a time when equities are near their highs is rarely the recipe for any sort of meaningful peak in stocks, particularly when the Advance/Decline is at/near all-time highs.  For now though, a few technical gauges do show that a reversal of trend should be near.  It's just wise to wait until the price action plays out instead of selling prematurely and getting shaken out of a trend just when indices have moved back to new all-time highs.


For those looking for shorts, we'll concentrate on the Consumer Staples index this week which has been the worst performing sector out of all 11 S&P GICS Level 1 groups over the last three months.  This is the only major sector with negative returns during this timeframe, with -0.06% performance through 1/27/17, vs an SPX return of 7.58%.  Specifically, Food/Beverage and Tobacco remains the best part of this group, while Food/Staples Retailing is the worst (led down primarily by WMT.  Household Products has perked up, and has trended higher vs Staples Retailing which looks to continue.  Overall, the group looks to be close to bottoming within a month.  Yet for now, the next 1-2 weeks look to be particularly bearish for this group and additional undeperformance in the short run looks probable.


SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term Thoughts (3-5 days) : Bullish- Despite S&P futures and cash getting up to 2300, which was thought to be a price area of resistance, time seems not to be lining up just yet, and a bit more strength is likely back to new highs before any peak is in.   Last Friday's pullback to new multi-day lows could lead to 1-2 days of weakness, yet this looks to be a buying opportunity near 2280-5 for a move up to 2315.  the NDX did not follow suit on the SPX's move and still looks to be quite strong.  Area for profit taking will arise likely within 1-2 weeks on strength back to new high territory.


Intermediate-term Thoughts (2-3 months): Neutral-  No change- Buy pullbacks for rallies into late Spring-  Overbought conditions combined with counter-trend sells and waning participation all look to be important in signaling that this year might turn out far differently than the Bulls expect.  For February, Equities definitely appear like more of a poor risk/reward given the degree of lift since the Election that has carried prices well above the Bollinger band 2% Standard Deviation on weekly charts.  Yet the longer-term structure for Equity indices certainly remains structurally bullish, and until there is evidence of some type of technical deterioration, it's difficult to go against the trend outside of making a short-term tactical call based on seasonality, sentiment and overbought conditions.  Overall, selloffs should prove muted and bottom into early March before a rally back to highs which could produce no net change over the next 2-3 months.  Thus, the trend for now is neutral on an intermediate-term basis, with the prospects for further rallies looking increasingly dim, despite the breakouts to new highs.

 


Charts of the Consumer Staples sector are shown below, both absolute and relative along with several Sub-sector relationships.  Finally, three stocks are analyzed, WMT, TAP, both which look to fall further, while MO looks to be a source of strength. 
 


XLP, the Consumer Staples sector ETF, looks primed to fall further in the short run following a rollover in prices in the last few days coinciding with a TD Combo and TD Sequential sell signal on daily charts.  Pullbacks to $51.75-$51.80 look likely in the short run, with a move down under $51.35 leading to a much more severe drop to test last November's lows.  This chart shows a mild uptrend in place since early December, yet Staples has been the worst performing sector out of any of the major 11 ,and the only one with negative returns.   The pullback last September was hugely damaging to the trend from 2015, and despite the mild bounce, it remains difficult to have much conviction in rallies in the weeks ahead.  For now, additional weakness is likely in the short run before this can stabilize, with the area near trendline support just under $52 being key.
 


Weekly XLP charts show a bit of a different picture than the daily, as XLP remains in a long-term uptrend from 2009 which has proven very linear and steady over the years.  Last year's outperformance proved to have gone too far, too quickly (as shown by the mean reversion in Discretionary to Staples in the back half of 2016) and the break of this red line uptrend from 2015 caused some weakness which doesn't appear to have completely played out.   For now, additional corrections could happen which might take XLP down to a maximum of $50 right near last month's lows, though that would represent a compelling buying opportunity for 2017 from a pure absolute standpoint. At present, this sector looks close to have bottomed on an absolute basis, yet the next 3-5 weeks still look to present much higher likelihood of downside than upside.  So this remains a sector to avoid in the near-term.

 


Consumer Staples relative to the S&P shows the underperformance which hit this sector hard after breaking down in September.   Relative charts have neared former lows and momentum has reached oversold levels.  Yet more evidence of stabilization is necessary before reaching for this sector, expecting an immediate bottoming process.  For the next 3-5 weeks, Consumer staples is likely to underperform further, with notable laggards like WMT, KR, MNST and TAP leading this sector lower before it can bottom out. 

 

FDSRSTPL.gif


Food Staples Retailing in relative terms to the broader Consumer Staples group remains under pressure near-term after peaking out in 2015.  Wal-mart (WMT) makes up a fair chunk of this index, and while having outperformed in years past it's taken a turn for the worse this year and this sub-sector of Staples is the weakest part of the group.  In the weeks ahead, additional underperformance looks likely for Food Staples Retailing, which includes WFM, SYY, KR, WBA, CVS, and COST outside of WMT.  Weakness into March/April might represent a better time to take a stab at this on the long side.  For now, however, it clearly looks premature, despite the monthly chart showing a lengthy bottoming process at work.

 


Outside of Food/Staples Retailing, the Household Products sub-sector also stands out as showing some of the more negative performance within this Staples group in the past eight years, and still appears to be a sub-sector within the group to avoid.  Until there is evidence of this downtrend being exceeded, one should consider using any bounce to sell, as weakness back down to test the lows within Staples looks possible in Household products.
 

FDBTSTPL.gif

 


Food/Beverage and Tobacco however, has outperformed substantially within the Staples group and continues to be the "go-to" part of this group worth investing in.  Tobacco related stocks like RAI, MO, PM have shown far better outperformance than most of Staples and are leading the group in performance this year as well as in the last 12 months.  This ratio chart above highlights a ratio of Food/Beverage and Tobacco stocks vs the broader Consumer Staples index.  Bloomberg's ticker for this index is S5FDBT and includes stocks like HRL, CPB, MCK, HSY, as well as the stronger Tobacco oriented RAI, MO and PM.  Interestingly enough, the Tobacco and the Food stocks have fared much better than the Beverages, and TAP, PEP, DPS, KO all represent the bottom half of performance for2017 for the Food Beverage Tobacco.  For now this group as a whole remains the best part of Staples, and should be favored for outperformance.
 

 


Food/Beverage & Tobacco relative to the SPX looks far different, and much more negative than when viewing this group vs the broader Staples index.  Thus, despite (FBT) being the strongest part of Staples, we can see that ALL the groups in Staples are having a difficult time beating the market, specifically following September of last year when most of the group turned down.    Momentum is negatively sloped but oversold, and further lagging could bring about attractive buying opportunities in the next couple months.

 

 


Household Products relative to Food Staples Retailing turned up sharply in the middle part of 2016, making this the second most desired part of the Consumer Staples group after Food Beverage Tobacco.  Relative charts of S5HOUS vs S5FDSR indicate that Household products should be favored between the two, as this continued to gain strength after the breakout of the relative pattern that held Household products down for the better part of five years.  Stocks like PG, CHD, and CL are all positive for this year and some of the better performing stocks within the Household products group, despite Consumer Staples lagging substantially in the last 12 months.
 

 

 


Wal-Mart Stores Inc. (WMT- $65.66) Additional weakness looks likely for WMT after this stock broke down under prior lows from mid-2016 as well as having violated the entire minor uptrend from 2015 lows.  WMT made what appeared to be a large intermediate-term breakout back in 2012 when it rose to exceed the highs that had been in place in this stock since late 1999 and kept this range-bound for over a decade.  2012's breakout certainly changed this view for the better, yet the rally lasted only two years before giving back over 50% of what had been accomplished since 2007.  For now, WMT looks attractive near $62.50 to buy in about 2-3 weeks on further weakness.  Below the area near $60 stands out, and then nothing until down near $56.  For now, the near-term prognosis for the next few weeks is decidedly bearish, and WMT looks like a much better short than long.  Those looking to buy dips should hold off until WMT gets to near May 2016 lows at $52.72 at a minimum before buying. 

 

TAP.gif

 

Molson Coors Brewing (TAP- C$- 95.35) Another laggard within the Staples group whichlooks to underperform further is TAP,  which shows a -2.01% negative return for 2016 and has lagged all other stocks but 2 within the Consumer Staples group over the last 3 month period with a -9.07% negative return.  Daily charts show this stock having attempted to bottom out after retracing 38.2% of the prior rally from late 2015 into last year.  However, the near-term consolidation remains bearish technically and should result in break and final pullback to near $88 which would be a more attractive area to take a look given how this sector remains under pressure.   Given the multiple tests of recent lows between $94-$96 which have marked support over the last few months, additional selling looks likely which should break $94 and cause further near-term technical deterioration.  For now, this is an "avoid" technically, and breaks of $94 would warrant not buying dips until this decline has completely played out. 
 

 

 


Altria Group- (MO- $71.03) MO belongs in the group of outperformers within Staples, which has shown a 10% return over the last three months and is the 3rd best performing stock in the group in the last six months, with returns of 6.41% at a time when Consumer Staples was down -3.17%.  MO has just pushed back to new all-time high territory which is a structural positive at a time when the group has been under substantial pressure of late.  While overbought conditions might limit its upside to near $75 until the group can successfully bottom out, this is one to favor within Consumer staples given its stellar track record and no signs of weakness.  Additional gains look likely in the weeks and months ahead, with dips being buyable in the high $60s.

 

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

 

Equity Resilience coupled with subdued sentiment should be the recipe for higher prices

January 23, 2017

S&P MAR FUTURES (SPH7)
Contact: info@newtonadvisor.com

2149-50, 2218-20, 2200-279-81        Support
2270-3, 2288-9, 2299-3k                    Resistance

 

Europe has been slowly but steadily gaining ground on the US, but now reaching areas of important downtrend line resistance which has held since mid-2015.   This ratio should be watched carefully of EZU vs SPY, representing the European Monetary Union stocks vs the S&P, and if broken, would favor Europe continuing to gain ground after a severe 2+year period of underperformance.  For now, this hasn't occurred, and this ratio lies up against what should be very solid resistance.

 

Well.. for all the excitement, anger, uproar over the Inauguration, there certainly wasn't that much overall volatility.  Equities ended last week with just fractional gains.  While some of the sector rotation gave a few clues, the underlying price action in the main US indices remains deadlocked in consolidation that has resulted in little net change since mid-December.  The bullish sentiment we commented on last week seems to have contracted rather dramatically given the uncertainty of the Inauguration, and/or what might in store during Trump's first 100 days.  Meanwhile equities have been undergoing their own mild sector rotation, with Technology, Materials and Industrials all starting to gain ground again, while Financials have been underperforming of late, despite some of the weakness in the Bond market.    Bottom line, until there is some evidence of equities attempting to violate lows of this consolidation since mid-December, it's thought that the combination of increasing bearish sentiment coupled with stocks holding up near all-time highs should result in an UPSIDE breakout before any pullback gets underway.

Three key developments are important to highlight for this week:  First, the acceleration lower in the US Dollar index lower, is important, and should boost emerging markets and commodities in the short run.   Second, the breakout in Treasury yields higher above trendline resistance is also significant and should prove to be a source of strength for Financials, which have begun to underperform lately.  (This hasn't just happened in the US, but globally).  Third, Industrials have shown evidence of trying to break out.  The Rail index surged last week on CSX's rally, and we saw both absolute and relative strength in the Industrials sector vs SPX that looks likely to continue.

As mentioned above, sentiment seems to have contracted very quickly, just after having widened out to optimistic levels in the last few weeks.  The latest AAII poll shows a severe pullback in Bullish sentiment, while Bearish sentiment jumped to narrow the gap between Bulls and Bears to just a level of "5", down from over 30

Seasonality does seem to favor pullbacks in the month of February, and a sub-par period of performance following Inaugurations in post Election years, no matter what party is elected.  For now though insufficient evidence of weakness is present to make for a compelling argument that this has begun, or should happen right away.  If anything, a move initially to the upside looks more likely given the Industrials and Tech outperformance, coupled with the drop in bullish sentiment with ongoing Stock index resiliency.



SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term Thoughts (3-5 days) : Bullish, and movement above 2270 should result in a quick move up to 2300 which represents serious resistance to the ongoing rally.  For now, it's important to witness the consolidation breakout, which has come close on both sides in the last few weeks, but remains pointed higher, despite the near-term consolidation.


Intermediate-term Thoughts (2-3 months): Neutral-  No change- Buy pullbacks for rallies into late Spring-  Equities definitely appear like more of a poor risk/reward given the degree of lift since the Election that has carried prices well above the Bollinger band 2% Standard Deviation on weekly charts and up to the highs of the band on monthlies.  Demark indicators now show TD Sequential and Combo sells on many longer-term timeframes, while the participation out of Technology and Healthcare has lacked the kind of surge seen in the Financials and Industrials, and is a work in progress.  Overall, the longer-term structure for Equity indices certainly remains structurally bullish, despite the overbought conditions, but it's doubtful that February will prove bullish given the aforementioned factors.  Yet, price alone is key to analyzing the true technical trend.  For now, we haven't seen sufficient technical damage to make an intermediate-term bearish call on anything more than just a counter-trend basis, and some evidence of momentum starting to wane will be important on weekly/monthly basis to justify fading equities during this period of bullish seasonality into April.

 



Charts of SPX, NDX, TNX, DXY, CCI, Gold, Crude, FXI, Sector absolute and relative charts along with analysis, shown below.
 


SPX daily chart since the Fall shows the base-building that's been in effect since mid-December , as none of the recent pullback attempts have gained much traction and prices still lie within striking distance of mid-December high closes which occurred after the Election surge.  Meanwhile, the trend from late December lows higher also remains intact, and has not been violated, even on several attempts last week.  Prices brushed the 50% retracement of the late Dec-January rally while snapping back to avoid any real damage by the close.  The key level for S&P futures remains near 2260 for short-term traders, and then 2249, near the late December lows.  Meanwhile, on the upside, getting over 2270 initially and then 2276-7 is important.    Until there's some evidence of technical damage, the trend remains structurally bullish, despite the recent sideways pattern.  The combination of the huge drop in sentiment coupled with minimal technical damage and resilient prices likely still results in an upside breakout for SPX. 
 

 


The hourly S&P futures chart really puts the recent consolidation into perspective, as prices have followed a pattern of lower and lower highs, while producing lows which are higher and higher since early January. This kind of consolidation typically follows a large move, so it's likely we do see an end to this neutral consolidation, given the recent narrowing in the range, and given the recent strengthening in both Industrials and Technology, it looks likely to be on the Upside, vs thinking prices break lower.  Some evidence of strengthening in the Defensives likely should take place at/or near any type of market peak, and for now, given the uptick in rates, Utilities are more likely to trend back lower, along with other yield sensitive sectors.  

 

 


Bloomberg World index shows a pattern which is largely structurally bullish, with a giant ascending triangle, which looks to have failed in its last few breakout attempts, the last coming early last week.   Additional upside still looks likely as a way to resolve this pattern unless we see some real structural damage in seeing prices breach trendline support.  This minor pullback globally in the last week "should" be buyable given the uptick in uncertainty, and lead back to new yearly highs.   The All-time highs were made back in 2015, and remains in divergence with the all-time highs shown in US stocks.

 

 


Industrials are on the move again, thanks to the Rails strength and specifically CSX's surge last week.  While the Rails remain just a minor piece of the puzzle, this technical breakout of the ongoing neutral range does seem important for the group, and also for the market, and along with Technology, should show further outperformance in the weeks ahead.   Stocks like EMR, UNP, NSC remain some of the better stocks to favor within Industrials that still appear like good risk/rewards, along with Airlines like DAL, JBLU, AAL, and UAL.

 

 


Relatively speaking, this upswing in the Rails resulted in a big turn back higher in the relationship between XLI and SPX, which had peaked and turned down in early December after the huge one-month surge since the Election.  This recent relative strength suggests that Industrials likely can continue its outperformance and show further relative strength vs the broader market in the short run.  Given it's percentage in the S&P, along with Financials and Technology, participation out of this group seems likely in the days/weeks ahead and could serve as a tailwind for the broader market.
 

 

 


Sentiment has pulled back substantially in the last few weeks, and particularly in the time leading up to last week's Inauguration, as might be expected given the lack of certainty regarding policies or what might be accomplished during Trump's first 100 days.   The AAII Bulls/Bears spread, which a few weeks ago had risen to 30, the highest level in over 1 year, has now pulled back to just low single digits, as Bears jumped to over 32% as of last Thursday 1/19, while Bulls also retreated to near 37.  This contraction in sentiment might be understandable given that uncertainty is on the rise, while indices have not really shown much headway.  For now, it's thought to be bullish that sentiment has pulled back with equities near all-time high territory, and could help this rally continue.

 

 


10-Year Treasury yields look to be on the move yet again, after stabilizing last week and turning up sharply, not unlike what's happening around the globe.  While sentiment had started to turn more bearish on Treasuries into end of year 2016, we saw nearly a 40bp pullback in yields.  Yet that looks to be proving short-lived as yields have pressed higher up above this downtrend from early December.  Movement up to 2.53-5% looks likely which if exceeded, invites a test of 2.60% and above.  Financials should begin to turn up this coming week given the resilience in rates, as it seemed to be Earnings that dragged down stocks like BK and KEY.  For now, additional upside looks likely for yields, and technically it's right to expect at least a retest of former yield highs.

 

 


German Bund yields have pressed up lately at an even faster clip than Treasury yields, and as this weekly chart of German 10s shows,  with rates on 10-year German bunds having closed at the highest levels since early last year.  The trend from 2014 highs has been broken and should help yields continue to press up in the next few months, with intermediate-term resistance from 2011 highs found up just below 1%.   It's important to present this to put the rally in 10year yields into perspective, which hasn't come close to showing the strength in besting recent yield highs, but yet looks likely in the weeks to come.

 


US Dollar index- Last week's late week pullback indicates that more weakness is likely before this move has run its course.  Pullbacks to test 100 in the DXY or even below near 99.50 are likely before the Dollar index can stabilize.  Movement into Commodity based stocks should continue for the near-term, and recent spikes in CCI index up to former highs that have consolidated a bit should lead to this being an excellent risk-reward long for further upside in the days/weeks ahead.  While the Dollar index is likely to turn back higher in February into late Spring, for now the trend is down, and appears early to think is bottoming.
 


The Trend in Growth vs Value (SGX/SVX) looks to be bouncing of late after a very sharp decline into early January of this year.  The intermediate-term trend was violated on last year's weakness, and now has given up about 50% of the entire uptrend since the 2013 lows.   For the next 1-2 weeks, Growth could outperform Value as this ratio bounces, and SGX should fare better than SVX.  However, rallies into February/March should be used to underweight Growth and think that Value should reassert its relative strength (ie.  this ratio moves back lower in SGX/SVX) and outperform Growth.

 

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

 

Technical longs and shorts to consider at this stage of the rally

January 9, 2017

S&P MAR FUTURES (SPH7)
Contact: info@newtonadvisor.com

2142-3, 2218-20, 2200-279-81, 2164-6    Support
2272-3, 2288-9, 2299-3k                           Resistance

 

While most of the US indices pushed back to new all-time highs last week, the Bloomberg World index flirted with its own breakout, testing levels that had been hit three times since mid-2015 as part of a 16-month Bullish ascending Triangle formation.  While a move to new yearly highs looks likely, it should be noted that prices peaked out globally back in 2015 from all-time highs,  and are not happening now as is the case for US equities.

 

 

Equities Back at new highs is Bullish right?  Well.. Yes.. and No   S&P along with NDX, NASDAQ Composite, and DJIA all advanced back to fresh new all-time highs last week.  The countdown clock was ticking for DJIA 20k, which as we know, just missed by a nose.   Bond yields and the US Dollar index began to stabilize a bit after recent declines,  while both WTI Crude and Gold gained ground.   Global equities joined the S&P in making some upside headway, but as we know, most other developed and emerging market indices lie well off All-time high territory, with many having peaked in 2015 and/or 2014.  So all is fine right? Well there remain both positives and negatives about this rally that are important to mention. Most of these were covered in the 2017 Annual 2017 Technical Outlook, so we'll just concentrate on the short-term developments and reasons for optimism/pessimism. 

Short-term POSITIVES:
1) S&P joined DJIA, NDX, and COMPQ in moving back to new all-time highs
2) Technical trends and structure remains bullish, with breakouts showing ongoing trends of higher lows and higher highs
3) Advance/Decline line remains at/near all-time highs, having made a fresh new high last week
4) Defensive sectors are still underperforming, even with yields having pulled back, as Consumer Staples, Utilities along with Telecomm were the worst performing sectors last week.
5) SPX has just had one day's close under its 20-day moving average since the Election.  Until some evidence of deterioration sets in, trends remain constructive


Short-term NEGATIVES:
1) Breadth was very subpar last week on the move back to new highs and throughout most of the day while volume was more skewed towards "Down" stocks than "Up"  So despite the Media talking up Dow20k and the move to new highs, there were barely more positive than negative issues, and volume was positioned nearly the opposite of what bulls would have liked to have seen
2) Sentiment remains elevated and much more bullish than bearish with nearly 3/1 spread between Bulls to bears in some polls and both Investors Intelligence and AAII depicting more bullish conditions to start the year than ever before
3) Demark indicators have shown a greater confluence of counter-trend sells on weekly, monthly and quarterly charts than at any point over the last 20 years.  While weekly and monthly sells were in place in 2014 and failed to be confirmed and produce any downturn, markets are now showing TD Combo and Sequential indicators lining up with Quarterly sells, while Weekly charts show officially completed 9-13-9 patterns on DJIA, SPX,
4) Nearly 80% of stocks are now trading above their 50-day moving average, fairly overbought and near levels which marked peaks last July and prior to that in March, when equities largely went sideways for six months
5) The divergence between US and the rest of the world is very pronounced, as Europe nor Asia moved back to new high territory when viewing their equity markets and the US remains one of the few developed markets that's making this move. 
6) VIX closed down last Friday at 11.32, less than half of the levels seen prior to the election, when S&P was nearly 200 points lower
7) Treasuries have been rallying over the last couple weeks, and this near-term uptrend has caused underperformance in Financials which is a key part of the market, the second largest sector by capitalization.   When looking at performance in Financials over the last month, it's interesting that this group actually has underperformed the SPX at number 7 of the 11 major sectors.  Most of its dramatic move, along with equities, came in late November/early December, but has since consolidated given overbought conditions
8) As fellow market colleague Urban Carmel pointed out in his blog over the weekend, Short-term protection was trading at less than 80% of three-month protection.  This indicates quite a bit of complacency and is a definite concern sentiment wise
9) Treasuries and equities both moved in tandem last week, not unlike what was seen from April-October of last year.  Both of our recent strong rallies in stocks in the last 12 months were led by Treasury yields, which spiked up while Equities followed suit.  February- March and then November-December.  If sentiment remains bearish on Treasuries and yields have started to turn lower, stocks might have a difficult time pressing up, given recent correlation trends and Algos which have caught onto last year's movement.
10) Given that DXY, TNX and SPX have all moved in tandem to new highs, while DXY and TNX just turned lower, for this correlation to hold it's likely that either the selloff in DXY, TNX proves shortlived, or SPX turns down in the near future



SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term Thoughts (3-5 days) : Bullish- The move back to new high territory still looks to have upside given structural progress technically and lack of daily Demark sells on this latest push higher.  However, in the next week, on strength up to 2290-2300, the near-term upside likely should prove limited, and one would be inclined to take profits from a short-term perspective.  Overbought conditions coupled with bullish sentiment are both important short-term negatives which could limit the degree of progress above 2300.

Intermediate-term Thoughts (2-3 months): Neutral-  Equities definitely appear like more of a poor risk/reward given the degree of lift since the Election that has carried prices well above the Bollinger band 2% Standard Deviation on weekly charts and up to the highs of the band on monthlies.  Demark indicators now show TD Sequential and Combo sells on many longer-term timeframes, while the participation out of Technology and Healthcare has lacked the kind of surge seen in the Financials and Industrials, and is a work in progress.  Overall, the longer-term structure for Equity indices certainly remains structurally bullish, despite the huge lift in Bullish sentiment coupled with overbought conditions, but it's doubtful that January and February will prove bullish given the aforementioned factors.  Yet, price alone is key to analyzing the true technical trend.  For now, we haven't seen sufficient technical damage to make an intermediate-term bearish call on anything more than just a counter-trend basis, and some evidence of momentum starting to wane will be important on weekly/monthly basis to justify fading equities during this period of bullish seasonality into April.

 



5 Technical Longs and 5 Technical Shorts ideas will be featured below- The first 5 will be longs, and stocks that have begun to show mean reversion which still look to rally further, despite markets having gotten stretched.


LONGS
 


Celgene (CELG- $119.64) CELG's ability to lift off recent lows post election are constructive for the stock's structure technically speaking and suggest that this lengthy base which has been ongoing in CELG since July of 2015 should be coming to an end and is being resolved by a move back higher after multiple months of sideways churning.  CELG's surge up above $118 helped momentum begin to turn positive on weekly charts and is on the verge of doing so also on monthly charts (MACD) for the first time since August 2015.  This recent breakout from last November looks to have been consolidated in the last couple months as prices pulled back to fill the gap from November and is now turning back up coinciding with the Biotech ETF (XBI) making its own minor breakout last week.  Additional upside looks likely with targets up near $123 initially and then $127 with movement over that leading to a rally above which should eventually test July 2015 all-time highs just above $140.  Overall, the surge in momentum from a low level makes CELG attractive to own here with prices still more than 14% below its all-time highs.
 


Vertex Pharmaceuticals (VRTX- $79.39) VRTX is finally beginning to show evidence of mean reversion after turning in some of the worst performance of any stock in the SPX.  Last year's -41.45% earned this company the dubious distinction of having the fifth worst stock performance of any of the names in the SPX last year.   Now after VRTX looks to have found strong support right at the 50% absolute Retracement level of its all-time highs which also happened to be right near the 50% retracement of the stock's rally off the 2008 lows from low to high range, VRTX has begun to show compelling evidence of turning higher.  Its move back to multi-week highs last week helped it recoup its former lows from November, which from an oversold state should help this begin a more serious rebound.  Weekly momentum indicators like MACD showed positive divergence from back in early 2016 and now the stock has begun to turn sharply higher at a time of the year when last year's laggards often do tend to snap back after dismal performance the prior year.  Gains up to $84 look likely in the short run, with movement over that level leading up to near $93-$94.  Overall, VRTX looks like a very attractive risk/reward as part of a poor sector which is gradually showing evidence of trying to make a comeback.

 


Nike (NKE- $53.91)  Don't look now, but NKE has gone from worst to first, very quickly.  Last year's underperformance caused NKE to turn in -18.67% returns, the worst performance of any DJIA stock by a long shot.  This year, however, NKE is up over 6% thus far to start the year, as mean reversion helps another laggard snap back during the early stages of the year.  NKE's price has managed to recoup prior lows from last Summer, and should rally further up to near-term targets at $56-$57.50, and then $58.50.  Given the choppy overlapping correction that's taken place since late 2015, NKE would only have to get up above $56 to break this entire downtrend from late 2015 which would suggest this downtrend has likely run its course.  For now, NKE should work its way up to the mid-to-high $50s, and long positions are recommended technically in the short run.  Once this breaks out above this intermediate-term downtrend, one can make the case for a much larger rally up to the mid-$60's, which for now is premature.

 


Pinnacle West Capital (PNW- $78.49) PNW is showing increasing signs of turning higher after peaking last July and making a minor consolidation into last November, but maintains an attractive long-term uptrend from early 2009 which still doesn't look to have run its course.  Utilities in general have begun to strengthen in the last month ever since stocks initially peaked in mid-December, returning over 5% in the rolling 30-day period.  Signs of rates turning back lower could help this group to begin showing better outperformance.   PNW has been a consistent outperformer, but despite being up over 21% in the last 12 months, it's lagged on an absolute basis given last year's Summer peak.  Evidence of this turning back higher just in the last month makes this one to consider technically.  Momentum has turned back higher on a weekly basis, while climbing back above a minor downtrend since last June's highs.  Rallies up to former highs just below $83 look likely with stops on any move down under $76, which would postpone the rally.

 

 


Public Storage (PSA- $228.35) This REIT declined almost 30% from last April into year-end before bottoming out and making a sharp recovery back over this intermediate-term downtrend.  Gains look likely with targets at $239 and then $248 as the group slowly begins to recover after severe underperformance last year where REITS lagged every group outside of Healthcare, returning almost exactly 0% last year while the SPX was higher by 9.5%.  However, last week REITS outperformed every other S&P group (+3.05%) PSA is singled out in this occasion given the extent of the underperformance last year coupled with the fact that it maintains an attractive long-term uptrend from 2009 and still looks to push higher given the recent surge in momentum in the last month.  Overall, this snapback from severe underperformance -9.27% last 12 months, coupled with the downtrend break makes PSA attractive to show better relative strength in the weeks and months ahead.  Given that rates rallied up to near 30-year resistance in their own downtrend, a move lower looks more likely this year, and the REITS could show much better performance.  PSA, in this case, looks to be one to favor.


SHORTS
 

 


L Brands (LB-$61.23) Increasing signs of technical damage in LB make this one to avoid in the near-term and/or consider shorting with targets down near $53 initially with intermediate-term targets at $42.50.  LB just violated its long-term uptrend and looks to have failed in its retest attempts into August of last year.  Last week's decline breached prior monthly lows, bringing this down to the lowest levels since last May, but on a monthly closing basis, back since 2014.  Additional weakness looks likely until this can begin to show more evidence of stabilization.
 


Tractor Supply (TSCO- $75.16) TSCO looks like a good risk/reward short after the high volume decline in late 2016 was followed by an above-average bounce which took the stock up over 20% in just the last three months, yet the rally now seems to be stalling out and could give way to a meaningful pullback lower to test last October's lows.  Short positions can be considered in TSCO with targets at $71.80, then $69.83, which would constitute a 50% retracement of the gains since last October.  For now, given the ongoing poor intermediate-term momentum combined with short-term rally starting to fade, TSCO looks like a far better short than long for the weeks and months ahead, technically speaking.
 

 

Fossil (FOSL- $25.21)   Additional losses look likely for FOSL and despite the recent carnage seen from late December, no realistic support looks likely until this makes a complete retracement of the rally from last November with minor support near November lows at $23 and more important areas down near $20.50.  This stock has already seen huge losses since peaking out in 2012, yet this minor stalling out since March of last year hasn't produced any real evidence that the stock is bottoming out.  It's attempts to breakout back in November proved to be false and resulted in nearly a complete reversal of these prior gains.  Now a final push down to new lows looks possible, and FOSL should be avoided in the short-term and/or considered for trading shorts with stops near $27.35.
 


Kohl's (KSS- $41.43)  Additional losses look likely for KSS after violating the uptrend from last year, which occurred last week on very heavy volume of around 6 times its normal average of 3.8 million shares.  Last week's trend violation makes the rally attempt look like a failure which now should result in a decline back to the low to mid-$30's at a minimum.   This stock has consistently been a laggard within the Retail space, with virtually no change in trend since 2000.  Now the move to multi-month lows last week should arguably result in weakness back down to challenge last year's lows.  While near-term momentum became oversold with last week's move, any bounce attempt should be used as a chance to sell into KSS, as last week's selloff occurred on such heavy volume that losses appear far more likely technically before this can stabilize.
 

 

Bed, Bath and Beyond (BBBY- $40.61)  Similar to KSS above, BBBY's rally has nearly been completely retraced in the last couple months and makes further weakness likely, in this case down to test former lows near $38.60 and below.  The stock's technical pattern took a turn for the worse when it violated a Head and Shoulders pattern going back since 2011.  BBBY has since lost more than 20% of its value and is down around 50% of its absolute highs from 2013.  However, insufficient signs of bottoming are present, and momentum remains quite weak and should allow this to see further losses in the weeks ahead, which should take this down to $38.60 and then the low to mid $30's.

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

 

Bullish Seasonality should outweigh near-term equity stallout

December 19, 2016

S&P DEC FUTURES (SPZ6)
Contact: info@newtonadvisor.com

2142-3, 2218-20, 2200-279-81, 2164-6    Support
2272-3, 2288-9, 2299-3k                           Resistance

 

SPXvWORLD.gif

The divergence between US and Europe has been widening most of the year and should continue to be monitored closely for any evidence of weakness in US equities and/or sufficient strength in Europe that support a bigger period of mean reversion and snapback in this ratio.  For now, Europe (shown in Blue) remains under its highs from last year

 

Equities have stalled, yet still haven't shown much signs of weakness and this might be postponed until next year.  The last five days have brought about massive volatility in bond and currency markets, yet precious little real progress in either direction for Equities.  The SPX finished the week within 2 points of its prior weekly close, while the DJIA is knocking on the door of 20,000 for the first time ever, a level that's more psychological than important technically, and should be exceeded into year-end.   Meanwhile, most momentum indicators remain overbought and the recent waning in the last couple days means that prices need to push back up to highs immediately to avoid at least a minor correction in the days ahead.   While a few other sectors have joined the rally in the last couple weeks, the outperformance is still largely dominated by Financials which seem to ebb and flow along with the movement in rates.(which lately as we all know, has been straight up) Breadth-wise, we've seen a bit of deterioration in recent days, which makes sense given the sideways action in prices, but despite Advance/Decline being back at new highs, the participation isn't as robust as we saw from February lows into May of this year.

Sentiment continues to be very optimistic, which might be expected given the combination of Election uncertainty being relieved, economic data beating expectations at a quicker rate, along with Equities heading into year-end on much better footing than most expected.  Readings by AAII, Investors Intelligence, Consensus, and CNN's Fear and Greed index all show investors to be as bullish as they've been all year.  While sentiment gauges at these levels can often precede pullbacks,  they're more difficult to come by in December, and often most declines are postponed until January, which given that only nine trading days remain in the year, looks increasingly likely.

Sector-wise, the Defensives have all begun to sprout up in recent days, showing some of the strongest outperformance of the week, with Telecom, Utilities and Consumer Staples all being within the top five sectors in the past five trading days. Financials continued their own recent dominance, and with yields still not showing much signs of reversing, still look to have a bit more to go on the upside.  The biggest change seems to have come with the recent stabilization and rally in Healthcare, while Technology has improved in recent weeks, two sectors which should be favored for outperformance between now and February.

With only nine trading days left in 2016, Seasonality should kick into gear in a bigger fashion over these last two weeks as equities are entering a traditionally very bullish time of year.  The Santa Claus rally period which begins the last five trading days of the year into the first two of the following year typically brings about returns of 1.4% gains since 1950According to Stock Traders' Almanac, Presidential Election year Decembers rank #2 for DJIA, and NASDAQ and #3 for the SPX.  So given that our recent rally has stalled out, but yet has not shown evidence of making any serious move to the downside, this churning could very well allow for upside surprises into year end before any volatility rears up in January.

For now, technically speaking, these seem to be the main reasons why rallies can still happen into year-end despite the overbought conditions and recent slowdown:

1) The 10-Year Treasury yield rally still doesn't show sufficient signs of being complete.  While the pace of the rise has slowed a bit, no real evidence is present for a turn back lower just yet.  Upside looks to be possible to 2.70-2.75%
2) VIX has moved back down to multi-day lows and looks apt to test if not break lows seen at 11.33with no evidence of any daily signs of exhaustion while weekly will require another 2-3 weeks of drawdowns which should coincide with equities moving back to new highs into end of year.
3) Financials have been consolidating at/near highs with no real signs of weakness.  Despite some minor slowdown over the last week, this hasn't led to any real technical damage.
4) Signs of both Healthcare and Technology joining the rally have occurred in the last two weeks, with XLK, MSH moving back to new highs which should lead to additional strength in the weeks ahead as mean reversion helps both of these groups show better performance.
5) Counter-trend signs of exhaustion (per Demark indicators) are present on daily charts of SPX, DJIA on a daily basis, but not yet weekly, and often the two need to be aligned before providing a bigger than average correction. 
6) Technical structure remains quite positive , with the recent push to new all-time highs not showing sufficient weakness to fade, and sideways consolidation not necessarily a negative
7) Seasonality remains quite positive for this time of year traditionally rewards Bulls, which given above-average technical structure, still looks likely.
8) Credit spreads continue to show a contraction which keeps Equities in a "risk-on" type environment.  Given that most market declines tend to start on the credit side with a widening out in spreads, the relative lack of this happening just yet is bullish.



TECHNICAL Long/Short Ideas:
Longs: 
  NVDA, NTAP, WAAS, APA, TXN, SLB, HPT, AVGO, MRK, EXP
Shorts:  VXX, YHOO, CRM, TRIP, TWTR, FLS, CCI, EEM



SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term Thoughts (3-5 days) : Bullish- The sideways grinding of the past week hasn't negatively affected the technical uptrend since November and despite some waning in breadth and momentum given this recent slowdown, the final nine trading days of the year likely should have an upward bias given the structure and bullish seasonality.   2273 will have importance on the upside, while 2243 on the downside.  Movement up above 2273 should result in a quick move to 2285-2300 into end of year.


Intermediate-term Thoughts (2-3 months): Neutral-  Equities are starting to look increasingly like a poor risk/reward after a huge lift since the Election that has carried prices well above the Bollinger band 2% Standard Deviation on weekly charts and up to the highs of the band on monthlies.  While the near-term view remains positive and should press up higher into year-end, the 2-3 month likely will have a noticeable "backing and filling" early next year after this most recent surge.  The longer-term structure for Equity indices certainly remains structurally bullish, despite the huge lift in Bullish sentiment coupled with overbought conditions and possible counter-trend sells in the making which might be present at year end.  Additionally the downturn in monthly momentum into last year still has not been properly recouped and should be a possible larger issue next year.  Most of these factors make it difficult to trust this move continuing too much higher, yet are just warnings only amidst a bullish backdrop of trends of higher highs and lows.

 



Charts below feature SPX, TNX, DXY, along with a few sector charts and other currencies, commodities of interest
 


SPX's daily chart shows five days of consolidation as part of this ongoing rally.  While evidence of upside exhaustion is present on daily charts which could be confirmed as early as Monday with a daily close under 2271.72, the last nine days of the year traditionally have a very bullish bias, and the combination of this positive seasonality combined with the current uptrend should allow for SPX to work its way higher up to 2285-2300 before any meaningful peak.  Downside should be limited to 2233 for now.

 


QQQ successfully broke out to new highs last week before pulling back Friday to consolidate this move.  Technically, a pullback to the base of a breakout typically marks an attractive spot to consider buying dips with upside targets near 125.  For now, neither daily nor weekly counter-trend exhaustion sells are present via Demark's indicators, so this minor weakness looks like a good risk/reward opportunity to buy.

 

 


Healthcare's ascent looks to have begun two weeks ago with the group's outperformance vs SPX which has exceeded the downtrend from early November and should pave the way for additional gains in the next couple months.  While the intermediate-term downtrend for the group remains intact from 2015, the recent stabilization and lift in the Pharma and Medical Devices group bodes well for further strength in the weeks ahead.  Momentum has turned bullish on daily charts and it would take just a move above $63 in XBI before Biotechs would join the rally.  Overall, this looks like an attractive risk/reward group given that mean reversion in the market looks to have begun.

 

 


Crude oil managed to pullback nearly all week after breaking out of its six-month consolidation range, but yet rallied back to recoup much of this loss last Friday.  For now, it's tough calling this a failed breakout, but rather a chance to buy technically for a move back to new highs.   Momentum remains positively sloped and movement back up above $53.41 should drive prices back to the mid-to-high $50s.  While this WTI Chart is important for how Energy stocks likely perform, it's insightful to note that in multi-currency form, Crude has already moved back to new highs for 2016, with Energy as a sector providing the best performance of any of the major S&P sectors this year, outperforming the next best sector, Financials, by over 500 bps YTD through 12/16/16.  In this daily chart, long positions are favored unless Crude were to move back down under $49.95 which would postpone the rally. 

 

 


This weekly US Dollar index chart shows why last week's breakout was so important, as prices moved up above peaks which have held one time already since last Spring.  This breakout has now resulted in the Dollar index accelerating to the highest levels we've seen since 2003.  No evidence of any counter-trend sells are apparent on weekly, nor monthly charts, which makes further strength likely next year with potential technical targets found near 110.

 

 


As might be expected, the Euro also made its own significant breakout last week, albeit to the downside, as this accounts for over 60% of the US Dollar index.  Closing down under 1.05 in EURUSD makes a move to Parity likely next year and makes this entire consolidation from 2015 just a large trading range which has now been violated.  The intermediate-term trend for the Euro has continued lower since 2008 and after the near-term two-year neutral range now has been broken, most minor rally attempts should be used to sell with downside targets potentially near levels which were reached back in the early 2000's.

 

 

2-Year Yields spiked up to the highest levels since the Financial Crisis last week, a steep ascent which along with the Dollar move, was one of the most pronounced Technical breakouts of the week.  The yield curve flattened out as a result, and upside technical targets lie near 1.35% in the short run. 

 

 

Ten-year Yield charts show the driving force behind what has largely served to boost Financials substantially in the last month.  Following the Election surge in yields, Financials and the broader stock market followed suit, and at this time, shows no compelling evidence that pullbacks need to happen right away.  Rallies in yield up to 2.70-2.72% in the next 3-5 trading days would provide a good area to consider buying Treasuries for a move back down near 2.40-2.45 in yield.  As this daily chart shows, yields have begun to take an even steeper trajectory than the uptrend projected from mid-November following the initial surge.  Sentiment has reached the most bearish levels in two-years for 10-year Treasuries with most Speculators starting to bet heavily on further upside for yields.  This likely should put at least a temporary ceiling for yields at levels just above.  However, between now and end of year, a bit more upside does in fact look likely.

 

 

This chart of the 5s/30s curve shows that despite the FOMC ramping up Fed funds rates at the recent meeting the back end of the curve has not moved nearly as quickly, causing a severe flattening in the yield curve of the 5s to 30s along with 10s to 30s.  Given that the US is moving towards tightening in a global era of monetary accommodation, attempts at normalization in the US are being possibly interpreted in the US as something which might hurt growth, as long rates have remained subdued.

 

One noticeable development which might be expected given a rapidly rising US Dollar looks to have affected Emerging markets negatively, as the Ratio of Developed to Emerging markets has broken out of a trend which has been intact most of the year.  After several years of outperformance, Developed markets had largely underperformed Emerging markets this year until late October right before the Election.  Since Trump's win, the combination of a rising US Dollar and rising US rates have resulted in severe lagging in Emerging markets, which on this chart, takes the form of Developed markets breaking out sharply vs Emerging.

 


VIX pullback to new multi-day lows should keep continued pressure on the VIX, leading to a test and break of early December lows into end of year.  Given that VIX doesn't reflect any signs of turning back higher from a counter-trend exhaustion perspective, this breakdown last Friday should provide for implied volatility to steadily decline into end of year, coinciding with a likely equity market rally.  For now, this downward pressure in the VIX and lack of any stabilization is one reason to expect that equities still have some tailwinds to move higher in the final nine days of the year.

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

Making Technology Great again- Large Caps leading the charge in Tech

December 12, 2016

S&P DEC FUTURES (SPZ6)
Contact: info@newtonadvisor.com

2144-6, 2218-20, 2200-279-81, 2164-6    Support
2270-2, 2288-3, 3k      Resistance

BWORLD.gif

Bloomberg World index rallied all the way back to new yearly highs after last week's pullback to support.  Its rally now has taken it over prior highs from September, but also higher than late 2015, which provides some extra confidence in this rally.  For now,

 

Participation in this rally is growing, and while near-term overbought conditions and bullish sentiment are minor concerns, the positive structure in US equity trends along with a pick-up in sector participation should help to fuel this rally into year-end.   Just in the last week we've seen pushes back to new all-time highs in the Consumer Discretionary sector, DJ Transportation Avg, Materials ETF (XLB) and the Technology Sector SPDR ETF (XLF) .  Four of the 11 major S&P sectors would stand to make new all-time high monthly closes at current levels, with Industrials rounding out the Materials, Discretionary, and Technology groups.  Amazingly enough, the 7% rally since the Election has added nearly $1.7 trillion in value, which has caused near-term momentum to spike back to rather lofty overbought levels.   The spike to new all-time highs in Small-caps over the last few weeks followed by Transports now confirming the Industrials move (from a Dow Theory perspective) are certainly positives.  Yet, a sharp move outside the upper Bollinger band for SPX on weekly charts and to the edge on a monthly basis is a definite concern regarding the longevity of this rally without any sort of consolidation.  While this might not materialize in December, it is a factor to watch carefully as the market enters 2017. 

Breadth has expanded, yet still some reasons for concern- When examining the internals of this rally, we have begun to some pick-up in stocks hitting new 52-week highs reach reached nearly 500 at the end of last week on NYSE, while the Percentages of SPX stocks trading above their 10 and 50-day moving averages have increased to near 87% and 75% respectively, the highest levels since July.   The Advance/Decline for "All Stocks" (excluding Fixed income) rose back to new highs in mid-November, while even the standard "all-inclusive' A/D line has just now pushed back to new all-time highs.   The key complaint concerns the Summation index, the McClellan based Sum of the McClellan Oscillator values as a "momentum of breadth" of sorts, which is just a fraction of levels hit back in July.  The lack of Technology participation of late could be called as a notable culprit in this regard.  All in all, quite a few indicators have turned more constructive.  Yet, still a few that have not, and should be watched carefully.  

Trump Rally? or Inflation expectations growing, while Economic data improves?  Many have taken to calling the Stock surge the "Trump rally" , a media savvy soundbite, but one largely based on psychology, more than any material change in the market.   Given that no turnover in government or Presidential/Vice-presidential switches have occurred, most of this stock surge has been driven by "Hope for Change" rather than our current "Hope and Change mantra for the last eight years.    Industrials and Financials have certainly made up the bulk of this move along with Energy, but it's notable that economic data has improved globally in the last month, with data beating economic expectations jumping to multi-month highs when examining the CESIG10- or Citigroup Economic Surprise index for G-10 countries, and this same index for US and Europe alone have both enjoyed a sharp upward trend in the last couple months.  A Ramp-up in inflation expectations that set yields moving sharply higher can be used to justify the Financials move, as the yield curve steepened sharply, but aside from this data, not much has materially changed to explain why markets would run 7% higher in a month's time.   Seasonality is the traditional fall-back to explain Positive performance in December, and happens frequently enough that it rarely pays to fight a surging stock tape, regardless of how bullish sentiment has become. 

Specifically for this week, the rally in Technology is worth talking about a bit more in detail, as the highest percentage S&P sector by capitalization (20%) has enjoyed a nice bounce at a very opportune time when Financials had gotten stretched and were in dire need of some relief.   This sector's move back to new all-time highs (S&P Information Technology index) last week is seen as a bullish move specifically for Large-Cap Technology which should be able to lift the broader group to outperform and keep this rally going a bit longer. While much of this has been Semi related, the larger group should eventually follow what's being seen in Large-caps.



The key technical takeaways in the Technology space:

1) Information Technology index hit new All-time Highs last week, clearing the highs of the consolidation that had held since September.
2) NDX(QQQ) hit new weekly All-time highs while Daily closes came within pennies of achieving the same.  Structurally the higher low as of December 1, followed by the sharp rally back to the highest closing level since October looked quite positive. 
3) XLK, the S&P Sector SPDR ETF for Technology, rose to the highest levels since 2000, and similar to S&P Information Technology index, cleared former highs from the last few months.
4)  Semiconductor stocks engineered a sharp rebound from late November weakness after the SOX lost 6% in the final week of November.  NVDA regained all of its decline after losing 10%, while ADSK, FSLR, MU, AVGO, WDC, JNPR were all up more than 6% in the last week. SOX managed to rally back to the highest levels since 2000, retracing 61.8% of the decline from 2000-2008.
5) Equal-weighted Tech has not yet moved to new highs, but remains in consolidation over the last couple months
6) Relatively speaking, Technology VS the SPX, when viewed as MSH (Equal-dollar weighted basket of 35 names from 9 sub-sectors) vs the SPX has rallied up to, but not yet OVER the downtrend from October
7) Neither Software not Tech Hardware indices nor ETFs have moved to new highs, but have made considerable progress in recent weeks, rallying to within striking distance of highs.  The recent move to new highs in S&P information Technology index and QQQ on a weekly close is thought to eventually lead these sectors higher, making it right to overweight them, expecting a similar move.
8) Demark's Counter-trend indicators (which show signs of exhaustion on a given move) on Tech, when viewing weekly/monthly counts on XLK, SOX, S5INFT index, MSH, all show the group to be close to, but not yet at levels which would suggest a top in place.  Thus, this most recent surge still looks to continue into end of year. 
9) Semiconductor stocks look to be close to peaking out vs most of Technology after a stellar run throughout most of the last seven months along with most of the last couple years.
10) Hardware looks more attractive than Software after a seven-month rally on the heels of a two-year downturn.



TECHNICAL Long/Short Ideas:
Longs: 
  APA, TXN, SLB, HPT, AVGO, HQY, MRK, EXP
Shorts:  TRIP, TUP, TWTR, AN, FIT, FLS, CCI, EEM



SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term Thoughts (3-5 days) : Bullish- Additional upside still looks possible for this week, despite the extent of the prior move.  Prices have indeed pushed up to near-term overbought levels, yet there remain no signs of upside exhaustion while seasonal tendencies should carry indices higher into year end given the recent momentum and structural patterns.  Near-term weakness should be bought for a move back up to 2270 which might be a better area for profit-taking into end of week.

Intermediate-term Thoughts (2-3 months): Neutral-  Equities are starting to look increasingly like a poor risk/reward after a huge lift since the Election that has carried prices well above the Bollinger band 2% Standard Deviation on weekly charts and up to the highs of the band on monthlies.  While the near-term view remains positive and should press up higher into year-end, the 2-3 month likely will have a noticeable "backing and filling" early next year after this most recent surge.  The longer-term structure for Equity indices certainly remains structurally bullish, despite the huge lift in Bullish sentiment coupled with overbought conditions and possible counter-trend sells in the making which might be present at year end.  Additionally the downturn in monthly momentum into last year still has not been properly recouped and should be a possible larger issue next year.  Most of these factors make it difficult to trust this move continuing too much higher, yet are just warnings only amidst a bullish backdrop of trends of higher highs and lows.

 



Charts below of the Tech sector, shown as Information Technology index, along with SOX, MSH index, XLK and relative charts of the sector
 


Technology just moved back to new high territory as seen by the S&P Information Technology index surpassing the highs of the last few months last week.  While Software and Hardware both could stand to strengthen a bit more to allow for relative charts to confirm what Absolute charts achieved last week, it's certainly a step in the right direction and makes the near-term trend bullish for this index.

 


QQQ managed to push all the way back to former highs last week, failing to record a new record high on a daily close, but successfully doing so on a weekly basis after a lengthy period of consolidation in the last few months.  Given the pattern of highs being at equal levels while the recent 12/1 low being substantially higher than the prior, the formation has taken on a more bullish shape in recent days.  A move back to new highs is likely in the weeks ahead, despite if minor consolidation takes place given this retest.

 


When viewing ratio charts of Technology vs SPX, or MSH index,( the equal-weighted index of 35 Technology names from nine various sub-sectors) vs SPX, this has failed to show the same degree of breakout as was seen in the S&P 500 Information Technology index in recent days.   The Downtrend for Technology in relative terms remains since October and until broken, it will be tough to suggest that Tech should begin to outperform materially,  Most of the strength occurred in Large-cap Tech and specifically the Semi group in recent days,  which should eventually spread to most other parts of Technology.

 


Semiconductor stocks managed to recover all of their recent losses in late November, after SOX lost 6% in the final week of the month before rallying to move back to new multi-month highs.  While near-term stretched in a fashion that could allow for 2-3 days of consolidation, the trend is bullish in Semis and should allow this rally to extend higher into year-end. 

 

Semiconductors have outperformed all other parts of Tech since August of last year as part of a larger period of outperformance vs all of Technology since 2014.  In the very short run, Semis stalled out in late November, and recently peaked after retesting this area, yet remain very much the group to favor in the short run and one to buy on any weakness.  Movement back to new highs in relative terms seems likely into end of year before any meaningful peak.

 

In Equal-weighted terms, Technology shows the same degree of choppiness in recent months which can be seen in both Tech Hardware and Software as they struggle to keep pace with the Semi group.   The chart above details the Equal-weighted Technology index vs SPX, showing that most of Technology has not yet joined the recent push to new highs seen in the QQQ and XLK on a weekly basis.  For now, this consolidation will need to move back to new highs to have some confidence of Technology as a group beginning a larger rally.

 

 

Semiconductor stocks vs Software, as shown by S5SSEQX vs S5SFTW (Bloomberg) have stalled out near where prices peaked out back last Spring which proved to be an important area of resistance for Semis vs the Software group.  Near-term, it's unlikely that Semis can show the same degree of strength that they've shown most of the year when compared to the Software group, as this ratio looks to be stalling out.

 

 

Microsoft (MSFT- $61.97) Movement back to new high territory after its two-month consolidation near where the stock peaked out in 2000 looks meaningful and should result in MSFT trending higher up to the high $60's in the weeks ahead.   The pattern has been quite bullish after moving up above prior highs, and now the recent multi-week sideways pattern is being exceeded by a price move back to the highs.

 

 

Facebook (FB- $119.68)  Tough to say too much negative about FB overall, despite the pullback from $130+ in the last couple months.  For now, prices look to have stabilized and a counter-trend bounce looks to be underway.  This should allow FB to rise up to $122 and then $127.50-$128 which would be initial selling areas for traders.   When looking at Facebook's long term trend from 2014, we see that the ongoing uptrend for this stock remains very much in place, and still precious little to suggest anything more than just a minor trend reversal from late October.  The stock looks like a good risk reward to buy anytime it dips down under $115 which it did into mid-to-late November.   For now, a counter-trend bounce looks to be underway.  Failure to achieve this which results in this pulling back again to take out $113 would be a more negative intermediate-term signal.  For now, FB should rally back to the mid-$120's before its next big test.

 

 

Xilinx (XLNX- $55.91) Structurally, XLNX looks to be one of the better positioned stocks within the group after its rally to hit new highs for 2016.  The longer-term chart shows highs from over two years ago which are now being tested and are providing a technical setup which appears like a long-term Cup and Handle pattern.   Gains to the highs $50s and/or early $60's look to be underway, which looks to be a decent target area following the stock's recent breakout. 

 

Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.  Newton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: HAS, INTU, AMT, and LRCX.  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC.

5 Top Technical Developments from this past Week

November 14, 2016

S&P DEC FUTURES (SPZ6)
Contact: info@newtonadvisor.com

2147-8, 2122-4, 2104-6, 2028-30    Support
2180-2, 2194-6, 2213-5                   Resistance

 

 

The post Election volatility is shown above, where S&P futures quickly lost over 5% from 8pm til 12 midnight on Election night, then recovered all of the weakness back, and then some.  This resilience is thought to be solely based on Treasury yields spiking along with Dollar/Yen, with SPX following suit.  The last three days alone have brought about near 8% gains.  Movement back to highs and above to near 2193-6 looks likely before any stalling out.


One of the largest reversals on record since 07/08 as markets record best weekly gain in at least two years. (5 years for DJIA) Last week was one for the record books.  Not only did the US markets soar back to within striking distance of new high territory (which did happen for DJIA) but did so in an amazing V-shaped fashion that yet again seemed to catch most investors off guard.   The initial plunge on election night in Futures erased nearly 6% from the highs between 8pm and 12 midnight, bringing Futures down to their daily limit, only to recoup the entire loss and then some, with the DJIA rallying over 1200 points from low to high. (While some ignore the DJIA given its price-weighting, it does have over a 90%+ correlation with the S&P)  All in all, the S&P 500 index managed to rally nearly 8% in the last three days, putting prices in near-term overbought territory, but on much firmer footing technically. 

Why the Rally?  Looking back, many scratch their head as to the reasons for the plunge and recovery, with many taking partisan stabs in saying with conviction that a Trump victory caused the decline, and others giving credit for the rally.  But who can say with any real certainty that this could be responsible for Both?   Which one was it really?  The fear of an uncertain world with Smoot-Hawley-like fears of high deficits and Trade protectionism, or the second coming of Ronald Reagan?  One thing's for certain.  Those who banked on declines initially likely failed to cover shorts at the lows.  And many who pared back gains likely failed to buy into the rally after such a steep ascent from Midnight Tuesday night into Friday.  As the saying goes though, sometimes when the Horse bolts out of the barn and runs away, it's proper to chase it.  Those who hope that the horse comes back can often be disappointed and are then faced with a very difficult task of when to start the search party late (re-enter the market at a much higher levels)

One things for certain, the global sovereign bond selloff has continued in a big way this past week, and Bond yields reversed course nearly exactly when Equity futures did Election night, around 12:00 Midnight, with both bottoming out and moving straight up.  The surge in yields is a far more credible reason for why Equities rose so quickly, as the global Financials space stabilized and turned higher in Europe along with Dollar/Yen moving up, creating a "risk-on" type environment where Algos kicked in and took equity futures much higher, without any rhyme or reason.  Short covering was attributed to some of this advance, with Goldman's Most Short Rolling index swamping the returns on US Equity indices with over 11% gains since 11/3/16.   Lack of positive market breadth was also a concern, as when tossing out Industrials and Financials last week, and even Technology finished the week lower as the giddiness of the "FANG" space finally gave way to some much needed sobriety.


5 Key Technical Positives which suggest additional gains still lie ahead:

1)  Russell 2000 Breakout on an absolute and relative basis- Amazingly enough, the RTY has gained nearly 12% since 11/3, moving up sharply to the highest levels since July of 2015.  This has helped Small-caps regain the trendline that was broken last month along with exceed the larger downtrend in the ratio of Small-caps /SPX which had been present since 2014.

2) 10, 30 year yield breakouts of the trendline from the last 3 years-  This jump in yields has helped the yield curve steepen dramatically coinciding with a big surge in Financials, as might be expected.  Though overdone at present, this is probably the most important technical development of the past week.  Further gains into year-end are likely for Financials after a brief consolidation given the shift in momentum, which is positive given the Percentage of composition within the SPX.

3) Breakouts in several Equity sector ETF's including Industrials, Financials along with Transportation - Looking over the last week, we saw impressive breakouts back to new multi-month highs for the Industrials- (XLI) along with Financials (XLF) while the DJ Transports exceeded former monthly highs to reach the highest levels for 2016 after a lengthy period of basing/consolidation.  While many of these moves have made the sectors near-term overbought, they're good structural moves which keep the indices bullish and are a driving factor to the Tailwind being seen right now in the Equity market despite the Technology weakness.

4) US Dollar Breakout which looks to be a real net negative for Commodities as seen in Precious metals plummeting last week along with WTI Crude falling to the lowest levels since early August.  The DXY closed last Friday at the highest levels since January of this year, rising right up to test prior highs from October following just a minor pullback.  This bullish technical action suggests additional US Dollar strength ahead

5) Upward Shift in Developed markets to Emerging markets-  This happened largely because of the Dollar breakout, but is a positive shift for US Equities given that Emerging markets have largely outperformed most of the year.  The Emerging market ETF, (EEM) broke down under the prior month's lows along with severing a multi-month area of intermediate-term trendline support.


Positives outweigh the negatives currently given snapback-   Overall, there are some Technical negatives of course,  which largely have to do with ongoing low level of breadth which would be expected to surge back to highs given this positive price action of late.  For now, we see several sectors rallying, but yet others are fading, so we've seen very little net change.  The Percentage of stocks trading above their 50-day moving has moved back up above 50% by a small margin, but is nowhere near the levels seen back in July of this year when this recorded over an 80% reading.  The Advance/Decline also lies far off the highs it made back in September, while the DJIA currently sits at all-time high territory.  While this has begun to rebound in a way that suggests additional gains can occur, the overall low relative levels compared to this past summer will have to be monitored closely.   Additionally, monthly levels of MACD are well off the highs seen back in 2014/5 despite markets being at/near all-time highs.  This had much to do with the selloff into August of 2015 continuing into this past January/February.  While gains still look likely, this will create a level of intermediate-term divergence that will be hard to snap.   Despite these negatives the positives listed in the list above, coupled with a very bullish seasonal picture for November/December and a healthy degree of skepticism regarding the levels of uncertainty present with a President-elect Trump make stocks still the place to be.   High prices not accompanied by breadth is an intermediate-term issue.  Yet not one to make ignoring bullish trends prudent.



TECHNICAL Long/Short Ideas:
LONGS: 
 HZN, RSG, NTES, AGN, RF, FDX, VMW
Shorts:  FLR, PM, TRIP, FOSL, EEM, GDX, PHM, ITB, IBM, ANF, TSCO,  HON



SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION

Short-term Thoughts (3-5 days) : Bullish-  Insufficient grounds to call for any type of meaningful weakness this week, despite S&P having risen 8% in just the last 3 sessions. Groups like Financials and Industrials are stretched, yet others like Healthcare and Technology might follow-through and take their place, if last Friday was any guide. (NASDAQ outperformance and Tech bounce) Technically the first key level lies up near 2180 and over that gives the chance to grind to over 2193 which looks increasingly likely before any kind of stallout.  Under 2122 would suggest there should be a more meaningful pullback which could give back 61.8% of this rise, but given the improvement in sector rotation, it's unlikely that a larger pullback gets underway.   Election year Novembers tend to be the best month of the year which could keep the rally afloat into early December before any stalling out. 

Intermediate-term Thoughts (2-3 months): Bullish-   The Election volatility failed to bring about any true weakness, and despite being down 6% from former highs, that proved incredibly short-lived and resulted in a sharp rally back up to near all-time highs.  Advance/Decline has begun to shift back higher and has broken a minor downtrend from mid-August which should allow for further strength.  Meanwhile, longer-term uptrend lines for SPX remain very much intact and the uncertainty has lessened a bit given the Election outcome, putting full focus on the December rate hike probabilities, which are back up to 84%.  While the negatively sloping momentum on a daily, weekly and monthly basis IS an intermediate-term concern, the bullish seasonality for this time of year should provide stocks with a healthy rally into year-end before any larger correction gets underway. 

 



Charts below show S&P along with various charts of Healthcare indices and sub-sectors on an absolute and relative basis.  


While S&P did seem to beak the uptrend from February lows when looking purely at an absolute trend guiding the lows from June, the actual price/time trend from February never got broken.  The Nov 4 pullback fell down to a place which was nearly exactly 268 days and price points up from February 11 lows, which often is a much more realistic area of support.  At present, prices have jumped above the minor trend from August but could continue pressing higher to test 2185 up to 2196 before any stalling out.

 


Transports broke out of a large base this past week, one of the more meaningful technical developments outside of the breakout seen in Treasury yields.  This move took the Trannies up to new highs for the year and the highest levels since July of 2015.  While certainly stretched here, any pullback should provide attractive buying opportunities into year-end, particularly in the Rail sector which looks more attractive than Airlines on a relative basis.

 


Russell 2000 provided the other meaningful move this week with its surge up above September highs, carrying this also to new highs for 2016 along with surpassing a giant Downtrend which has been intact in the relative relationship in Small-caps vs SPX since 2014.   This is a bullish development, and likely means that any equity drawdown in the weeks ahead proves premature.

 

 


Treasury yield strength managed to breakout above the long-term trendline which has been intact since late 2013, which happened both in 10 and 30 year Treasury yields.  While near-term stretched, this is a bullish move for yields and suggests a bit more upside into Year-end, which could be bullish for Financials.   The start of this acceleration higher began right near Midnight on Election night and was a much more practical example of why stocks rose vs suggesting President-elect Trump's speech sounded "Presidential".  The uncertainty had been eliminated, paving the way for most to focus on Rate hikes in December.

 


Financials managed to show some of the sharpest outperformance that this group has demonstrated in years with relative charts of XLF v SPX showing a very powerful move up to near 2013 highs.  While stretched, this is a bullish move for the group, and looks premature to sell other than just from a 24-48 hour trading perspective.   Seeing the relative performance since 2013, Financials have been laggards for quite some time, so this Yield rally is a real wake-up call for the group.

 

 


The Breakout in the US Dollar index looks to be on the immediate horizon after prices closed up at the highest levels since January while USD made a new intra-day and closing high.  This current technical pattern is bullish and suggests additional upside to test the levels hit back in late 2015 when the US Dollar index peaked near100.50.  This bullish trend could spell doom for the Commodities space and we saw some brief evidence of that last week with the falling Precious Metals and Energy.

 

 

Developed markets relative to Emerging markets experienced their largest one week gain all year as a result of recent Dollar strength.   As seen in this relative chart of the MXWO vs MXEF index, most broader indices have begun to outperform Emerging markets in a major fashion in the last few weeks, which goes for both equities and Fixed income.  Additional US Dollar strength looks likely which would translate into further Developed market outperformance over Emerging, and send this relative chart likely back to this past Spring's highs.

 

 

Gold is looking increasingly more vulnerable after it broke down in early October, failed to make much headway with its bounce, and now has sold off back under September lows.  As this daily chart shows above, the trend from early last year was violated on this recent weakness, turning the trend from neutral from within an uptrend, to bearish.   while the area near May lows at 1210 also represents a 50% retracement of the gains from last year, additional selling looks likely, and this doesn't seem to be any real major support.

 

 

MSCI Emerging Markets ETF violated key trendline support last week for the first time since this consolidation began in July.  This breakdown under prior monthly lows also violated an uptrend for EEM that had been ongoing most of the year, suggesting additional downside for Emerging markets as the US Dollar rallies. 

 

 

The NYSE Cumulative Advance/Decline for "All Stocks" looks to have made major headway this past week by not only regaining the area near prior lows from September/October, but also exceeding the minor downtrend from September highs.   This should help this trend higher into end of year and is one reason to have a supportive view of the near-term equity strength, despite breadth thus far still being somewhat subdued.

 

 

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