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Chinese Tech stocks nearing good support to consider- Short-term Bottoming out process looks to have begun for US

October 15, 2018

Contact: info@newtonadvisor.com

S&P 500 Cash Index
2729-31, 2710-1, 2690-2,  2633-5    Support
2775-7, 2825, 2852, 2940                 Resistance

 

Summary:  Equities remain trending down from mid-September as part of the intermediate-term uptrend from 2016 and 2009.  While the downdraft was particularly severe last week, livng up to October's reputation as a volatile month, it failed to do much damage to the long-term trends.  Thus, this is considered short-term only in nature as of now.  Momentum, however, has seen some damage as a result of the recent pullback when looking at weekly charts, with MACD crossing the signal line and turning negative.  Daily momentum meanwhile reached the lowest levels of oversold territory of the year and has started to diverge positively on hourly charts (a good signal for Bulls)  Arguably, last week's pullback never really gave the old fashioned "fear-based" BUY signal, as markets witnessed no real evidence of volume capitulation on the downside, nor outsized Equity Put/call readings.   Thus, it remains a tough market near-term to have much conviction that any low into mid-October is sustainable.   Seasonality argues for a sharp rally into most mid-term Election periods in early November.  Yet, seasonality this year has been remarkably unpredictable with better than average August and September performance while Q4 has gotten off to a much worse start than normal.  Overall, there stands a good likelihood that we haven't seen the last of the volatilty this year, and it pays to monitor the sector rotation carefully for evidence that Technology and Financials can begin to make a more sustainable comeback after recent weakness.  Bottom line,  Long-term trends are fine, but some definite signs that markets could be entering a new stage, with momentum and growth rolling over as the search for new leadership has begun.  Failure to mount a strong rally in the weeks ahead that turns down to challenge last week's lows would be a mild concern. Yet until the long-term trends are broken, this should remain a dip to buy into, as oversold conditions as part of long-term uptrends give way to opportunity near-term.  

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Overview:  Has the Market peaked for the year?  What are the risks?   I think this week's Barron's sums up my feelings perfectly with the title "The Easy part is now Over for the stock market.  I'm still of the opinion that stocks can likely make it back to new highs, even if the decline has a bit more to work out before bottoming.  Historically, the combination of near-term oversold levels coinciding with intermediate-term uptrends typically presents a compelling risk/reward to try to buy dips.  As mentioned above, however, the drop-off in weekly and monthly momentum presents a bit of a difficult scenario for how the future of this rally could play out.  This is a crucial distinction which is often lost on most market participants which hear the media claim "oversold" and think that translates into a buy signal.  Unfortunately this is often not the case, as oversold can stay oversold for quite some time, similar to how overbought conditions rarely lead to an immediate snapback.  Putting the various timeframes into perspective makes this a bit easier to get a handle on.   Looking at current markets,  it's true that momentum has gotten oversold on daily and intra-day charts.  However, weekly and monthly are nowhere near oversold  (Very different being oversold here in October 2018 than being oversold in March 2009 when all time frames were oversold)   Let's not forget that back in January, weekly and monthly momentum got to the highest overbought readings on those timeframes than we had seen in months, if not years.  Thus, rampant near-term oversold conditions now might not be a positive for stocks, if the weekly and monthly momentum start to trend down sharply.  They very likely could coincide with a breakdown which should give rise to selling opportunities in the weeks ahead.  For now, the combination of negatively sloped momentum with an ongoing uptrend tend to still favor the uptrend vs trying to be bearish when prices are down near weekly uptrend line support.  (But often this means it's necessary to rally sharply in a broad-based manner or else the bounce would be vulnerable to failing.)   Overall, let's take a moment and review the recent technical warning signs that were in place coinciding with this market decline and then a list of what's present now.

Warning Signs-  While many blamed Tariffs towards China for the decline, as earnings and economic data failed to show much disappointment, the push up in Treasury yields was the most direct technical catalyst that happened the day that stock indices broke down.  While many were shocked at the degree of the pullback last week, this type of market weakness is quite common during most years (Losing 5% over a two-day period)  But for those paying attention, there were ample signs that it was right to continue to be defensive heading into October.  Some of these warning signs (which we've discussed in the Weekly Technical Perspective for the last two months) are mentioned below, for the benefit of new subscribers and to refresh one's memory as to truly what was happening technically that could have started this.

1) Market breadth peaked in late August-  NYSE "All stocks" advance/decline along with Summation index both moved steadily lower throughout September
2) Divergences between US stocks and the rest of the world started to widen materially in August/September
3) Technology underperformance- This proved to be the true technical catalyst (25% of SPX) and peaked relatively in June and has lagged over the last few months with Semiconductor weakness particularly troublesome
4) Defensive outperformance - Looking back one month ago, Utilities had outperformed both Financials and industrials Year-to-date while showing better one-week performance vs Technology
5) Sentiment indicators like Investors Intelligence widened out to a Bull/Bear spread of +40 heading into September which largely persisted the entire month (Stock indices peaked 9/21) 
6) Stocks hitting new 52-week highs began to steadily drop off, but became particularly pronounced right before the early October part of the Decline, with stocks hitting new 52-week lows expanding to a greater number than New highs.
7) Negative momentum divergence on daily charts of SPX, DJIA, NASDAQ-  Prices had pushed back to new highs, yet momentum was lower and had failed to keep up pace
8) VIX diverged positively with the higher lows in September and early October failing to fall to new lows even as indices pushed higher
9) Demark's TD Sequential and TD Combo indicator had both signaled exhaustion signs right at the peak where stocks had topped out at 9/21, forming 9-13-9 patterns
10) Trend violation on 10/4.  While many of the factors above were in place throughout September, prices had held up in resilient fashion up until 10/4 when S&P, NASDAQ and DJIA all violated three-month uptrends from late June.  This was the first real warning sign that price was finally confirming what breadth and momentum had been suggesting for some time.  

How do things look now?   Let's take stock of where Stock indices are now and what might happen given the recent technical developments.

1) SPX, NASDAQ and DJIA have shown sufficient deterioration to bring about the most oversold conditions for 2018 thus far on Daily charts based on RSI, while Percentage of stocks >10-day moving average fell to 3%.    While this isn't enough to suggest buying, it is notable and worth keeping on top of .  Weekly and monthly obviously are nowhere near oversold.  

2) Weekly, intermediate-term uptrends are intact for SPX, DJIA and NASDAQ-  This is important, as the daily deterioration has not been sufficient thus far to violate the uptrend from 2016. 

3) Momentum has rolled over to negative on weekly charts and is showing negative divergence on both a weekly and monthly basis-  This is a larger concern, as MACD is negative  and has rolled over at a lower level than where peaks were registered back in late January.   Former market peaks in 2000 and 2007 both gave initial warning signs by flashing negative divergence as indices peaked out in these years.   (But it took the actual long-term trend break before this really was confirmed and mattered)

4) Demark exhaustion is not yet present on the downside to signal a possible low  (this is a potential factor that might limit the extent of the rally before a retest.  Of course, these signals don't necessarily "need" to occur at bottoms, but they typically do on daily charts after prolonged weakness

5) No evidence of "fear" just yet- While sentiment polls like AAII now show more Bears than bulls (which from a contrarian standpoint is a "plus", we haven't seen Equity put/call ratio spike above 1, nor has the TRIN registered readings over 2, which would be suggestive of volume capitulation on the downside.  Often near market bottoms, e see an abnormally high level of volume to the downside vs upside.  (both early February and April showed high TRIN readings)  (Meanwhile, right during the initial part of this month's decline, we saw abnormally LOW TRIN readings of .49 on 10/4, the day of the market break) while 10/8 showed .46, the lowest reading of the year) 

6) VIX Backwardation-  Normally markets will show SPOT VIX trading well above 2nd and 3rd month VIX when the Equity market is close to a bottom.  This can often persist for a period of time, but important to note when this has begun.

6)  Equal-weight Technology has broken down under two-year trendline support, indicating an important shift out of Technology, which at 25+% of the SPX, is troublesome.  Some other sectors will need to rush to take the place of Tech if this market is  going to make a bounce of any magnitude.  Financials and Industrials have been weakening lately, not strengthening, but Healthcare could be up for the task.

7) Growth has shown evidence of rolling over vs Value which began in early October.   The ratio of IVW to IVE, the Growth vs Value ETF, broke uptrend lines going back since April which looked to directly coincide with Technology rolling over in bigger fashion.

8)  Small caps and Mid-cap stocks have both been weakening meaningfully since June which is right when Technology peaked out.  Both the Russell 2000 and S&P Small-cap 600 index and Mid-Cap 400 index peaked out relatively vs SPX in June and have weakened to the lowest levels in the last two years.   This might be the start of the splintering of this rally longer-term, as historically we see Small caps and mid-caps start to weaken ahead of larger market peaks, where the Large-caps are the last group to fall. 

9) Treasury yields have officially broken out on the long end from long-term trend channels which have been in place for Bond yields since the mid-90s and have occurred globally, not just in the US.   This looks like an important development.  Whether or not Financials follows the move in Yields will be particularly significant in the months ahead. 

10) The US Dollar seems to be turning back lower which has sparked a breakout in many commodities  and should coincide with the start of a larger bounce in Emerging markets in the weeks ahead.  

This last topic is the basis for this week's writeup on the Chinese Internet names, as many have sold off sharply, irrespective to the companies fundamentals, and many are just reaching areas of support that make their stocks interesting from a risk/reward basis for buying dips.  Most of the stocks below exhibit the same pattern of having gotten very overbought, then correcting 30-50% off those highs to meaningful intermediate-term trendlines.  Near-term these are oversold, but yet one can argue the stocks have held longer-term trends and this makes them attractive to consider. 
 

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

Short-term (3-5 days):  Mildly bearish- It's thought that a bottoming process has begun, but still could allow for a minor pullback to new lows- 2690-5 area which might allow volume to show more capitulatory traits and allow Demark exhaustion to be completed before the rally gets underway.  However, the drying up in negative breadth is a positive lately, so any pullback at this point should be a chance to cut shorts and consider putting on longs in small size for a rally into the mid-term elections.  2710 is important as Thursday's low and if broken would likely allow for q quick 10-15 points before stabilizing.  Look to start adding longs and use any weakness this week to consider adding more longs, as this recent selloff likely should be nearly complete.  

Intermediate-term (3-5 months)-  Bullish-  No change-  Its thought for now that pullbacks should be buyable as no real intermediate-term weakness has occurred and momentum weakness is short-term only and has not affected the weekly charts.   If trend channels from late April are broken (2775-80 in SPX) ahd happen in NASDAQ, DJIA, while weekly momentum starts to rollover, it would be right to expect a larger correction.    (From last week:  The beginning of Q4 kicks off the most positive stretch for Equities seasonally within the four-year election cycle.  Barron's notes this past weekend that combining the fourth quarter of a mid-term election year with the first two quarters of the 3rd year of a presidential term averages 20.4% since 1950.  Mid-term Octobers also rank as top months for performance, with average gains in DJIA of 3.1% since 1950, with 12 of them being higher and five being lower since that time.   Impressive seasonal stats for sure, however, the mid-term 2nd and 3rd quarter performance certainly deviated from the traditionally sub-par performance which happens during these years, and SPX has now strung together six straight positive months.  Overall, given the monthly close at new all-time highs for US Equities, it remains difficult to be bearish on an intermediate-term view without any semblance of weakness heading into this seasonally positive time.  However, the recent breadth deterioration, Financials weakness, and momentum waning combined with bullish sentiment are real concerns to those that simply argue a bullish tune based on price alone without studying the underlying weakness.  Bottom line, it seems more likely than usual that October turns out to be far less positive than these seasonal stats suggest.  A selective stance is preferred with overweights in Energy and Healthcare, keeping alert for evidence of any downturn that might change the thinking that dips are automatically bought.  For now, price trends and seasonal factors outweigh the breadth concerns which have all been present for some time, with little to no effect.


10 Charts of China, relative and absolute and 6 key names to consider within the space

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China vs US-   When looking at relative performance of China vs US, we see that ratio charts show this relationship to be closing in on what appears to be a very good risk/reward opportunity to be long China for the first time this year.   While the breakout in 2017 helped to spark some outperformance, much of this was given back after this ratio peaked and consolidated these gains for most of this year (Indicating relative China weakness.  Now momentum has gotten oversold and we've seen the start of some positive momentum divergence just in the last couple weeks for the first time all year.  Additionally, Demark's counter-trend exhaustion indicators like TD Sequential and TD Combo are within 2-3 weeks of signaling "buys" which would help to lift this ratio chart and help it start to trend higher.  Given that many of these stocks have gotten very oversold (not just like US oversold on daily, but weekly and monthly oversold with losses greater than 20%) it seems like an opportune time to revisit China, thinking that US Dollar weakness likely helps Emerging markets and in turn, helps China to outperform relatively which could be in place by early November. 

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FXI- The Ishares China Large-cap ETF, looks poised to begin a rally of its own after recent pullbacks in price were not met by similar movement in momentum.  While the trend currently is undeniably negative, and breaking trends in the middle part of 2018 turned the trend bearish on this group technically, it looks wise to consider revisiting now given that many have gotten very oversold.  Last week's ability to finish the week well up off the lows was a positive sign.  Looking forward, regaining $43.63 would be a positive structurally, helping FXI to get back up above September highs.  Additionally, this would also break the trendline which has kept this trend bearish most of this year.  

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Developed vs Emerging markets look to be peaking-  Bodes well for EM-   Emerging markets very well could be on the verge of a larger comeback if this relative chart of Developed v Emerging is any guide.   The ratio chart of MXWO vs MXEF has shown evidence of stalling out right as prices near the highs made in the latter part of 2015.   Counter-trend exhaustion is in place, per Demark which has signaled its first weekly TD Sequential sell since this rally got underway shortly following the US Election two years ago.  Momentum got overbought, and now is gradually waning and shows RSI having dropped back down under 70 after nearly six months of overbought conditions.   This likely can pave the way for Developed markets to give way to relative weakness vs Emerging and could be bullish for China if Emerging market equities and currencies start to lift in the weeks/months ahead.  The recent rolling over in the US Dollar seems to be particularly important in coinciding with the recent lift in commodities which has occurred in the last couple weeks.  Overall, while just one small  piece of the puzzle, the combined warning signals on this ratio chart seem to favor Developed markets starting to pullback vs Emerging and could allow for a greater than normal bounce.  

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Alibaba (BABA-$147.29) Good risk reward now at trendline support after 35% drop. BABA looks poised to begin stabilizing after its recent 35% drop from highs made earlier this year.  Technically speaking we've seen the stock retrace 50% of the prior gains from mid-2016 just in the last week while also reaching levels that line up with a larger area of trendline support.  While the downtrend for BABA is very much ongoing on a weekly basis over the last six months, it's important to note that its two-year trend remains positive and the stock has just pulled back to test this area of significance, right near $135.  While a serious rebound back over the red downtrend is vital to expecting that bounces turn into an intermediate-term rally and not just a short-lived rebound, it looks right to position long in small size given this confluence of support, looking to add in the weeks ahead on any test of last week's lows near $135, expecting that the stock should be near a formidable level of near-term support which could prove important in helping this establish a good bottom.  


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Tencent Holdings Ltd. (TCEHY- $37.87) Expect stabilization within this downtrend and a bounce to come.   Similar to BABA, TCEHY has had a very tough road this year, falling nearly 43% from early year highs and giving up nearly 70% of the rally from late 2016.   Weekly trends are certainly still very much bearish, but momentum has reached oversold levels and have started to show some positive divergence for the first time in nearly seven years.  As weekly charts show, this area near where the stock bottomed last week also intersects an uptrend from early 2016 and looks to have provided support to the recent correction.  Overall, this will take some time before the trend can truly start to shift from down to up on a weekly basis, but this appears like an excellent risk/reward area to take a stab technically, as the combination of oversold conditions coinciding with multi-year trendline support should help this start to bottom out in the weeks ahead.  Movement back over $42 would signify that the rally has begun, and investors could consider adding to longs.  On the downside, any pullback to the low $30s in getting back down to test last week's $34 level should be an excellent time to consider buying technically speaking, despite the ongoing downtrend. 

 

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Baidu (BIDU- $204.36) Recent drawdowns have taken BIDU down to levels coinciding with the trend from 2016, making this an interesting spot to consider initiating longs for an upcoming rebound.  Last week's pullback managed to close up meaningfully off its lows, right near this trendline, while prices generally have given back a bit more than half of the rally from 2015.  However, technically the stock's pattern is much more choppy and neutral in the last couple years than many names discussed here which have dropped 50-60% of the rally up from a few years ago.  Thus, on rebounds, BIDU could potentially be stronger in its rally efforts.  Overall, BIDU's key area of importance lies near 220, and when exceeded, one could add to existing longs, expecting that the downtrend is starting to give way to BIDU starting to trend back higher.   On the downside, pullbacks under 190 would be near-term damaging to this trend, but momentum indicators like RSI show the drawdown to have taken this to near oversold territory for the first time since late 2015.  

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NetEase Inc. (NTES-$220.88) After giving back nearly 50% from its peak early this year, NTES finally looks to be closing in on levels that have importance and could help put in a tradable low for this stock in the weeks ahead.  The violation of the steeper uptrend from 2016 caused the acceleration seen most of this year, (It's almost always important when yearly trends of support or resistance are broken)  The retracement of recent months has caused this to give back roughly 50% of the prior rally from 2012,  so both on an absolute and relative basis, one can make the case that the stock is growing closer to meaningful support.  On the downside, it's important that any further weakness not violate 180 which would result in one final pullback down to near $150-5.  On the upside, the ability to get over $240 would help this start to trend meaningfully higher, so this is the key area to watch which would exceed the intermediate-term downtrend.  

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Momo Inc. (MOMO- $37.65) MOMO looks attractive from a risk/reward standpointgiven its near 35% selloff from highs seen back this past Summer.   In this case, the stock has held up quite a bit better than some of its peers, which should make this rebound in stronger fashion when this group starts to trend back higher.  MOMO's weekly charts show the pullback from June which failed to break the uptrend from 2016 and now the stock looks to be trying to stabilize after last week managed to hold prior lows and rally up to the highs of its weekly range.  Overall, a move back up to test highs seems very possible in the months ahead, and MOMO looks appealing to consider buying in small size here technically, with plans on adding on any further pullback to the low 30s. thinking that this is meaningful support which should not be violated anytime soon.  Overall, this seems attractive as a risk/reward long given that the stock has held up better than many other Chinese Technology stocks as its held up in the upper quadrant of its range in the last couple years.  Meaningful support lies near its uptrend from 2016, near 31.
 

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YY Inc (YY- $73.02) -Minor evidence of stabilization after YY gave back 61.8% of the prior rally from 2016.  YY trended sideways for nearly three years before its breakout in mid-2017.  This resulted in nearly a quick doubling in price before giving back most of those gains into September.  It did find good support near the 50% retracement level near $87 ,and then when broken, proceeded to drop down to the low 70's.  Despite the recent pullback to new lows in Shanghai Composite, YY has trended sideways in the last six weeks, giving some indication that its beginning to act a bit better. Rallies back over $78 should help this test and then exceed the former lows broken near $87.  Further gains up to $100-5 can't be ruled out, but it will take a move over $110 to think this has begun a new uptrend, as opposed to just bouncing from oversold levels.  Weekly closes back under $67 would postpone the rally, and one should hold off on buying weakness, as this could lead down below $60 temporarily before this stabilizes.  For now, the act of holding up while China has fallen in the last 2 months makes this one to consider buying into, expecting a snapback rally.

Equal-weight Technology dropping to new relative lows could make correction extend

October 8, 2018

Contact: info@newtonadvisor.com

S&P 500 Cash Index
2883-5, 2864-5,  2823-35, 2817    Support
2916-7, 2923-5 , 2945-6                Resistance

 

Summary:  Trends remain near-term bearish in the short run, with US Stock indices having rolled over to violate 4-5 month uptrends as prices finally gave way to join momentum and breadth which had largely peaked out in late August.  Meanwhile the broader intermediate-term uptrends remain very much intact.  Therefore this shakiness which began late last week remains just some seasonal volatility in a month where such volatility happens to be very common, and until larger trends show evidence of giving way, this pullback likely will turn out to be buyable into mid to late October ahead of the mid-term elections.  Meanwhile, Bonds have broken down both domestically and abroad, with US 10-year Treasury yields jumping to the highest levels in more than five years and bond yields exceeding long-term trends going back since the mid-90's.   The Dollar remains choppy, range-bound in recent months, while more positive in the near-term, as prices have carried up to near former highs and stalling.  Additionally, commodities have begun to bottom out, with the Energy rally leading Grains, Softs and precious metals to also begin to lift.  Overall, a market which remains one of many moving pieces but which sector rotation up until last week was able to bail out weakness in Technology and Financials.  The CBOE Volatility index, meanwhile has started to edge higher, and as daily charts below illustrate, last week's close successfully exceeded the entire trend from late June while having shown higher lows in the last couple months.  It's thought that a technical spike to the low 20s is possible in the next couple weeks before volatility starts to compress again, and for now, it's right to own implied volatility, expecting this could lift in the volatile month of October. 
 

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Overview:  Last week finally saw the much anticipated volatility as stock indices fell to match what breadth and momentum had been saying could happen for the past month.  The degree to which bond yields spiked last Thursday seemed to kick off an exodus out of risk assets and both stocks and bonds moved in unison with yields reaching the highest levels seen since 2011.   Most breadth indicators like the Advance/Decline and Summation index, had peaked out in late August and spent much of the last month falling, even as stock indices were working their way higher.   Technology continued to lag with drops in Semiconductor and Hardware names falling, and Discretionary also rolled over with Retailing starting to weaken, along with continued pressure in Homebuilding names.  Even healthcare wasn't spared, with Biotech (XBI) dropping to the lowest levels since May.   However, perhaps the most curious move came out of Financials which failed to keep up with yields, and despite a minor bounce last Thursday, still haven't moved up meaningfully enough to suggest any sort of change in trend.    Overall, given the ongoing negative slope in momentum while breadth has moved to multi-month lows, some time of a correction is overdue and finally looks to be underway.   Ironically, just as August and September dramatically outperformed expectations, turning in good performance in a seasonally weak time, October now looks to have the potential of being much worse than expected just as most have been talking up how bullish Q4 should turn out. 

Bottom line, we'll see the extent to which corrections could prove short-lived and allow for just minimal damage before prices start to stabilize.   At the close last Friday, SPX and NDX had both violated four month uptrends, yet remained above longer-term areas of support drawn arithmetically from late April.  This area should be tested, which intersects near 2823 for SPX, while the larger area of support lies near 2779 which would be a daily 1x1 price/time angle from the February 2016 lows.  Technology has shown evidence of turning lower, and given that NYSE new 52-week lows are spiking to multi-month highs while momentum and breadth are already bearish and dropping, a further pullback in price is expected in the next couple weeks.  If Fear starts to pick up on this decline and we see an outsized amount of volume into declining vs advancing stocks in the near future while prices remain above intermediate-term trendline support, then it should be right to buy dips ahead of the election.  However, if channel support is broken on SPX, DJIA and Nasdaq from late April lows, this could allow for a larger correction to test areas just under 2780 in SPX.   For now, a defensive stance in equities still looks correct.

Bond yields meanwhile look stretched, but should begin at least minimal pullbacks sometime this week which could take yields lower in the near-term after huge spikes.   Thelarger trend however, looks very much negative technically for Treasuries along with UK Gilts after yield breakouts of trends going back at least the last ten years, and in the case of US treasuries, yields accelerating higher in breaking out of 20+ year trend channels.   Meanwhile the US Dollar looks stretched and could begin to pullback in the weeks ahead, particularly vs some of the Emerging market currencies, while commodities look to be starting at least a minor bounce.  It remains right to favor Energy within the commodities space ahead of November, as Crude, Gasoline are showing very good signs of momentumlately and last week's late pullback should be buyable.  At present, Energy still looks more attractive than the metals, but this could show signs of changing by month's end.  Until there's evidence of crude starting to weaken,  this should still be favored above the metals complex for further gains in October.   Additional highlights, summary and charts below.


Recent developments important to highlight heading into this week:
1) Technology sold off to new monthly lows in Equal-weight terms vs SPX, breaking down under Sept lows
2) US Treasuries have started to correlate positively with Equities, with last week's meaningful selloff also coinciding with Equities weakening.  
3) Small-caps and Mid-caps have begun to accelerate lower lately, after both peaked out vs SPX in June.  The last two weeks saw meaningful underperformance
4) Biotech could be a source of near-term weakness within Healthcare after XBI broke down to new multi-week lows last week
5) Energy still favored for outperformance and XLE showed some evidence of playing catchup to both OIH and XOP last week, breaking out relatively vs SPX
8) Europe weakness still underperforming US pullback and should still lag in the next few weeks.  Patterns on SX5E, SXXP, DAX look far worse than US equity indices
9) Breadth and momentum gauges have turned down more sharply and after two late week declines, these haven't given any indication of positive divergence, but have movedlower with price, which is a negative
10) Commodities have been showing strength in the last few weeks, despite a rising Dollar and rising yields.  Energy strength has been followed by Metals, and Softs strength, which would likely accelerate if/when the Dollar turns down.   This should lead to further bounce in Emerging markets and Materials

 



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

Short-term (3-5 days):  Bearish- The near-term trend has turned bearish after the break of 2886 in SPX cash last week.  Pullback looks to be underway that could take S&P down to 2823-35 and below that to 2775-80 before this is complete.  The selloff in the bond market directly coincided with Equities starting to rollover last week and we saw Technology break support relative to SPX which is important given its 26% weighting in SPX.  Breadth and momentum have been negative and downward sloping while not yet signaling any real support after just a few days of decline.  Yet, looking back, S&P ended up peaking on/near 9/21.  For this coming week, getting under 2869 in SPX cash would allow for a final pullback into late this week (2873-S&P Futures)   To have any sort of confidence that this move was just a few-day pullback, we'd need to get back up above 2921-SPX, yet it's imperative to see Technology and Financials start to stabilize and turn back higher relatively as both groups have been under pressure lately. 

Intermediate-term (3-5 months)-  Bullish-  No change-  Its thought for now that pullbacks should be buyable as no real intermediate-term weakness has occurred and momentum weakness is short-term only and has not affected the weekly charts.   If trend channels from late April are broken (2775-80 in SPX) ahd happen in NASDAQ, DJIA, while weekly momentum starts to rollover, it would be right to expect a larger correction.    (From last week:  The beginning of Q4 kicks off the most positive stretch for Equities seasonally within the four-year election cycle.  Barron's notes this past weekend that combining the fourth quarter of a mid-term election year with the first two quarters of the 3rd year of a presidential term averages 20.4% since 1950.  Mid-term Octobers also rank as top months for performance, with average gains in DJIA of 3.1% since 1950, with 12 of them being higher and five being lower since that time.   Impressive seasonal stats for sure, however, the mid-term 2nd and 3rd quarter performance certainly deviated from the traditionally sub-par performance which happens during these years, and SPX has now strung together six straight positive months.  Overall, given the monthly close at new all-time highs for US Equities, it remains difficult to be bearish on an intermediate-term view without any semblance of weakness heading into this seasonally positive time.  However, the recent breadth deterioration, Financials weakness, and momentum waning combined with bullish sentiment are real concerns to those that simply argue a bullish tune based on price alone without studying the underlying weakness.  Bottom line, it seems more likely than usual that October turns out to be far less positive than these seasonal stats suggest.  A selective stance is preferred with overweights in Energy and Healthcare, keeping alert for evidence of any downturn that might change the thinking that dips are automatically bought.  For now, price trends and seasonal factors outweigh the breadth concerns which have all been present for some time, with little to no effect.


10 Important charts which illustrate some of the key technical moves of this past week and what might be expected going forward



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SPX-  Trendline break likely results in weakness to the lows of SPX larger six-month channel, but still looks near-term only.   The weakness last Thursday/Friday managed to finally violate the uptrend which had been tested no fewer than three times since started in late June.  Signs of negative momentum divergence ( price moving higher, but momentum not following suit ) had been ongoing for the last month, and we've seen evidence of Technology starting to rollover along with Financials (despite Thursday's bounce)  Overall, gauges of technical momentum like MACD are negatively sloped on daily charts and given the recent uptick in bullish sentiment, (with bullish readings as high as this past January) further near-term pullbacks look likely before this move is complete.  Support on this move initially looks to come in near 2832 for December S&P Futures and 2823 for SPX Cash.

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SPX weekly shows extreme negative momentum divergence compared to this past January which will likely continue to be an issue for markets heading into next year.  At present, the move to multi-week lows last week likely should retreat to test the larger uptrend from earlier this year.  The area at 2820-35 is likely to prove pivotal.  Several key points to make on this weekly:  first, weekly momentum does remain positively sloped, so despite the divergence, weekly trends remain intact and positive at this time.  Second, no evidence of counter-trend exhaustion is complete on the SPX.  Thus, while the divergence is a larger issue, for now, drawdowns likely find support near this uptrend and should be buyable.  Breaks of this would be far more problematic for Q4 and at this time, are not expected right away.  

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US 10Year Treasury notes breakout last week provided the catalyst last week for Equities to turn lower, despite the brief bounce in Financials.  As this monthly chart shows, yields have reached the highest levels since 2011, while successfully surpassing the long-term trendline channel that has been in place since 1994, over 24 years ago.  After two successful retests over the last couple decades, this trend looks to have been broken not just with US Treasuries and long-term bonds, but also with many European sovereign bond yield charts.   Near-term, it's likely that this rise stalls out and could backtrack in the next 1-2 weeks.  However, the long-term breakout at this point looks very much in place after last week's yield rise.  So near-term pullbacks in bond yields should represent chances to sell Treasuries. 

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The Energy complex remains one of the better areas to favor technically in thismarket that has gradually begun to lose steam in recent weeks.   Charts above highlight the XLE vs SPX ratio chart, showing Energy breaking out of minor trendline resistance.   Thus, continues to get stronger, and just in the last week we've seen XLE start to make progress to join the strength seen in OIH and XOP.  There remains little evidence of a WTI or Brent Crude peak at this time and still likely that prices can push up into the early November sanctions vs Iran, despite some recent bearish inventory builds.  Overall, this minor breakout in relative terms should allow for further Energy outperformance as WTI and Brent Crude both turn back higher for a push up through the balance of October.  
 

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Equal-weighted Technology has shown convincing evidence of rolling over in the last few weeks which supports the view that Technology should be avoided technically in the near-term until this correction has played out.  This is but one example of some of the sector rotation which has been ongoing in US stocks lately, where one group falls by the wayside, giving rise to strength in another.  In recent weeks, both Financials and Technology have been waning, with more evidence just last week that Technology has further to go in showing a larger correction.   Relative charts of the SPXEWIN index (Bloomberg) which is an equal-weighted Tech index, has broken down vs SPX to new monthly lows violating the trend going back since 2016.  This is a particularly damaging sector breakdown given that Tech represents over 25% in the SPX.  

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Equal-weighted Consumer Discretionary breaking down vs Equal-weighted Consumer Staples-  The ratio chart of Discretionary to Staples has violated the trend going back since late July, something which argues for a more defensive tone in October as Staples have been gaining ground to the expense of Discretionary.  This Equal-weighted version of this ratio gives a much clearer way of seeing this sector rotation unfold in a way where the large-caps don't dominate the picture.  Overall, the next two weeks should bring about further lagging from Discretionary relative to Staples and from an ETF perspective, one should favor RHS over RCD, expecting more relative underperformance out of RCD. 

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Growth vs Value has also broken trendlines going back since April over the last couple trading days.  This has been a nearly uninterrupted uptrend for Growth vs Value since the Election, but is starting to show increasing evidence of stalling out and turninglower.  The ratio chart undercut the early September lows as of last week which also violated the longer-term trend from April.   IVW vs IVE is this ratio, which now looks to be rolling over.  One should choose value, or IVE as a preferred source for outperformance in October, expecting this trend to turn down even further.  
 

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NYSE new 52-week lows have expanded now to the highest levels since early February. This daily chart shows 140 new 52-week lows as of last Fridays close, greater than the amount shown for Bulls, which numbers 22 as of 10/5/18.  While the bond selloff does indeed account for a number of new lows, this acceleration in the chart and breakout typically signals a cautionary time, and given the breakout above five former peaks in Newlows, its likely that further upside in this New Low ratio could occur early this coming week.  

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Turning to commodities, Sugar is the latest example of a recent downtrend in this area which now looks to have given way to turning back higher.  The last few days oflast week saw Sugar break out above early September highs which signifies a bullish breakout above this longer-term downtrend line which has been lower throughout the year.  Rallying to new multi-month highs is bullish near-term, and likely carries this up to 13.50 without too much trouble.  The commodity rally looked to have gotten underway right near 9/20 and started out with metals following Energy as well as grains making a big bounce, while the Softs have slowly but surely also begun to participate.  If the US Dollar starts to make a larger pullback in the weeks ahead and start to weaken into 2019, this will help the bounce in the group begin to extend much more.  For now, near-term strength in Sugarlooks likely  and one should be on the watch for a more broad-based move higher out of commodities. 

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Emerging market currencies have begun to show increasing signs of trying to stabilize lately and the JP Morgan Emerging market currency index has triggered its first weekly counter-trend exhaustion buy signal since the decline began to accelerate sharply early this year.  This will take some time given the degree of downward momentum being seen in this index, but similar readings look close for Emerging market stocks as well.  This should allow for a snapback in the EM group at a time when most had begun to avoid the EM space, and recent BaML Monthly Portfolio manager sentiment showed a very negative bias towards Emerging markets which means from a contrarian standpoint, both the equities and currencies could begin to work much better in November and December.

Energy leads while Market breadth divergence reaches extremes

October 1, 2018

Contact: info@newtonadvisor.com

S&P 500 Cash Index
2897-2900, 2883-5, 2864-5,   2830, 2817    Support
2916-7, 2923-5 , 2945-6, 2960-3                  Resistance

 

Summary:  Stocks have continued to show resilience in recent weeks, bucking the trend of poor seasonal tendencies for mid-term election years, and ignoring much of the DC drama that many thought should be important in potentially derailing the rally.  Markets now enter the seasonally bullish mid-term month of October, which has averaged 3.1% gains since 1950 (12 higher, 7 lower) and enter what's widely considered to be the best three-quarter stretch of the Election cycle.  Data from this past weekend's Barron's shows that Q4 in mid-term election years combined with the 1st and 2nd quarter in third-term Presidential years  has averaged a whopping 20.4% for the DJIA and 21.1% for the S&P over the last 70 years.   (Whether to pay attention to these stats given that the mid-term performance far exceeded expectations is a different story)  Europe meanwhile has slumped with the EuroSTOXX 50 barely positive for the month of September and both DAX and IBEX35 negative.  Whether or not Europe can be counted on to show some mean reversion snapback as the ECB gets set to dial back QE at a time when Italy and Greece might face fiscal issues is a different story.  But the real story is the extent to which global bond yields have begun to turn up sharply again while most Financials, both US and European, have not paid attention, and have indeed been moving steadily lower.  The Dollar meanwhile looks to be at areas which might stall out and turn lower, which could help Emerging markets into end of year.  With a little more than a month ahead of US mid-term Elections, investors seem fairly confident that gains can continue uninterrupted and markets have done little to prove this thinking wrong.   Yet, the divergences have grown to some of the greatest levels all year, making the index strength a bit of a mirage to the underlying sector rotation and negative momentum divergences playing out.   While right to stick with this trend until some evidence of shakiness arrives, this is starting to look increasingly likely as markets enter the notoriously volatile month of October.  Overall, it's right to own implied volatility at these levels, and be particularly selective, with a keen eye on the 4-6 month uptrends for stocks.   The chart below highlights the MSCI World index which has moved higher for its third straight month and while not at new highs, has not shown much signs of breaking the two-year trend from 2016 which will be important to pay attention to.  Momentum has waned, as might have been expected following the lackluster rally following the big drawdown from late January, yet, its proper to respect this trend until given reason to doubt it otherwise. 

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Overview:  The last few weeks have shown without any doubt that this is a market of a LOT of moving pieces, to say the least.  While Financials fell to new relative lows of the year, other groups like Healthcare gained sufficient strength to take on the top spot in performance for a 1 and 3 month period, gaining rapidly on Technology.  Transports and Small-caps have been losing ground lately, while Energy has been able to slowly but surely start to turn higher as both Brent and WTI Crude have begun to accelerate higher.   Breadth has been lackluster as has momentum lately, but these are all concepts we've discussed before, and simply haven't amounted to much.  While it's right to put more weight on actual price action than to make too much of lagging breadth, when the divergence grows as great as markets are showing now, with McClellan Summation index at the lowest levels since May and NYSE New highs having slumped to 54, the lowest levels since late June, it makes it important to pay attention.  

The Media in many Financial publications this past weekend highlighted the simple fact that markets just "didn't care" about last week's ugly judicial panel hearings and instead are focused on bullish earnings and the economy.  Unfortunately, it's always difficult to know when markets "care" and when they don't.   Investors are very much tuned in to earnings and economic updates constantly, so this tends to be an excuse that is rarely one to lean on for why markets are moving higher, or lower for that matter.  When corrections finally do arrive, investors will surely still be paying attention, yet most will likely scratch their heads as to why markets are falling until the latest narrative of the day is blamed for the decline.  More often than not, market prices move in fairly well defined patterns that have more to do with sentiment, seasonality and market cycles than anything to do with politics, or even earnings and economic data for that matter.   The second fallacy to take note of this week comes courtesy of Stock Traders almanac, the indispensable guide to having seasonal trends at one's fingertips.  We're told that this coming month and nine-month stretch is sure to be bullish, given trends going back since 1950 (which i've mentioned above)   However, should investors be paying attention as closely to this data to support their bullish leanings if the past few months simply have not worked as they should have with regards to mid-term election year seasonal tendencies.  If anything, this suggests that we're in a very different time indeed, a strange period rife with reasons to be afraid based on tariffs, trade war and political upheaval, yet reasons to be optimistic given the economy and FOMC's rate hike plans given their rosy economic outlook.  


The following seem important heading into this week:
1) Financials selling off to new relative lows for the year vs SPX
2) NYSE New 52-week highs are at 44 now, well below comfortable levels given new monthly closing highs
3) VIX holding up firmer than expected given push to new highs by Equity indices
4) Emerging markets have begun to show some outperformance and EEM is challenging key trendline resistance
5) McClellan's Summation index, fell to the lowest level on a weekly close since May. 
6) Equity put/call ratio fell into the low 50's using a 5-day ma which seems overly complacent
7) Healthcare outperformance has carried this sector to #1 performer on 1 and 3 month basis
8) Europe sold off sharply on Italian election results, & DAX fell in the month of September
9) Energy managing to outperform as Crude moves higher- Good likelihood of Brent reaching high $80's
10) Cryptocurrency volatlity reaching very low levels as patterns reach the apex of triangles- Large move coming soon

 



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

Short-term (3-5 days):  The trend will remain bullish until 2886 is broken in SPX cash, 2883-S&P Futures.  While the downturn in Financials is a concern, there hasn't been sufficient weakness in other sectors to justify any broad-based weakness, and we've still seen sectors like Healthcare and Energy come to the rescue to help keep the recent uptrend intact.  The divergences in both breadth and momentum are also important and negative, but it's important to see that reflected in price, and thus far, indices have been able to push higher and ignore all these warnings.  2940 will be important on the upside for this week, representing 9/21 highs, and above that allows for additional upside to 2957-9.  On the downside- under 2883 will lead to a test of September lows at 2864, with strong five-month uptrend line support near 2823. 


Intermediate-term (3-5 months)-  Bullish-  The beginning of Q4 kicks off the most positive stretch for Equities seasonally within the four-year election cycle.  Barron's notes this past weekend that combining the fourth quarter of a mid-term election year with the first two quarters of the 3rd year of a presidential term averages 20.4% since 1950.  Mid-term Octobers also rank as top months for performance, with average gains in DJIA of 3.1% since 1950, with 12 of them being higher and five being lower since that time.   Impressive seasonal stats for sure, however, the mid-term 2nd and 3rd quarter performance certainly deviated from the traditionally sub-par performance which happens during these years, and SPX has now strung together six straight positive months.  Overall, given the monthly close at new all-time highs for US Equities, it remains difficult to be bearish on an intermediate-term view without any semblance of weakness heading into this seasonally positive time.  However, the recent breadth deterioration, Financials weakness, and momentum waning combined with bullish sentiment are real concerns to those that simply argue a bullish tune based on price alone without studying the underlying weakness.  Bottom line, it seems more likely than usual that October turns out to be far less positive than these seasonal stats suggest.  A selective stance is preferred with overweights in Energy and Healthcare, keeping alert for evidence of any downturn that might change the thinking that dips are automatically bought.  For now, price trends and seasonal factors outweigh the breadth concerns which have all been present for some time, with little to no effect.


Energy -  Bullish and further outperformance likely in October-  5 key charts on the sector, followed by 5 bullish technical risk/rewards
 

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XLE v SPX-  Gradually turning higher, but no broad-based strength just yet.  While WTI and Brent Crude have been showing very sharp acceleration higher lately, Energy as a sector has only gradually started to turn higher.  OIH vs SPX broke out two weeks ago, but the chart of XLE vs SPX above is just arriving at its own "moment of truth" Given that technicals for Crude oil still point meaningfully higher in the weeks ahead, particularly for Brent crude, it looks likely that one should continue to position for further energy strength.  Overweighting XLE looks prudent, and increasing this bet once XLE can manage to exceed this four-month downtrend.   Overall, it looks right to position long here ahead of this move, and Energy likely can continue bucking its weak seasonal trend, as Iranian sanctions might be a bigger deal in terms of taking capacity away at a time when demand has not fallen off materially.  

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XOP, the Exploration & Production ETF, still looks like a better bet than XLE, or OIH for Energy exposure.  This daily chart of XOP shows a gradually improving technical picture after the huge decline from 2014 into 2016 lows.  Prices have tested the $45 level now twice and appear headed for this area yet again, which should help cause a breakout and drive this sector higher at a time when Crude still looks to move higher.  Longs are favored and would be increased over $45 on a weekly close which would represent the highest weekly close since mid-2015.   Upside targets lie at $50.62, with intermediate-term levels found at $53.05, the 50% retracement level of the entire 2014-2016 decline.  Movement under September lows would be necessary to postpone this rally, ($39.41) and would cast some doubt as to a continued rise. 

Brent Crude still looks likely to rally to the mid-to-upper $80's with the first legitimate upside target near $90.  While prices have gotten overbought, no evidence of any trend exhaustion has surfaced and should be at least another 5-6 weeks away.  This is suggestive of possible strength into November, when the sanctions v Iran are expected to reach 100% and should allow for Crude to rally into this time before peaking.  ETF's like BNO or USO could be considered for a short-time only but given the nature of the construction of these ETF and the futures roll affecting prices, one should be wary of underperformance vs Crude itself.  BNO, based on Brent crude, is a likely outperformer to USO in the short-run.



The spread between Brent and WTI, as shown on this weekly ratio chart, still looks to widen out materially in the weeks ahead, which is depicted by the ratio of WTI CRUDE over Brent Crude.   While it's widened out already from 2 to near 10 in the last few months, technical trends do not seem complete given last week's pullback to the lowest levels (widest) since June.  This recent pullback last week to new lows without any accompanying exhaustion signals is likely to allow for a pullback down to -12, signifying a further spread widening and Brent outperformance over WTI.  

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Drillers preferred over Equipment/Services within Energy-  Ratios of Equipment & Services stocks within Energy to Drilling show the recent break of support which had held on this chart since early 2015.  This means that Equipment and Services names are still likely to underperform Drillers and could result in much more strength out of the Drillers relatively in the weeks ahead.  A breakdown in this weekly chart of a pattern of this sort represents a multi-year Head and Shoulders pattern and until/unless recouped, means that the Drillers likely will show much better strength in the weeks ahead on a further rise in Crude while the Equipment/Svcs should underperform. 


5 Technically Attractive Risk-reward Long Candidates within Energy
 



Cheniere Energy Inc (LNG- $69.49) LNG stands out as one of the better technical risk/rewards within Energy in the near-term given its recent  push back to new weekly closing highs for the year.  Additional strength looks likely, with upside targets near the highs made back in 2014/5 in the mid-to-upper $80's.  the pattern from June itself is reminiscent of a minor Cup and Handle pattern, and the breakout last week should help this extend further without too much trouble.  Volume expanded on the rise in the last couple weeks, and the consolidation over the last few months has helped LNG to avoid getting too overbought after its rise from 2016.  Overall, LNG is seen as attractive and would be favored long until/unless prices get back under $64.70 which is not expected.
 

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Whiting Petroleum (WLL- $53.04) WLL looks attractive given its recent resilience in holding up near the highs of its 2.5 year base from mid-2016.   The stock has made several prior highs in the high $50's and has pushed up in recent weeks to test this area again.  This adds to the probability of an upcoming breakout given Crude's ongoing ascent.  Long positions recommended, looking to add to positions on the ability to exceed $56.50, near the highs from late June.  Only on pullbacks under $45.91 would this thinking be reversed, and for now, it's right to expect a move to test this $56.50 area. 

 

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SM Energy (SM- $31.53) Further gains likely in SM given the strong near-term technical structure and its recent resilience in pushing up to the low $30's.   SM had formed a lengthy downtrend line just from its latest intermediate-term peak in 2015 which was just exceeded over the last few months.   The act of getting above this 3 year downtrend along with surpassing the minor Cup and Handle pattern since late 2017 were both bullish factors that allowed the stock to accelerate once it got over resistance at $28 which was right near the 50% retracement of SM's pullback from late 2016.  Its rate of ascent has been slow enough not to generate extreme overbought readings, and SM still lies meaningfully off highs from 2014 and 2015, making this an attractive risk/reward.  Upside looks likely to near $40,which would be a 38.2% Fibonacci retracement of the entire pullback from 2014 highs.  

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California Resources Corp. (CRC- $48.53)  Bullish for move to the upper $50's.  This stock continues to make steady progress in recent weeks after pulling back to test the area of its 2.5 year base breakout near $28 in mid-August.  Its subsequent ability to rally back sharply managed to make the highest weekly close since 2015, arguing for further intermediate-term strength to the mid-to-upper $50's before any meaningful resistance.  While CRC has gotten short-term overbought, weekly RSI only shows readings in the mid-60s and volume has been heavy on the recent move back to new highs.  Overall, long positions are recommended, looking to buy any dips given the chance in the weeks ahead.  

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Hess Corp (HES- $71.58) Bullish for a move to $77 initially-  HES recent success in breaking back out to the highest levels since 2015 has helped this stock's technical position to get better in recent weeks.  The stock has exceeded not only Spring 2018 highs but also highs from mid-to-late 2016 which bodes well for its recent upward progress to continue.   Upside targets lie near $77 initially, and any pullback down under $70 would create a very good risk/reward scenario to buy dips for gains to this key Fibonacci retracement zone.  Overall, HES has been able to show some decent strength in recent months that makes this a stock to consider which is well positioned technically to be able to make gains as Crude works its way higher.

Materials, Emerging markets likely to outperform in Q4 on Dollar weakness

September 24, 2018

Contact: info@newtonadvisor.com

S&P 500 Cash Index
2897-2900, 2883-5, 2864-5,   2830, 2817    Support
2916-7, 2923-5                                             Resistance

 

Summary:  US stocks remain extraordinarily resilient, and with one week remaining in the seasonally bearish month of September, have defied all odds with indices successfully ignoring all the tariff threats and political drama thus far in the last few months.   This could potentially allow for the sixth straight month of gains for SPX and 5th of 6 for DJIA along with NASDAQ.  However, as we're all aware the NASDAQ has been lower in September, diverging negatively as Tech stocks take a back seat to Recent strength in Energy, Materials and Financials.   Meanwhile, Emerging markets have shown some evidence of snapping back, just at a time when the currency crisis was beginning to sound alarm bells and create uncertainty as it spready in contagious form to most of the continents on the globe.  This chart below shows the relative chart of the MXWO relative to MXEF-Emerging markets which has shown developed market strength since the US Election.  For the first time in nearly six months, we see that this ratio is signaling some counter-trend exhaustion just as the ratio has reached former highs.   The last time TD Sequential signals were seen on weekly charts happened in March of this year within a week of this turning up sharply as Emerging markets fell given the US Dollar strength.  At present, the opposite is happening, and bodes well for a period of Emerging market strength in the final quarter of 2018.  Or as seen in the chart below, this ratio should be likely to turn down, as Developed markets begin to deteriorate vs Emerging in the weeks/months ahead.  This should be a good sign for China which has seen its market plunge 20% at a time when the US has held up resiliently.  While  a new round of tariffs is expected which could amount to nearly half the value of Chinese imports last year, or 250 billion, combined, most charts show Emerging markets on the verge of turning back higher.  This should mean that the trade escalation might prove short-lived, and some type of compromise could be right around the corner.  The next few weeks should be important in this regard, but it's worth taking a stab at buying Emerging markets as the 4th quarter gets underway, thinking they might hold up much better than the first 3 quarters of 2018 thus far. 


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Overview:  The last few weeks have proven to be some of the more interesting times for global assets all year.   While many just concentrate on the SPX, and/or NASDAQ  & see a mild uptrend, when digging beneath the surface we see that the internals have gotten significantly worse on this push back to new highs, a discouraging development that takes away from some of the positives on a move back to new high territory.  Meanwhile we've seen the Dollar begin to rollover in the last two weeks, along with Treasury yields breaking out of ranges on the long end, with yields climbing ahead of this week's FOMC meeting.  Emerging markets have begun to stabilize which is seen as an encouraging development and is the subject of this week's Weekly, along with the Materials sector which has begun to show some evidence of turning higher.  Even if this next week adheres to seasonal tendencies and weakens, it's thought that Materials and Emerging markets overall should start to outperform and show better than average relative strength in the weeks and months ahead.

As of Sunday evening, we've seen some evidence that futures have weakened with the threat of tariff plans being accelerated yet again, with nearly 250 billion of tariffs, or half of China's imports, and index futures in US are down -0.50%.   However, we'll need to get down under 2883-6 area to have concern, with 7400 being key for NASDAQ 100.  The lows hit back on September 7 will the dividing line between bull and bear territory.  Breaks of this level over the next two weeks would necessitate a negative stance for a 3-5% correction in stocks. 

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The following seem important heading into this week:
1) Dollar rollover-US Dollar made discernible breakdowns vs both Euro and Pound sterling last week
2) Treasury yield breakout extending into FOMC-10,30yr Treasury yields continuing higher into FOMC
3) VIX holding up firmer than expected given push to new highs by Equity indices
4) Emerging markets have begun to show some outperformance and EEM is challenging key trendline resistance
5) NYSE new 52- week highs have dropped to levels nearly half of where they were a month ago
6) NASDAQ broke down vs SPX, snapping an uptrend that's lasted most of the year
7) McClellan's Summation index, fell to the lowest level on a weekly close since May. 
8) Equity put/call ratio fell into the low 50's using a 5-day ma which seems overly complacent
9) TRIN fell to the lowest level since January last week, with negative breadth but volume still more positive than negative.  This is a near-term warning sign for equities at extremes, similar to high TRIN levels during pullbacks
10) Seasonally speaking, as discussed below, markets are entering the part of September which has a distinctly negative bias and has been down more than up for the DJIA since the latter part of the 19th century.
 


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

Short-term (3-5 days):  Despite overnight Futures weakness on Tariff concerns heading into Monday, the trend will remain bullish until 2886 is broken, which would violate the trend from late June, causing a pullback to 2817.   Internals by and large all worsened last week, which despite equities gains, make for a poor risk/reward picture now with prices towards the top of the channel.   Heading into the final week of September, seasonality warrants a defensive stance, which when combined with overly bullish sentiment, near-term overbought conditions near the highs of the range while breadth has failed to keep up, should make Equities vulnerable in the near future.  So despite recent resilience, still very little confidence that this market should extend too meaningfully.  As we've discussed however, it's a must to await signs of weakness holding before thinking markets have reached a pivotal time.  Implied volatlity seems like a smarter way to play for any drawdown until technical trends change. 

Intermediate-term (3-5 months)-  Bullish-  (No change) While there remain ample reasons for concerns in the short run, now that markets have nearly finished August with little to no evidence of any real downturn, the period between now and end of year will likely only suffer minor pullbacks between now and into early October before rallying into end of year, postponing the larger decline yet again.  Specifically, the fact that Advance/Decline for All-stocks pushed back to new all-time highs into early July is thought to be a bullish factor.   The fact that Small-cap and Mid-cap indices have rallied back to new highs is also thought to be constructive, as most bear markets start with a serious dropoff in Small and mid-cap performance.  Though some of that did indeed happen in July with the Russell2k, most intermediate-term chart patterns remain constructive.    Overall, the 2 month bias is more negative for a 3-5% drop.  However, on a 4-5 month timeframe, it's likely yet again that markets exhibit seasonal strength.  so given that markets have been able to absorb the relative underperformance in Tech lately with little to no damage, we'll need to see S&P drop under 2700 to have any real concern, and given the tariff taunts which have been ongoing, the sentiment is likely to reflect fear much faster these days than normally which bodes well for the bulls into year end.


Materials and EM space-  5 important charts to watch, followed by 5 attractive Materials stocks
 

EEM strength has tested key trendline, but further strength and outperformance likely in the months ahead.  EEM daily charts above have shown increasing evidence of stabilizing in the last couple months, with its gains since early September having carried this to important make-or-break resistance on this rise.  Despite being in an ongoing downtrend from late January, it's importnat to see the degree to which momentum has begun to improve lately, starting with the rally attempt into July but also the lack of decline since that time.  EEM has shown several failed breakdown attempts in the last couple months which are key to notice and have helped momentum indicators like MACD make a string of higher lows which pushing up to test trendline resistance at $43.25.  While  EEM could very well stall out after this push initially, the degree of stabilization in the EM space lately while the Dollar begins to rollover suggests that EEM could begin to show greater strength vs Developed markets in the weeks and/or months ahead.   Climbing over $44.50 initially would be a meaningful amount of strength that suggests the start of a more gradual lift and outperformance for Emerging markets.  Bottom line, pullbacks in the days/weeks ahead should be buyable at $41-$42 for the start of more meaningful EM outperformance going forward.  
 

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S&P upside might prove limited in poor seasonal week, but UNDER 2883 is necessary for the Bears-  SPX has pushed back to the highs of its trendline channel after last week's gains and now faces one of the toughest weeks of the year seasonally speaking.  Given the track record of finishing down 22 of the last 28 weeks with an average loss of -0.96%, we're on the lookout for the possibility that stocks might pullback to the lows of the recent channel.   Breadth and momentum have weakened lately despite last week's rise and we've seen NYSE new highs fall, despite gains in the averages.  Overall, trends will remain positive until/unless 2883 is breached and it's important to see some evidence of trend failure before turning too negative.  However, internally, it's important to note that the technicals have gotten worse in the last week, not better, despite the price rally.  Sector rotation has helped to cushion the indices despite some weakening in Technology, and for now, none of the bearish arguments will mean too much until we see that trend from June lows give way.  

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Materials bullish on breakout-  Long XLB looking to Buy dips-   The Materials sector as shown by the XLB Select SPDR ETF, has just broken out of a symmetrical triangle formation that has been intact since January.  This happened initially back in late August before consolidating and then giving way to another push up to test the highs from early June.  Technically this is a real positive for this group after months of consolidation.  The rolling over in the US Dollar index should help most Metals, mining and commodity oriented stocks to begin showing better outperformance in the days and weeks ahead.  Pullbacks to 59.50-61 would create a very good risk/reward area to buy given the degree that momentum has begun to improve lately.  Upside technical targets lie near January highs near $64, making this sector seem like a good risk/reward to own and buy dips in a market where Technology is slowly but surely beginning to rollover.  
 

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The Materials sector relative to SPX has given its first real indication that outperformance is just around the corner given the sectors minor relative breakout to SPX which happened last week  The longer-term downtrend in Materials relatively speaking remains intact, but the last few weeks have shown noticeable evidence of this starting to lift, breaking the three-month downtrend while momentum has gotten noticeably stronger (Upward sloping MACD)  The rolling over in the US Dollar last week along with the signs of Emerging markets possibly starting to turn up vs Developed markets looks to be a big deal for this group and should help Materials begin a larger rally in the weeks ahead.  A pullback in Treasury yields post FOMC would start to help the Metals stocks in bigger fashion, which have all begun to show a bit more strength just in recent weeks.  Overall, this move might take a bit longer as bottoming out after a lengthy downtrend is definitely a process, and doesn't usually happen overnight.  But the incremental progress shown by Materials makes this one to consider overweighting and adding on weakness as the group's stabilization efforts look likely to continue and will eventually lead to a larger rally in the group.  
 

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Growth vs Value-  Signs of possible Reversal which would favor VALUE in the months ahead This chart of the S&P Growth (IVW) vs S&P Value (IVE) has given some important signs of an inflection point just as this ratio has reached former highs from 2000.  The indicators of exhaustion shown by Demark's TD Sequential system have produced the first "9-13-9" pattern since the shift to growth began back in 2006/7. Momentum indicators on this ratio have gotten overbought based on RSI rising over 70, but yet not as high as was seen back in 2015, thus, creating the start of some negative divergence that suggests this ratio might start to rollover.  This would favor the Value scenario vs Growth in the months ahead, and increasingly suggests that favoring Value makes sense after this record run that now seems to be stalling out.  


5 Technically Attractive Risk-reward Long Candidates within Materials
 

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Ashland Global Holdings (ASH- $85.67) An attractive technical play within the specialty Chemicals space, as ASH move back to new all-time high territory on a weekly close last week  should allow for further gains in the weeks ahead.   The act of getting above $75 back in May allowed for some real acceleration out of ASH, which looks to close out September with five straight months of gains.  Its success in making a new weekly closing high last week was not met by any evidence of exhaustion, and its consolidation for the last seven weeks makes this attractive to buy for a stock that should now play catchup for a move up to $90.  Minor pullbacks this week should prove buyable with support at $83-$85.  Until this demonstrates some evidence of weakness, it's thought that ASH is a compelling risk/reward to continue to outperform within this space, and longs are recommended technically.  


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PPG- (PPG Industries - $115.98) Bullish given PPG's movement back above the uptrend from 2016, a constructive development that allows for a likely test of multi-year high resistance just above $120.  This stock has been basing for nearly three years after a huge six-year lift which saw price rise over five-fold.  Now momentum has begun to kick in to high gear in the last few months with PPG showing outperformance and has been one of the top performing names in the Materials sector in the last month.  Most of the appeal for this name is on an intermediate-term basis, vs as a near-term play.  Structurally its success in coming back lately bodes well for a push to highs.  Given that this area has been tested once already, this is typically a very good risk/reward for expecting an eventual breakout which should take PPG to new all-time highs.  Pullbacks to $110-3 should be used to buy dips.

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China Petroleum & Chemical Corp (SNP- $97.13) Attractive given the base buildingwhich has occurred this year at levels just below the highs from 2014.    CNP managed to double in price from 2016 into early this year,  rising up to $105 to test 2014 highs before consolidating.  However the extent of the churning over the last few months has proven miniscule and SNP's 10% lift in the last two months has bought this again to within striking distance of new highs and seems like 2014 levels won't prove too difficult to exceed before a larger lift to push up to 2007 highs.  Overall, this is partially a play on a China rebound along with the US Dollar rolling over.  Both should allow for SNP to begin to improve.  Technically the act of stalling and consolidating for 4-5 weeks near a prior high without any deterioration is looked upon as a bullish omen and one would position long here, adding above 100 for 104.50-105.50.  However, the larger move should be in store once most of this group starts to hold and turn higher.  Given that SNP has outperformed despite prior China weakness, once the EM space starts to kick into full gear in turning higher, SNP should be likely to outperform at an even quicker rate.  Bullish thesis looking to add on minor pullbacks as well as a weekly close over 100.

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CF Industries (CF- $52.81) Bullish, but extended- One of the top performers this year in all of Materials, CF began its comeback in the fall of 2016, more than doubling in a year's time before consolidating into this past Summer.  The last three months have seen CF push up for six straight weeks, and at $52.50-$54 looks likely to stall and might offer some consolidation to this move.  However, on any pullback down to $49-$51, this becomes very attractive from a risk/reward perspective given its current strong momentum.  It's thought that even on a minor correction in the weeks ahead, this should be one of the top names to own within Materials and on any pullback, this would allow for long positioning for a push back higher to eventually challenge prior highs from 2015.  
 

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Sherwin Williams Co/The (SHW- $469.96)   One of the top performing stocks within the S&P 500 Materials sector this year, despite the underperformance, SHW has returned over 14.6% YTD and still looks like a compelling intermediate-term long.  Last week's pullback has helped to alleviate some of the overbought conditions on daily charts and pullbacks to near 460 would create a very attractive risk/reward profile to buy dips in SHW for a push back to new highs.  Despite last week's move to multi-day lows on Friday, SHW has managed to turn in positive gains for the last five straight weeks.  this might persist for 1-2 weeks, but SHW would be one of the stocks to consider on any weakness given its ongoing stellar technical structure.  

5 Technically attractive Longs/Shorts during a seasonally weak time

September 17, 2018

Contact: info@newtonadvisor.com

S&P 500 Cash Index
2897-2900, 2864-5,   2830, 2817    Support
2916-7, 2923-5                                   Resistance

 

Summary:  US stocks have managed to successfully dodge most of the weakness being seen globally thus far, rallying back to within striking distance of new highs as both S&P and NASDAQ showed signs of snapping back from prior week declines.  Treasury yields look to have broken out of recent ranges on the upside, while the Dollar has begun to rollover.  This provided some much needed relief within the Emerging markets space, and Turkey's rate hike combined with the general EM currency stabilization helped soothe some of the anxiety about currency weakness turning into a larger issue.   Now seasonally speaking markets enter what could be their most difficlt two week stretch of the year, as bearish seasonality kicks in for Equities which historically has taken markets lower during the latter part of September during mid-term election years.   However, the degree of the strength and resiliency of this market is seen as an intermediate-term "Plus" for now, and declines into late September likely coincide with sharp rallies back into the 2nd-3rd week of October ahead of this year's Elections.  The chart below focuses on the tendency of markets to weaken two months ahead of the mid-Term elections followed by a sharp rally as this time grows closer.   We'll look to buy implied volatility early in the week on any drop in the VIX under 12, expecting that this Equity rally cannot continue uninterrupted into October, but utilize any Market weakness into this month's Fed Meeting to buy dips.

 

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Overview:  Near-term trends turned bullish on move back over S&P 2900, but now are facing some seasonal headwinds which combined with near-term overbought conditions and some lackluster breadth could make it difficult for US indices to push higher and extend last week's rally.    Last week's bullish close still looks to extend early this coming week, but one needs to be on the lookout for any evidence of reversal mid-week and particularly one which takes S&P back under 2864 (2900 initially a warning for S&P)  with 7400 being key for NASDAQ 100.  The lows hit back on September 7 will the dividing line between bull and bear territory, and the recent Financials weakness can't be overlooked with XLF having pulled back to new multi-week lows.  Overall, i'm expecting weakness over the next two weeks before a low and rally into October.   Look to still favor more underperformance out of Europe while Asia looks to have begun a bottoming process given the EM stabilization.   Bottom line, it looks right to expect further equity weakness, but this might prove complete by the 9/26 FOMC meeting, and one should consider buying dips into this time.   

The following seem important heading into this week:
1) Financials fell to new multi-week lows last week, making this group the worst performing sector and the only one negative on the week despite the yield rally

2) As mentioned, long rates broke out of multi-month ranges last week, with both 10 and 30-year Yield breaking out

3) Healthcare moved back to new all-time highs and on a relative basis, broke out of a three-year downtrend on weekly charts vs SPX

4) NASDAQ barely reached half of the prior week's pullback, still under 8/29 highs while DJIA managed to exceed these former levels, but overall has been weaker, still not back at new all-time territory, and roughly 500 points away

5) McClellan's Summation index, fell to the lowest level on a weekly close since May.  This smoothed breadth indicator is often important to pay attention to as it can give advance warning on signs the rally isn't all that strong internally

6) Emerging market equities and currencies jumped late last week, as the Dollar decline coincided with a move in EEM to the highest level in over six days.  While this is near-term encouraging, much more work needs to be done

7) Defensive groups fell on hard times late last week, with the yield sensitive groups like Utilities, REITS, falling as yields broke out.  VNQ, the REIT ETF, broke down under trendline support vs SPX, suggesting more weakness to come. Staples underperformed the broader averages as well which might have been expected given market strength

8) While non-technical in nature, the threat of additional tariffs happening early this week could serve as a negative technical catalyst for prices to drop, even if it proves short-lived.  China has threatened to skip trade talks with the US if additional tariffs are announced, and something of the sort would likely cause the global mood to sour and potentially coincide with weakening in equities heading into late September.

9) Seasonally speaking, as discussed below, markets are entering the part of September which has a distinctly negative bias and has been down more than up for the DJIA since the latter part of the 19th century.  
 



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

Short-term (3-5 days):  Bullish above 2900, Bearish below, with upside targets at 2920-5, and movement under 2865 leading to a 3-5% drop into late September before stabilization.    The combination of overly bullish sentiment, bearish seasonality, near-term overbought conditions while breadth has failed to keep up, should make Equities vulnerable between 9/18-9/19 into 9/26 before rallies take hold.  However, given the extent of the recent strength, it's a must to await signs of weakness holding before thinking markets have reached a pivotal time.  

Intermediate-term (3-5 months)-  Bullish-  (No change) While there remain ample reasons for concerns in the short run, now that markets have nearly finished August with little to no evidence of any real downturn, the period between now and end of year will likely only suffer minor pullbacks between now and into early October before rallying into end of year, postponing the larger decline yet again.  Specifically, the fact that Advance/Decline for All-stocks pushed back to new all-time highs into early July is thought to be a bullish factor.   The fact that Small-cap and Mid-cap indices have rallied back to new highs is also thought to be constructive, as most bear markets start with a serious dropoff in Small and mid-cap performance.  Though some of that did indeed happen in July with the Russell2k, most intermediate-term chart patterns remain constructive.    Overall, the 2 month bias is more negative for a 3-5% drop.  However, on a 4-5 month timeframe, it's likely yet again that markets exhibit seasonal strength.  so given that markets have been able to absorb the relative underperformance in Tech lately with little to no damage, we'll need to see S&P drop under 2700 to have any real concern, and given the tariff taunts which have been ongoing, the sentiment is likely to reflect fear much faster these days than normally which bodes well for the bulls into year end.


5 Important charts to keep an eye on for this coming week
 

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September seasonality tends to turn negative mid-month with the average returns on SPX lower by over 1% and have been lower 74% of the time since 1980.   The DJIA performance going back since 1885 has been positive fromSeptember 16-27th only 42% of the time.  Thus, while seasonality has traditionally been positive for the first half of the month, on average we begin to peak around this time and selloff into end of month.   Holding up above 2900 will be important for S&P and under should cause a pullback to test and likely breach 2865.  
 

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NASDAQ 100 could be vulnerable given the lack of prices to recoup prior highs.   Looking at last week, NDX managed to snap back and regain about half of the prior week losses, but unlike the DJIA, it has begun to diverge negatively and remains well under the 8/29 highs.  On any move back down under 7400, this would violate the trend from this Spring, coinciding with a drop  which should take NASDAQ down 3-5% before recovering into October.  Importantly perhaps, for the first time since mid-July there is the presence of a counter-trend sell signal on daily charts which might make further progress difficult to come by this week.  The key for the Bears will be a drop under 7400, while the Bulls should need to see prices get up to challenge prior highs without much hesitation.  However, the trend right now still lies firmly in the Bulls favor.  Barring any breakdown of this trend the NASDAQ remains firmly in an uptrend.  

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Healthcare breakout worth mentioning as this sector has exceeded the three-year downtrend vs SPX that has kept the sector under pressure relatively for the past few years.  The 2018 Annual Technical outlook discussed this sector as being a favorite given the presence of counter-trend buy signals present last December, and its success has helped Healthcare claim top spot as the best sector over the last three months.  Additional gains look likely, and this should still be an area to favor ahead of Technology.  
 

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McClellan's Summation index managed to drop to its lowest level since early Augustbut is within striking distance of the lowest levels since May .  This smoothed version of breadth is a disappointment given the market's success lately and higher readings would certainly bring about much more confidence in this rally vs looking back and seeing that breadth largely peaked out in June given this index.  
 

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VIX- Close to Bottoming-The CBOE Volatility index has gotten down to attractive levels to consider buying implied volatility early in the week if/when VIX gets back down under 12.  Momentum has gotten oversold again, while counter-trend indicators are set to line up this week on any further weakness (which would occur on Equity market gains Monday) and line up with similar signals that were present back in early August that drove the VIX higher from under 11 to near 17 in a short period of time.   Such a move cannot be ruled out again given the weak seasonal tendencies directly ahead of markets into late September, and owning cheap calls as Stock replacement and/or considering protective puts on longs that have gotten stretched might make sense.  Others who are more aggressive might consider long positions in volatlity based ETFs between now and late September.  



5 Technically Attractive Risk-reward Long and Short Candidates
 

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Planet Fitness (PLNT- $51.57)  PLNT looks quite attractive technically following its breakout above the minor one-month consolidation that had been in place since early August.  The daily chart by Investors Business Daily's MarketSmith shows the recent "backing and filling" following the breakout on heavy volume in early August and the stock has consistently maintained very good structure going back over the last 10 months since it broke out on heavy volume last November.  Movement up to the mid-$50's looks likely while any move back below $49.50 would postpone this rally, shifting the structure back to near-term neutral on the failed breakout.  For now, between Monday and Wednesday of this week, it looks likely that last week's move should extend, and long positions are preferred. 

 

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Dave & Busters Entertainment Inc. (PLAY- $62.23)  Bullish breakout on high volume  Last week's success in getting over $58.86 managed to surpass not just August and June highs, but highs going back since January of this year, making this a solid breakout of a near-term Cup and Handle pattern which can be argued is part of a larger Reverse Head and Shoulders which has been in the making since last September, one year ago.  Volume spiked to 5-times average as this moved back to 52-week highs, and suggests that further gains should occur between now and end of year.  Given that markets are entering a seasonally challenging time and PLAY became stretched on Friday's move, pullbacks would offer better risk/reward areas to buy, ideally from 59.50-61.50 in the weeks ahead.  However the pattern remains compelling and this high volume breakout should be watched for any signs of backing and filling which would create a very attractive time to add to longs.  

 

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Cigna (CI- $194.77)  CI's breakout above 191 should help the stock gain further ground in the weeks ahead with technical targets near $202 initially.  While the stock has gotten a bit extended given Thursday and Friday gains last week, CI managed to exceed the former area which had given way to breakdowns this past March, and the act of exceeding this area is considered to be quite important technically   Its base from early August proved to be a bullish symmetrical triangle pattern and now that this area has been exceeded, this should help to jump-start this stock which has managed to advance as part of the bullish Healthcare space which has outperformed all other sectors over the last three months.   This group remains attractive and this stock in particular looks like a good technical long for more gains in the days/weeks ahead. 

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Apple (AAPL-$223.84) Short-term Bearish for move down to 205-208  AAPL's trendline break into early September has not been fully recovered and the near-term technical pattern remains negative and can allow for further losses over the next two weeks before this stock reaches support.   Momentum remains elevated on weekly charts with RSI readings over 70, while daily MACD has turned negative as AAPL started to stall out over the last couple weeks.   The stock had gotten very overbought after more than a 35% rally just since late April a bit less than five months ago.  Additionally, from an Elliott perspective, the pullback into early September looked to resemble a perfect five wave decline, while its counter-trend bounce should be complete as of last Friday on the rebound.  Technically if this recent pullback is equal to the first one into early September, this would target $215 for a possible support low where this could stabilize.  However, more important technical targets lie down at $205 up to 208 which would make for an attractive area to buy dips.  Overall, given the start of a weakening in other names within this group, AAPL looks to be in need of consolidation before this can make further upside progress. While the stock remains quite compelling technically on an intermediate-term basis, this recent churning and minor technical weakness still looks to need additional downside before it's complete.  Bottom line, one should hold off on buying dips too aggressively until this can get down under $210.  
 

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Mallinckrodt PLC (MNK- $30.50)  Short-term bearish, with targets initially at $27.10which would represent an 11% decline from current levels.  The reason for the near-term concerns are three-fold.  First, prices have managed to undercut last week's lows which had been an initial area thought to represent stabilization.  The Demark TD Buy Setup thus failed to lead to any real rally and now a new count has begun with the pullback down under $31.   Second another Demark signal just appeared as a "sell" on weekly charts, shown as a TD Combo 13 countdown that was confirmed on last week's close.  Third, volume spiked on both last Tuesday and last Friday's declines while prices managed to close right at the lows of the week.   Overall, while some bullish intermediate-term reasons exist given some positive developments with long-term structure which began to improve this past June, the extent of the rise since that time has carried prices to levels that are too overbought in the near-term.  Pullbacks to intersect the uptrend from this past Spring would create a much better buy opportunity for this name, and near-term the technical damage looks likely to persist.  

Technology selloff has not yet led to XLI, XLF weakness

September 10, 2018

Contact: info@newtonadvisor.com

S&P 500 SPDR ETF Trust- SPY
283.59-284, 281.62, 280.16, 279, 278.19      Support
291.17-292, 292.40                                   Resistance

 

Summary:  Last week finally saw US stocks starting to weaken to join the deterioration being seen in the rest of the world, suggesting that the long-awaited September correction is starting to get underway.  However, certainly not a very powerful or convincing pullback by any means thus far.  After the last 4 of 5 days of decline, S&P had barely given back 1/3 of the prior rise.  Indices like the DJIA have held up admirably, with above-average strength in both Industrials and Financials.  And the Growth trade is still largely holding up vs value.   Yet the Technology sector specifically began to show some real selling last week, and Semiconductor stocks along with most of the "FANG" names and Hardware have weakened rather substantially in recent days.   Stocks like Facebook and Netflix have both rolled over, each being down over 17% from recent highs.   Yet some further pressure "should" start to take place in other sectors over the next 1-2 weeks, or else this pullback will prove very mild indeed.  The fact that Financials, Healthcare, and Industrials (Transports) have held up in the last few weeks has helped to cushion the market during this rotation out of Technology.   Of all the global Equity markets, Europe began to break down the most last week, violating recent monthly lows to close down at the lowest levels since March.    Additionally, the Dollar's recent bounce has continued to put pressure on Emerging markets.  While an oversold rally in this space looks near, it still appears to be 1-2 weeks away from where this could bottom out.  For now, it's right to stick with the defensive game plan, and buying into this market still appears premature. SPX, as shown below, sold off during much of last week and lies just above initial trendline support from late June.  However, bounces likely prove mild and a larger decline could be likely which takes S&P down to 2800-2807 into late September before a rally gets back underway.  For now, its not wrong to think this pullback in S&P should be buyable into end of month given a lack of weakness, and US remains one of the stronger, most attractive equity markets in the world.  Yet, at present, it's though to have a positive stance technically in US without having some short exposure elsewhere.  
 

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Overview:  Near-term equity trends remain bearish and early to buy for anything more than a 2-3 day rally.  Additional selling likely over the next 1-2 weeks before a low of any magnitude.  Look to still favor more underperformance out of Europe and Asia while the US Dollar rally could make commodities weak a bit longer along with Emerging markets and Materials stocks.  Transports, Financials and Industrials should begin to show evidence of peaking this week, and expect each of these groups to begin weakening to join some of the recent underperformance seen in Technology.   Staples have shown some recent strength, and this push into Defensive sectors should continue for the next couple weeks and on any evidence of Long-term yields weakening, would occur even faster into late September.  For now, yields have pushed up to near resistance in the 10-Year, and some backing off should be likely ahead of this month's Fed meeting.  Bottom line, it looks right to expect further equity weakness, but this might prove complete by the 9/26 FOMC meeting, and one should consider buying dips into this time.  

The following are important to note:
1) Financials, Industrials, Transportation have largely still held up, despite Technology weakness and is one of the key reasons why US equities have proven so resilient in the face of a larger global equity decline.
2) Technology's underperformance has NOT yet been sufficient to expect intermediate-term weakness, but it has knocked Tech out of 1st place in YTD standings, and its one-month performance heading into 9/10/18 has been negative
3) VIX managed to break the downtrend from early April, finishing at the highest levels since early July.  
4) DJIA has still not joined the SPX, nor NASDAQ at new highs
5) EEM, the ETF for Emerging markets, has signaled initial downside exhaustion on Daily charts while weekly is still a bit premature.  
6) Materials sector looks to be 1-2 weeks away from bottoming and should also bolster the case for an EM bounce
7) Growth still hasn't really broken down vs Value, and while most charts show this ratio to have slowed meaningfully, the uptrend remains very much intact. 
8) WTI Crude weakness was unexpected last week, and Counter-trend indicators on weekly charts suggest Crude's time will prove short-lived as markets get into late September.   

Bottom line, the move to the upper part of the trend channel seemed to be important this past week, causing a stallout and minor trend reversal.  Excessive bullish sentiment with overbought conditions, Demark exhaustion and bearish monthly seasonality were already important and negative.   The divergences have merely gotten bigger between US and rest of the world, while indices like DJIA still have not reached new all-time highs.  Technology seems to have taken the lead in turning down, but if other sectors join suit between now and the FOMC meeting, the selloff could start to accelerate during this seasonally bearish time.  Overall, one should own implied volatility, diversify, and hold off on buying dips too aggressively until this correction has played out completely.   

 



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

Short-term (3-5 days):  Bearish into 9/19-20, and potentially into 9/25-7-  Negative-  Look to sell rallies-  Break of 2860 should lead down to 2807.  Recent weakness has gotten near initial support, but bounces should prove sellable for a break under 2860 down to 2800-7 into 9/19-25 timezone before a reversal back higher occurs.   Risk/reward remains poor for new longs, and one should consider adopting a defensive tone and not buying into recent pullbacks too aggressively during the month of September.  

Intermediate-term (3-5 months)-  Bullish-  (No change) While there remain ample reasons for concerns in the short run, now that markets have nearly finished August with little to no evidence of any real downturn, the period between now and end of year will likely only suffer minor pullbacks between now and into early October before rallying into end of year, postponing the larger decline yet again.  Specifically, the fact that Advance/Decline for All-stocks pushed back to new all-time highs into early July is thought to be a bullish factor.   The fact that Small-cap and Mid-cap indices have rallied back to new highs is also thought to be constructive, as most bear markets start with a serious dropoff in Small and mid-cap performance.  Though some of that did indeed happen in July with the Russell2k, most intermediate-term chart patterns remain constructive.    Overall, the 2 month bias is more negative for a 3-5% drop.  However, on a 4-5 month timeframe, it's likely yet again that markets exhibit seasonal strength.  so given that markets have been able to absorb the relative underperformance in Tech lately with little to no damage, we'll need to see S&P drop under 2700 to have any real concern, and given the tariff taunts which have been ongoing, the sentiment is likely to reflect fear much faster these days than normally which bodes well for the bulls into year end.


10 Important charts to keep an eye on for this coming week
 

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DJIA- No real evidence of any damage- DJIA should be highlighted for the degree of its resiliency lately, as despite the NASDAQ and S&P having showed weakness in the last week, DJIA remains within striking distance of its highs.  Thus, something will have to change in this in the next couple weeks to make a stronger case for the bears, such as a break under 25500..  Lack thereof would cause a strong move back to new highs into October, putting the bull market back on track.  Technically, it's thought that a 400-500 point selloff is more likely than not between now and the FOMC, but it's a break of this trend from late June which would allow for more broad-based market weakness. 

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Europe far weaker than US at present, and breakdown looks serious-  Europe's STOXX50 index, meanwhile, looks far weaker than many US indices, and last week's break of June/July lows puts this at the lowest levels since March, and within a hair of hitting the lowest levels since early 2017.  Structurally it's possible to make the case for SX5E to pullback to 3100, or nearly 200 points from here without breaking intermediate-term trends, but this recent weakness needs to be highlighted as being a real negative structurally, which has just begun to get underway as of last week.   FEZ, and/or VGK are ETF's tracking Europe which might be considered as technical shorts to take advantage of this weakness, and should underperform in the month of September.  
 

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DJ Transportation Avg-  Consolidating near highs is more bullish than bearish-Similar to the DJIA, it's important to point out that the DJ Transportation Avg has also not really weakened in the last couple weeks, and remains within striking distance of all-time highs.  To have a bearish bent on US stocks, we'll need to see breaks below 11200 in the next 1-2 weeks.  Lack thereof into late September would argue for a much stronger trend that has further to go into mid-October before any peak.   Technically, it's still right to expect TRAN, along with DJIA to start to weaken by 9/13 at the latest to begin at least a 1-2 week correction, but increasingly this is being thought of as mild for the time being and could lead to additional intermediate-term strength.  

 

Materials looks close to trying to bottom out-  Following a sharp lift in the US Dollar from early March, the Materials sector turned down to break key support from late 2016 that had held as support for the last 18 months.  The chart above highlights the S&P 500 Materials sector vs the SPX, which allows one to see a relative picture of how Materials are performing.  Interestingly enough, the damage has been sufficient enough that relative charts are within 2-3 weeks of producing counter-trend signs of exhaustion that should allow a meaningful bounce back to occur into the month of October.   This bottoming out looks likely between next week and the end of September, and Materials should be scanned for evidence of stocks that could offer an attractive risk/reward to bounce in the weeks ahead.  Stocks like PPG, DWDP, ECL, look attractive to consider trying to buy into in small size here, and one would look to add on any weakness, with more stocks appearing on the hit list within the next 2-3 weeks.  


 

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XLP-  Consumer Staples -Near-term Bullish, while still intermediate-term Bearish-  Own/buy between now and end of September, looking to sell into strength.  Given the outperformance in Food, Beverage & Tobacco and Staples Retailing last week, the Consumer Staples turned higher to end the week at the highest level in the past few weeks.   Daily charts of XLP show a completed TD Buy Setup a Demark exhaustion sign that has allowed for a meaningful snapback.  While the intermediate-term prospects for this sector remain poor, the next 2-3 weeks should show some outperformance in Staples as the defensive trade starts to gain more traction.  Stocks like COST, CLX, HRL, SYY, K, CL, should be favored for relative and potentially absolute strength in the weeks to come.  

 

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Industrials still bullish, but evidence of time-based resistance hits this week, which could be important.   Industrials, along with financials, is yet another Bullish sector which has shown above-average signs of strength after the breakout of the downtrend from January back in late July.  While Technology turned down sharply late last week, we still haven't seen this weakness take hold in Industrials.  Demark wise, this coming week will have some importance, as XLI will show TD Sequential sell signals on Industrials while forming a completed TD Sell Setup, given 9 consecutive weekly closes above the close from four prior.   Overall, one should be on the lookout for signs of Industrials starting to stall and reverse this coming week, and the lack thereof would be a larger bullish argument for strength into October.   Downturns which break $76 would be a technical negative, allowing for weakness back down to near $74 into late September before stabilization and rebounds take place.   For now, it's just important to highlight the degree of strength in this group, and focus on Industrials as a key group to watch this week given the presence of counter-trend Signals which have been absent for the last seven months up until this coming week.   Stocks like TXT, LII, ENS, AMR, ROP, EMR, AWI, are to be favored within this group, while CMI, ITW, CX, SWK, MHK, OC, DE, SPR are laggards to avoid. 
 

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OIH vs Crude Oil-  Ongoing weakness in OIH has now reached Spring lows, while WTI has moved sideways in the last few months.   The chart above highlights the degree to which Energy has turned down since mid-May while WTI Crude began a neutral consolidation.  While the structure in Crude is arguably still constructive, Energy has been a very difficult sector to embrace, and OIH has fallen as of last week to the lowest levels since March.   While a counter-trend bounce looks near with OIH near Spring lows, the XOP and XLE are both better longs at this time, and OIH should be avoided until it can demonstrate much better signs of strength.   Stocks like HAL and SLB have been ongoing underperformers to avoid, while the E&P and Refiners have been much preferred for strength.  

 

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Growth vs Value-   IVW / IVE-   Still right to favor Growth, until trends are officially broken.  Growth has yet to truly rollover vs Value and the act of making it through September with no meaningful trend breaks bodes well for further strength into October.   While ratio charts of the S&P Growth ETF vs S&P Value ETF (IVW to IVE) have dipped slightly in the last week, ratio charts are still trending up strongly from this past April, and still very little degree of any real weakness.    While this stalling out very well could lead to weakness, it's tough to call for this to happen in absence of any trend breaks.  At present, it still looks like the Growth trade is on, and value is to be avoided.
 

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Developed vs Emerging-  Developed still leading the charge, but nearing key levels in both price and time which might cause a reversal.   Demark signals have consistently shown the turning points in Developed vs Emerging markets over the last two years, and yet again markets seem to be nearing an inflection point, which should lead to Emerging markets to start to bounce  which could be in place over the next couple weeks, allowing for a large snapback in EM at a time when most have been slowly but surely starting to give up on this trade.  Demark counter-trend TD Sequential and TD Combo buy signals were present back in March when Developed markets turned higher vs Emerging for the first time since early 2017.  This coincided with the upswing in the US Dollar, which has persisted in recent months with little to no real evidence of any deterioration.  Now this ratio chart is approaching 2016 highs, and is within 1-2 weeks of producing a counter-trend TD Sequential 13 countdown Sell, which should stop prices just as this ratio chart is nearing prior highs.  Bottom line, while no signal can be acted on until the reversal begins, one should give Emerging markets a close look at the end of September, as the currency and Equity weakness very well could bounce in the months of October into November.  

 

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WYNN Resorts - The Casino stocks continue to be very hard hit, and this area offers opportunities for shorting stocks as the seasonally bearish month of September enters its second week.  Stocks like Las Vegas Sands (LVS) were hard hit in recent weeks, yet the other Casino stocks like WYNN, MGM, CZR have also been weakening substantially, with many of these undercutting the intermediate-term trend from early 2016.   Bottom line, for those in search of attractive risk/reward shorts among the Consumer Discretionary space, the Casino area is one to pay special attention, as many of these stocks remain quite weak and are showing no real signs of stabilizing.   WYNN, in particular is bearish, and likely to drop down to $115 in the weeks ahead.   

5 of the most important charts to watch for September

September 3, 2018

Contact: info@newtonadvisor.com

S&P 500 SPDR ETF Trust- SPY
283.59-284, 281.62, 280.16, 279, 278.19      Support
291.17-292, 292.40                                   Resistance

 

Summary:  No change :Technically it's likely that the next 1-2 weeks brings about a short-term peak that causes a 4-5% correction in stocks for the month of September.  While intermediate-term trends are very much intact for the US, and the Advance/Decline is at new highs along with many other indices, the divergences have grown striking, which as explained below, is occurring on multiple fronts and is not just about US vs overseas performance.   Furthermore, Interest rates on the long end have been quite low, representing not just ample global liquidity but also perhaps a concern about economic growth in the years to come.  However, the resilience of stocks during time of very negative news flow is something to cheer, not fret about, and the US continues to be the "best house in a bad neighborhood" with regards to global stock market performance for 2018.    While technical factors could coincide with weakness next month (which many will blame on Tariffs and political drama), it's likely that stock market corrections overall prove to be minimal in scope for now.   Betting on anything more given resilient uptrends in place coupled with mass uncertainty is almost always ill-timed and requires sufficient proof.   Below we highlight the SPX having pushed yet again back to new all-time highs by a thin margin, but yet likely will face resistance here and not get to 3000 right away.  Bottom line: Pullbacks down to 2750 should come before 3000, and while not intending to voice "doom and gloom" or ignore the records being set by US indices, it's right to have a sober, honest perspective about both the positive and negatives to try to sort things out.  
 

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Overview:  It's difficult to present something fresh and original on the heels of last week's comments, which are still very much relevant and have real importance for the month of September.   While corrections have not played out yet in US markets, they certainly have globally, and this weakness has real significance to the duration and longevity of how long our own rally can continue uninterrupted.   While a couple of the negatives have dissipated, others have grown more pronounced which we'll discuss below.  Bottom line, this is a month to pay attention, and no time for complacency as the threat of increasing tariffs, geopolitical threats and political drama, all which have grown more intense in the last two weeks.  Initially, it's right to delve into some of the new developments that have occurred over the last five days.

1) S&P Futures joined SPX cash index back at new all-time high territory, above late January highs before stalling at channel resistance

2) NASDAQ Composite and NDX both accelerated last week after exceeding their own "Ascending Triangle" patterns, and are both now at the top of the channel from late January

3) DJIA lagged on the week, and remains under January highs, having NOT confirmed the move in many of the other indices

4) Europe dropped over 1% last week as per EuroSTOXX 50 and remains a huge underperformer to the US, as does Asia

5) US Dollar index bottomed after hitting support and looks to bounce in the days/weeks ahead

6) Emerging markets look to have taken a leg down after their initial bounce, and many of the currencies were even more hard hit than the equities:  Turkish Lira down over 10%, Russian Ruble and also S. African Rand to name a few.  This looks to continue near-term

7) Long-term Treasury yields backed down and are in striking distance of breaking the entire consolidation since January (which if violated, would be a Head and Shoulders pattern, sending yields down to near 2.60%

8) Despite the push higher last week, most of this was Technology and Discretionary focused, with Healthcare also making nearly a 1% gain.  But important sectors like Financials and Industrials were barely positive, just eking out  +0.30-0.50% gains

9) The Defensive trade seems to be waning, not gaining speed, and this has reversed in the last couple weeks, with Utilities, Staples and Telecom all losing ground last week

10) NYSE New 52-week highs have been dropping again, which is a concern as stocks are moving higher.  This finished at 85 New highs last week, down from 140 back on 8/21 and well off the 178 level seen in mid-June.

11) US indices are now officially overbought on daily charts, while on intra-day we've seen strongly overbought levels on 60, 120, 240 min charts before the minor pullback late week.

12) Demark indicators have now completed TD Sequential and TD Combo patterns on NASDAQ, while S&P, IWM, MID, SML, DJIA show TD Sequential, but combo not yet in place and would take another couple days

13) Last, but not least,   Healthcare broke out to new all-time high territory last week, and we've seen a notable uptick in relative performance from this group, making this one to favor among the "risk-on" sectors. 

Now let's list the Concerns we highlighted last week, with an "INCREASED" or "DECREASED" right next to this in bold, highlighting the degree that this problem as gotten worse, or dissipated a bit.  

1) The divergence with US stocks and the rest of the world has grown to be the largest we've seen in years.    (INCREASED)
2) Technology has begun to slow noticeably in the last month, along with Financials, which combined represent more than 40% of the SPX.  Both have underperformed on a one-month basis. ( DECREASED-  Arguable about Financials, but Tech has definitely bounced
3) The VIX has begun to diverge positively with prices, holding up over 10% above where it was in early August. (INCREASED)
4) The divergence of DJIA to hit new highs like the DJ Transports has, and also S&P Futures and NASDAQ 100 are not yet at new high territory is something to watch. ( DJIA still diverging- NASDAQ and S&P FUTURES AT NEW HIGHS)
5) Negative momentum divergence on daily charts of DJIA, SPX and NASDAQ-  Prices have moved to new highs, but momentum has not and actually lower. (DECREASED)
6) The Defensive trade remains in place despite underperformance last week.  Utilities have performed better than Financials, or Industrials this year and have performed better than Technology in the rolling 30 days.  (DECREASED
7) Breadth has improved in a mild fashion since mid-August, yet McClellan's Summation index , the smoothed version of Advance/Decline, still shows this year's peak occurring in June  (SAME)
8) Seasonality in markets for mid-term election years historically shows both August and September to be sub-par  (SAME- Concern for September has increased given that August was positive
9) Sentiment indicators like Investors Intelligence have widened out to a Bull/Bear spread of nearly +40 in the last week, (August 22) with Bulls at 57.7% and Bears at 18.3%, the highest Spread since January.  (INCREASED) 
10) Only 103 stocks in the NYSE were at new 52-week highs, way down from 176 in mid-June and well below the 340 level seen in January of this year  (This ISSUE has gotten worse-  so Increase in problem, new highs are lower
11)  Last, but not least, Demark's TD Sequential and TD Combo indicators are now flashing exhaustion signals on daily charts for the SPX, DJIA, NASDAQ, IWM, MID and will show more signals if the market is able to rally into Wednesday of this week.  The VIX is also showing downside exhaustion at the same time as market indices are showing upside.  (INCREASED)  

Bottom line, the improvement out of Tech has been impressive, but yet now NASDAQ and NDX are at the top of their respective trend channels and we're seeing Demark counter-trend exhaustion on these to match what's been seen on many other indices.  Combining excessive bullish sentiment with overbought conditions, Demark exhaustion and bearish monthly seasonality while US shows huge divergences to Global equities makes for a poor risk/reward in the weeks ahead.  While this uptrend is still intact for SPX, NASDAQ, DJIA  (and yes the trend is the MOST important factor) I'll go out on a limb and say that this should turn down sometime this week, with Monday/Tuesday important as well as Fridayfor a change of trend cyclically.    

LONG/SHORT TECHNICAL STOCK IDEAS-   5 TOP LONGS, 5 TOP SHORTS


LONGS:   TLT, NEP, EXC, NRG, MPC
SHORTS:  TUR, LVS, WHR, BWA, MHK




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

Short-term (3-5 days):  Peak expected by Friday of this week- Trend bullish from Aug 15, but some signs of staling and a downturn looks near given the dropoff in New highs while Financials and industrials have waned a bit in the last week.    As was stated just above, combining excessive bullish sentiment with overbought conditions, Demark exhaustion and bearish monthly seasonality while US shows huge divergences to Global equities makes for a poor risk/reward in the weeks ahead.   Treasury yields have threatened to break key 2.80% which looks like a Giant Head and Shoulders pattern.  However, as always,  it's proper to actually await this break before calling it as such.   Overall, it's right to stick with a defensive tone for September.  Selectivity is key, and one should consider owning implied volatility for either hedging, or speculation purposes.

Intermediate-term (3-5 months)-  Bullish-  (No change) While there remain ample reasons for concerns in the short run, now that markets have nearly finished August with little to no evidence of any real downturn, the period between now and end of year will likely only suffer minor pullbacks between now and into early October before rallying into end of year, postponing the larger decline yet again.  Specifically, the fact that Advance/Decline for All-stocks pushed back to new all-time highs into early July is thought to be a bullish factor.   The fact that Small-cap and Mid-cap indices have rallied back to new highs is also thought to be constructive, as most bear markets start with a serious dropoff in Small and mid-cap performance.  Though some of that did indeed happen in July with the Russell2k, most intermediate-term chart patterns remain constructive.    Overall, the 2 month bias is more negative for a 3-5% drop.  However, on a 4-5 month timeframe, it's likely yet again that markets exhibit seasonal strength.  so given that markets have been able to absorb the relative underperformance in Tech lately with little to no damage, we'll need to see S&P drop under 2700 to have any real concern, and given the tariff taunts which have been ongoing, the sentiment is likely to reflect fear much faster these days than normally which bodes well for the bulls into year end.

Overview:  It's difficult to present something fresh and original on the heels of last week's comments, which are still very much relevant and have real importance for the month of September.   While corrections have not played out yet in US markets, they certainly have globally, and this weakness has real significance to the duration and longevity of how long our own rally can continue uninterrupted.   While a couple of the negatives have dissipated, others have grown more pronounced which we'll discuss below.  Bottom line, this is a month to pay attention, and no time for complacency as the threat of increasing tariffs, geopolitical threats and political drama, all which have grown more intense in the last two weeks.  Initially, it's right to delve into some of the new developments that have occurred over the last five days.

1) S&P Futures joined SPX cash index back at new all-time high territory, above late January highs before stalling at channel resistance
2) NASDAQ Composite and NDX both accelerated last week after exceeding their own "Ascending Triangle" patterns, and are both now at the top of the channel from late January
3) DJIA lagged on the week, and remains under January highs, having NOT confirmed the move in many of the other indices
4) Europe dropped over 1% last week as per EuroSTOXX 50 and remains a huge underperformer to the US, as does Asia
5) US Dollar index bottomed after hitting support and looks to bounce in the days/weeks ahead
6) Emerging markets look to have taken a leg down after their initial bounce, and many of the currencies were even more hard hit than the equities:  Turkish Lira down over 10%, Russian Ruble and also S. African Rand to name a few.  This looks to continue near-term
7) Long-term Treasury yields backed down and are in striking distance of breaking the entire consolidation since January (which if violated, would be a Head and Shoulders pattern, sending yields down to near 2.60%
8) Despite the push higher last week, most of this was Technology and Discretionary focused, with Healthcare also making nearly a 1% gain.  But important sectors like Financials and Industrials were barely positive, just eking out  +0.30-0.50% gains
9) The Defensive trade seems to be waning, not gaining speed, and this has reversed in the last couple weeks, with Utilities, Staples and Telecom all losing ground last week
10) NYSE New 52-week highs have been dropping again, which is a concern as stocks are moving higher.  This finished at 85 New highs last week, down from 140 back on 8/21 and well off the 178 level seen in mid-June.
11) US indices are now officially overbought on daily charts, while on intra-day we've seen strongly overbought levels on 60, 120, 240 min charts before the minor pullback late week.
12) Demark indicators have now completed TD Sequential and TD Combo patterns on NASDAQ, while S&P, IWM, MID, SML, DJIA show TD Sequential, but combo not yet in place and would take another couple days
13) Last, but not least,   Healthcare broke out to new all-time high territory last week, and we've seen a notable uptick in relative performance from this group, making this one to favor among the "risk-on" sectors. 

Now let's list the Concerns we highlighted last week, with an "INCREASED" or "DECREASED" right next to this in bold, highlighting the degree that this problem as gotten worse, or dissipated a bit.  

1) The divergence with US stocks and the rest of the world has grown to be the largest we've seen in years.    INCREASED
2) Technology has begun to slow noticeably in the last month, along with Financials, which combined represent more than 40% of the SPX.  Both have underperformed on a one-month basis. ( DECREASED-  Arguable about Financials, but Tech has definitely bounced
3) The VIX has begun to diverge positively with prices, holding up over 10% above where it was in early August. (INCREASED)
4) The divergence of DJIA to hit new highs like the DJ Transports has, and also S&P Futures and NASDAQ 100 are not yet at new high territory is something to watch. ( DJIA still diverging- NASDAQ and S&P FUTURES AT NEW HIGHS)
5) Negative momentum divergence on daily charts of DJIA, SPX and NASDAQ-  Prices have moved to new highs, but momentum has not and actually lower. (DECREASED)
6) The Defensive trade remains in place despite underperformance last week.  Utilities have performed better than Financials, or Industrials this year and have performed better than Technology in the rolling 30 days.  (DECREASED
7) Breadth has improved in a mild fashion since mid-August, yet McClellan's Summation index , the smoothed version of Advance/Decline, still shows this year's peak occurring in June  (SAME)
8) Seasonality in markets for mid-term election years historically shows both August and September to be sub-par  (SAME- Concern for September has increased given that August was positive
9) Sentiment indicators like Investors Intelligence have widened out to a Bull/Bear spread of nearly +40 in the last week, (August 22) with Bulls at 57.7% and Bears at 18.3%, the highest Spread since January.  (INCREASED) 
10) Only 103 stocks in the NYSE were at new 52-week highs, way down from 176 in mid-June and well below the 340 level seen in January of this year  (This ISSUE has gotten worse-  so Increase in problem, new highs are lower
11)  Last, but not least, Demark's TD Sequential and TD Combo indicators are now flashing exhaustion signals on daily charts for the SPX, DJIA, NASDAQ, IWM, MID and will show more signals if the market is able to rally into Wednesday of this week.  The VIX is also showing downside exhaustion at the same time as market indices are showing upside.  (INCREASED)  

Bottom line, the improvement out of Tech has been impressive, but yet now NASDAQ and NDX are at the top of their respective trend channels and we're seeing Demark counter-trend exhaustion on these to match what's been seen on many other indices.  Combining excessive bullish sentiment with overbought conditions, Demark exhaustion and bearish monthly seasonality while US shows huge divergences to Global equities makes for a poor risk/reward in the weeks ahead.  While this uptrend is still intact for SPX, NASDAQ, DJIA  (and yes the trend is the MOST important factor) I'll go out on a limb and say that this should turn down sometime this week, with Monday/Tuesday important as well as Fridayfor a change of trend cyclically.    

LONG/SHORT TECHNICAL STOCK IDEAS-   5 TOP LONGS, 5 TOP SHORTS


LONGS:   TLT, NEP, EXC, NRG, MPC
SHORTS:  TUR, LVS, WHR, BWA, MHK




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

Short-term (3-5 days):  Peak expected by Friday of this week- Trend bullish from Aug 15, but some signs of staling and a downturn looks near given the dropoff in New highs while Financials and industrials have waned a bit in the last week.    As was stated just above, combining excessive bullish sentiment with overbought conditions, Demark exhaustion and bearish monthly seasonality while US shows huge divergences to Global equities makes for a poor risk/reward in the weeks ahead.   Treasury yields have threatened to break key 2.80% which looks like a Giant Head and Shoulders pattern.  However, as always,  it's proper to actually await this break before calling it as such.   Overall, it's right to stick with a defensive tone for September.  Selectivity is key, and one should consider owning implied volatility for either hedging, or speculation purposes.

Intermediate-term (3-5 months)-  Bullish-  (No change) While there remain ample reasons for concerns in the short run, now that markets have nearly finished August with little to no evidence of any real downturn, the period between now and end of year will likely only suffer minor pullbacks between now and into early October before rallying into end of year, postponing the larger decline yet again.  Specifically, the fact that Advance/Decline for All-stocks pushed back to new all-time highs into early July is thought to be a bullish factor.   The fact that Small-cap and Mid-cap indices have rallied back to new highs is also thought to be constructive, as most bear markets start with a serious dropoff in Small and mid-cap performance.  Though some of that did indeed happen in July with the Russell2k, most intermediate-term chart patterns remain constructive.    Overall, the 2 month bias is more negative for a 3-5% drop.  However, on a 4-5 month timeframe, it's likely yet again that markets exhibit seasonal strength.  so given that markets have been able to absorb the relative underperformance in Tech lately with little to no damage, we'll need to see S&P drop under 2700 to have any real concern, and given the tariff taunts which have been ongoing, the sentiment is likely to reflect fear much faster these days than normally which bodes well for the bulls into year end.


5 of the most Important charts to watch for September, and ETF's to buy to play the move
 

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Technology waning would be a big deal to stocks-  Short XLK this week, and consider shorting SMH for Short Semi exposure given lackluster charts and performance out of MU, AVGO and others.  In the last week we've seen XLK stage a decent comeback, and move right to the higher end of its trend channel.  Now momentum is overbought, while counter-trend exhaustion is present for the first time since early this year.  If XLK turns down to break $72.15, this would be a big deal for the broader market, given Tech's weight in SPX.  For now, the sector rotation seems to have shown a move back into Tech, but i'm skeptical this can continue given where Tech is trading now.  Technology appears like a poor risk/reward for September, and it's right to take down exposure technically and wait for corrections before buying back.

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Treasury yield breakdown seems near-  Buy TLT, or 10-year US Treasuries, sell TBT-  US 10-Year Treasuries breaking 2.80% in yield terms would also likely be troublesome for stocks.   Yields seem to have continued their recent drop, despite markets having priced in over 90% Hike chances for September (which seems like a forgone conclusion)  Meanwhile the odds for December are still over 60% while yields have not quite signaled the same comfort zone with the FOMC's plans.  Sentiment seems unanimously convinced that rates are moving higher as per the CFTC data, which still shows -530k short Futures by Non-Commercial "Specs" nearly the highest on record.  Yet the technical pattern in TNX argues that yields very well could continue lower in the weeks/months ahead.  The giant consolidation seen since early this year appears like a Head and Shoulders pattern, which would be confirmed on a break of 2.80%.   This is thought to be problematic for two key reasons.  First, Financials would likely underperform in this environment.  Second, yields dropping sharply might cause the Fed to Second guess their pace of rate hikes, as the yield curve would invert much more quickly.. Yields have also tended to lead equities over the last couple years, and while this has diverged somewhat lately, it's still important if yields make a big breakdown.   Overall, this chart is very important to keep an eye on in the weeks ahead. 

 

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McClellan's Summation Index-  Watch for when this turns down- Now seemingly at resistance- This smoothed version of Advanced/Decline often gives a solid warning as to when stocks start to weaken, as a serious deterioration in breadth typically happens before stocks turn down , and vice versa.  Lately, we saw the Summation index peak out in June and also in late January, while recently having staged a bounce to levels just below July highs.   Momentum indicators on the Summation index itself have gotten overbought, while Demark indicators are now flashing TD Sell setups with a possible TD Combo 13 Countdown sell this week, similar to what happened at the highs in January and also buys right at the lows in February.  Overall, it's important to watch for when this starts to weaken, and this now has risen to levels which should mark technical resistance where this kind of thing could happen.  Bottom line, any staling in breadth or weakening in the next few days would see this turn down, likely coinciding with a broader market correction over the next few weeks. 

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VIX breakout seems imminent- Buy Implied volatility and/or consider ETF's which allow one to profit as the VIX goes higher for the next 3-5 weeks.   Watch implied volatility carefully as a warning for when stocks might rollover. The CBOE Volatlity index, or VIX,  has had a compelling record lately as a warning sign for market weakness when it begins to exhibit positive correlation with the SPX.  Just in the last year, when we've seen a 10-day correlation top 0, from negative territory, turning positive, this has happened prior to at least minor setbacks in stocks.  Yet again, we've seen the VIX start to turn higher in recent weeks, and at current levels is nearly 12% greater than where this bottomed in early August.  Technically the fact that its managed to make higher lows into August and then turn higher late last week makes this very constructive looking technically, and has gotten stronger, despite not yet having broken out.   One should be on the Lookout for when its current intermediate-term downtrend is violated, as this would coincide with a probable rapid escalation in implied volatility for the month of September.  

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JP Morgan Emerging Market Currency index-  Buy USDRUB, USDTRY, USDZAR for next 3-5 weeks, or sell EEM, and hold off on buying until late September/early October.  The downturn to new lows in Emerging market currencies very well might coincide with Equity weakness in the weeks ahead, as the US Dollar stabilization and Tariff/trade stress might put further pressure on Emerging market currencies. Last week brought about a 12% decline in the Turkish Lira, and signs of both Ruble and Rand weakness and this follows a very rapid depreciation in the Argentinian Peso and ongoing carnage in Venezuelan Bolivar.  Emerging markets seem to have turned down again, for what could be a 3-5 week pullback throughout September, and the EEM along with this index, the FXJPEMCI index in Bloomberg, should be eyed carefully for signs of downward acceleration, or in any attempts at stabilizing.  Evidence of some positive divergence is now present in this index, while Elliott structure shows this to be likely the final pullback of this current 10-year decline.  However, given the recent breakdown, this has begun to pick up speed, and the skittishness in Emerging markets seems important to highlight as a negative factor for stocks.  

Top Energy stocks to consider, Technically

August 27, 2018

Contact: info@newtonadvisor.com

S&P 500 SPDR ETF Trust- SPY
283.59, 281.62, 280.16, 279, 278.19, 2760276.50      Support
286.01, 286.62, 287.01, 287.50                                   Resistance

 

Summary:  Technically it's likely that the next 1-2 weeks brings about a short-term peak that causes a 4-5% correction in stocks for the month of September.  While intermediate-term trends are very much intact for the US, and the Advance/Decline is at new highs along with many other indices, the divergences have grown striking, which as explained below, is occurring on multiple fronts and is not just about US vs overseas performance.   Furthermore, Interest rates on the long end have been quite low, representing not just ample global liquidity but also perhaps a concern about economic growth in the years to come.  However, the resilience of stocks during time of very negative news flow is something to cheer, not fret about, and the US continues to be the "best house in a bad neighborhood" with regards to global stock market performance for 2018.    While technical factors could coincide with weakness next month (which many will blame on Tariffs and political drama), it's likely that stock market corrections overall prove to be minimal in scope for now.   Betting on anything more given resilient uptrends in place coupled with mass uncertainty is almost always ill-timed and requires sufficient proof.   Below we highlight the SPX having pushed yet again back to new all-time highs by a thin margin, but yet likely will face resistance here and not get to 3000 right away.  Bottom line: Pullbacks down to 2750 should come before 3000, and while not intending to voice "doom and gloom" or ignore the records being set by US indices, it's right to have a sober, honest perspective about both the positive and negatives to try to sort things out.  
 

Overview:  Yet again, US equity markets continue to defy gravity, churning higher to set new records for the longest bull market of all time with little to no regard to much of what's going on in the rest of the world.  (Whether the May-October 2011 decline causes this bull market record to be relabeled is a topic for a different discussion)  While news of political convictions, guilty pleas and/or grants of immunity have failed to take markets lower, neither have the ongoing tariffs which many believed would be problematic.  News of course is a funny thing.  It's often what serves as the narrative to explain both good and bad times in markets, yet often is conveniently ignored when it doesn't work.   Given political drama ramping up again, it's insightful to take note of what Barron's (Aug.27, 2018) notes about impeachment and market activity.   They reference the Watergate period coinciding with one of the steepest declines in Equities on record during 1974, yet Nixon resigned before facing impeachment.  The Clinton era in the late 90s however saw stocks rally 25% in 1998 leading up to Bill Clinton's impeachment which obviously wasn't a time to avoid Equities and seek safe havens.  Now the US faces a similar period of uncertainty with regards to how recent developments will play out this year and heading into the mid-term elections.  The bottom line of course, if history is any guide, these prior times in history only serve to reinforce the importance of paying attention to markets, while avoiding the news.

Of course, technically speaking, we're always taught to ignore news, as it rarely matters anyway as to being the actual "cause" of price action.   Only in retrospect do most of us look back and select various news stories to back up why we believed prices moved the way they did.   Yet, price action is largely based on sentiment and cycles and often has no bearing on where prices should go, as markets always tend to discount events and its widely known that noone truly knows the value of any one piece of information, and what's "in" the market already, and what's "not"  So trusting the trends  provides all of us with a non-emotional, mechanical way of being able to trade with the trend regardless of good, or bad news.  

Getting back to markets, there have been ample reasons to be skeptical of the longevity of this move, despite the lack of trend damage, which have nothing to do with News.  Let's list out the concerns, and also the positive factors.
1) The divergence with US stocks and the rest of the world has grown to be the largest we've seen in years.  
2) Technology has begun to slow noticeably in the last month, along with Financials, which combined represent more than 40% of the SPX.  Both have underperformed on a one-month basis.
3) The VIX has begun to diverge positively with prices, holding up over 10% above where it was in early August.
4) The divergence of DJIA to hit new highs like the DJ Transports has, and also S&P Futures and NASDAQ 100 are not yet at new high territory is something to watch.
5) Negative momentum divergence on daily charts of DJIA, SPX and NASDAQ-  Prices have moved to new highs, but momentum has not and actually lower.
6) The Defensive trade remains in place despite underperformance last week.  Utilities have performed better than Financials, or Industrials this year and have performed better than Technology in the rolling 30 days.
7) Breadth has improved in a mild fashion since mid-August, yet McClellan's Summation index , the smoothed version of Advance/Decline, still shows this year's peak occurring in June
8) Seasonality in markets for mid-term election years historically shows both August and September to be sub-par
9) Sentiment indicators like Investors Intelligence have widened out to a Bull/Bear spread of nearly +40 in the last week, (August 22) with Bulls at 57.7% and Bears at 18.3%, the highest Spread since January.  
10) Only 103 stocks in the NYSE were at new 52-week highs, way down from 176 in mid-June and well below the 340 level seen in January of this year
11)  Last, but not least, Demark's TD Sequential and TD Combo indicators are now flashing exhaustion signals on daily charts for the SPX, DJIA, NASDAQ, IWM, MID and will show more signals if the market is able to rally into Wednesday of this week.  The VIX is also showing downside exhaustion at the same time as market indices are showing upside.

Yet of course, there's been a lot of positive developments also that need to be considered. 
1) First and foremost, long-term uptrends remain intact as well as uptrends from 2016 winter lows and uptrends from April of this year.  A move down under 2750 would be needed to show even minor short-term trend damage
2) The Russell 2000, the S&P Small Cap 600 index, S&P Mid-cap 400 index along with the DJ Transportation Average and SPX, and NASDAQ Composite have all moved back to new high territory. 
3) Credit has been in very good shape, and no evidence of spread widening.  The High Yield OAS index is at just 3.36%, or 336 bps over the 5-year Treasury, or a tad tighter than where 2018 started.
4) Advance/decline line is at new highs, & historically pulls back sharply to diverge ahead of bear markets.  This has only peaked along with stocks twice in the last 100 years:  1946 and 1976.. Mostly this gives an excellent warning.
5) Technology, the main driver of this rally in the last 12 months, remains trending higher vs SPX in ratio form.  Despite the underperformance lately, tech has not broken its relative uptrend
6) Growth has made just a near-term peak vs Value, but overall still trending higher on intermediate-term basis given the uptrend from November 2016 when this bottomed and rose sharply following the US Election


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

Short-term (3-5 days):  Trend bullish and 2890-5 cannot be ruled out, but SPX likely to peak sometime in the next 2 weeks with Demark indicators being complete by Wednesdayon a plethora of assets.  The reversal down under 2846 should be respected, and likely leads down to test and break 2800.  Ideally this would take the form of an early week rally but which peaks out Tuesday or Wednesday and turns lower to end the week down.  However, until then, as has proven to be the case over the last week, owning implied volatility could prove to be a more attractive trade than trying to short Futures before prices show evidence of breaking trends.    Defensive tone recommended and selectivity is key as markets enter the seasonally bearish month of September


Intermediate-term (3-5 months)-  Bullish-  (No change) While there remain ample reasons for concerns in the short run, now that markets have nearly finished August with little to no evidence of any real downturn, the period between now and end of year will likely only suffer minor pullbacks between now and into early October before rallying into end of year, postponing the larger decline yet again.  Specifically, the fact that Advance/Decline for All-stocks pushed back to new all-time highs into early July is thought to be a bullish factor.   The fact that Small-cap and Mid-cap indices have rallied back to new highs is also thought to be constructive, as most bear markets start with a serious dropoff in Small and mid-cap performance.  Though some of that did indeed happen in July with the Russell2k, most intermediate-term chart patterns remain constructive.    Overall, the 2 month bias is more negative for a 3-5% drop.  However, on a 4-5 month timeframe, it's likely yet again that markets exhibit seasonal strength.  so given that markets have been able to absorb the relative underperformance in Tech lately with little to no damage, we'll need to see S&P drop under 2700 to have any real concern, and given the tariff taunts which have been ongoing, the sentiment is likely to reflect fear much faster these days than normally which bodes well for the bulls into year end.


This week we'll take the time to dissect the Energy sector, as the recent breakout in Crude oil has resulted in this sector outperforming every other sector this past week.  While Energy is the worst performing sector on a 1 and 3 month basis, it's the best in the past week and third best in the past six months, so a very interesting roller coaster ride indeed.  Bottom line, Refiners along with the broader Exploration and Production stocks remain the most attractive part of this group.  While the Oil service names have rallied, they have not yet done so in a manner that suggests a large Energy boom awaits.   Overall, selectivity is important for Energy as with most sectors in the market at this moment.  We'll cover technicals of some of the sector indices, relative charts and then cover 5 attractive stocks to consider for long trades.


ENERGY-  Crude, XLE/SPX, Sector charts, and 5 Technically Attractive Energy to consider
 

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WTI Crude oil  (October '18 contract)    Crude's breakout last week was constructive in thinking prices likely can rise back to challenge July highs.  However, after 6 of the last 7 "Up" days, it's likely that prices might require some minor consolidation in the near future before an immediate retest occurs.  Daily charts show prices having broken the minor downtrend from early July which is a technical positive.  However, Bollinger Bands (shown in Yellow) which give 2% standard deviation price range, show prices now nearing the upper end of this band, making a move right away above $71 probably unlikely.   Seasonality tends to favor the period from February-May rather than October-February for Crude and the last 10 years have shown mixed results into year-end.  Despite the last two positive years for September/October period, the five years preceding were largely negative, seasonally speaking.   Overall, the near-term trend is more bullish than bearish, and does support the notion that an eventual retest should occur rather than a move back down to test the lows.    Crude longs are favored for a move to 71, while only a violation of $64 would postpone this rally, changing the thesis to more negative.  

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XLE vs SPX-  Short-term Positive, but challenges await-   Relatively speaking, it's still a bit early to think that Energy has turned the corner-  As was mentioned earlier, Energy has been the best performing sector in the last week, but the worst performing over the last one and three-month period.   Last week's outperformance helped the relative strength in Energy to improve slightly and this ratio chart managed to exceed a minor one-month downtrend.   Overall, this is constructive.   However, the pattern from May remains downward sloping and has not been exceeded.   This is the critical next step for Energy as a sector to start to demonstrate real strength and more signs of trending behavior.  At present, short-term strength is likely only and difficult to make the larger call without more evidence.  

 

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Exploration & Production ETF (XOP- $42.05)  Bullish for further bounce after last week's reversal near important trendline support.   The weekly XOP chart shows prices having pushed up into key resistance near $45 before reversing back lower into early August and hitting trendline support.  This looks to have successfully held given last week's push to new weekly highs, having held where it needed to.  Thus, a push back up to $45 looks likely, and any ability to get back over at this point given the consolidation near the former highs would be quite bullish for this group to start a larger rally.   For now, it remains right to be selective, as certain stocks like APA, XEC, NFX, EOG just aren't all that attractive yet technically and patience is required.   XOP does still look better than either OIH, or XLE, so this sector should still be favored for outperformance and bulls are right to consider XOP within Energy given the structure and recent relative strength.  
 

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XOP/OIH  Relative chart-   Big outperformance since this spring in XOP after Breakout-  One of the bigger mysteries to many this year concerns the degree to which XOP has powered higher, while most of OIH has been under pressure and/or has not participated.  This can be clearly seen in this ratio chart, which technically broke out earlier this year and has shown steady outperformance in recent months.  This has made XOP the way to play Energy, as opposed to owning OIH and expecting any meaningful strength.     Indeed, many stocks within OIH like HAL, WFT, RDC, DO, NBR, have had rough years, despite Crude being higher.  Halliburton is down over 10% for the year, and stocks like Weatherford are lower by over 30%.  While this ratio of XOP to OIH looks stretched, we'll need to see more evidence of this peaking out before thinking that this relative ratio is reversing.  Counter-trend signs of exhaustion look to be close, but given the uptrend and ongoing resilience, XOP still looks like the place to be.  

Exploration and Production ETF, Relative to Drillers  As this relative chart shows, the E&Ps have actually been lagging in the last month vs Drillers, most of which have bounced hard while the E&P names have underperformed.  However, this relative chart looks close to turning back higher, and as such the Exploration and Production stocks should be counted on to start to move higher in the weeks ahead relative to the Drillers.  Most of this thinking is based on a combination of near-term oversold conditions for this ratio along with counter-trend signs of exhaustion that were present at both former bottoms in the Spring and also in early 2017 the last time this bottomed and turned higher.  



Top Technical Long Ideas among Energy-   SM, VLO, PVAC, DNR, and ANDV
 

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SM Energy (SM- $30.39) Bullish Trendline breakout- SM should be favored for further gains in the weeks ahead.   The stock has just managed to exceed the two prior highs from earlier in the year.  As this weekly chart shows, the stock has broken out of the three-year downtrend and now just beginning to extend after a lengthy period of base-building.  Near-term technical targets for SM lie near $31.40, then $35, with movement over that allowing for a push up to near late 2016 highs.  $40 would represent a 38.2% Fibonacci retracement of the entire pullback from 2014.  On the downside, $26 represents the key area of risk for SM, and it can't afford to get back under that level without changing its pattern.  

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Valero Energy Corp.  (VLO- $120.55) Most Refiners still quite positive- Move to challenge/exceed all-time highs likely  VLO has shown some stellar performance in recent months.  The stock has doubled from levels seen at this time last Summer, and after just a minor consolidation since early June, last week's push to new weekly highs should represent the start to a push higher to challenge and exceed the highs made in early June near $127.  Initial resistance is at $122.60 and only on a violation of $110 would the trend turn back to negative.  For now, last week's push to multi-week highs gives this a lot of near-term acceleration and I expect higher prices.  

 

Penn Virginia (PVAC- $83.43)   The recent pullback from early July looks complete and should enable PVAC to turn higher to test and exceed recent All-time highs made back in mid-July.  Last week successfully closed at the highest weekly close in three weeks time, and after a minor pullback following its steep decline from this past Spring, makes this attractive for further gains to challenge targets at $95-$96 and then push higher up to $100.   Momentum remains positive given the degree of gains this showed in nearly tripling in price from this past Spring, and when $90 is exceeded, it's likely to not have too much trouble in getting up to $100 given its momentum.  Only a move down under $75 on a weekly close would postpone this advance, signaling a potential further drawdown to $72 before this bottoms which represents the first meaningful downside Fibonacci target on its pullback.   
 

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Denbury Resources Inc (DNR- $5.22) DNR is quite bullish near-term given the stock's ability to have exceeded mid-July weekly closing highs which puts this at the highest levels since mid-2015.  Further near-term strength looks likely based on last week's gains to areas near $6.24, and then $7.70, and $9.78 are both important for different reasons.  When scanning this stock for possible exhaustion, we see that at both former bottoms, last Fall and also in early 2016, DNR had completed counter-trend TD Sequential Countdowns (13) while on this rally they remain early by at least another 3 weeks.  Overall, the act of making a new weekly close above the highs of the last few weeks bodes well for this to follow-through higher, and longs look attractive, looking to buy dips if given the chance in early September. Only a move back under $4.19 would cancel the attractiveness of this pattern.  

 

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Andeavor (ANDV- $155.26) Push to new all-time highs keeps this rally intact.   ANDV has shown some excellent strength in recent months, having engineered a successful breakout of a large Cup and Handle pattern back in late April when the stock got above $120 which represented a breakout of both early 2018 as well as 2015 highs.  While ANDV has shown steep gains since this Spring, there's no immediate evidence of this losing speed, and if anything, last week's move back to new highs likely can allow for additional strength into the Fall.   While counter-trend sells look to be 3-5 weeks away, any near-term weakness before these are complete should be a buying opportunity for a push higher , with targets up near $170.   

Top REITS to consider technically

August 20, 2018

Contact: info@newtonadvisor.com

S&P 500 SPDR ETF Trust- SPY
283.59, 281.62, 280.16, 279, 278.19, 2760276.50      Support
286.01, 286.62, 287.01, 287.50                                   Resistance

 

Part 2 of last week's Divergence comments center on the extent to which the US and the rest of the world have diverged.   This chart shows the S&P having rallied steady since early April to within striking distance of highs.  However, the MSCI "All-World" Ex-US index has plunged to the lowest levels of the year as of last week, hitting levels it hasn't seen since last Summer.   This is somewhat problematic for the bull case heading into the last couple weeks of a very seasonally challenging month along with the worst seasonal month of the year, September.  While many expect profits to remain steady, the FOMC to hike rates and economic expansion continuing with stocks rising into year-end, this graph paints a very different and more troublesome picture.  Either Europe and Asia rebound sharply, or the US could begin to narrow this gap by turning down.   While intermediate-term trends are very much intact for the US, the next 4-6 weeks look to be problematic for the Bulls.  The defensive posturing tends to be an early warning sign, and now FANG stocks have struggled lately, which is something to keep a close eye on.  This week's Report discusses the Defensive trade in further detail, highlighting some of the better REITS to consider, along with some index charts to make sense of the S&P and Global equity indices. 
 

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Summary:  US markets are growing closer to experiencing weakness but heading into the final two weeks of August, it remains difficult to have nearly as much confidence about avoiding US stocks when comparing prices to the rest of the globe.  The early week pullback in US stocks proved incredibly short-lived, with US holding key support near 2800 before moving higher.  Despite breadth and momentum rolling over, US equities have been able to successfully defy gravity despite all the divergences.  Defensive sectors like Utilities, and REITS showed strong outperformance last week, while Technology demonstrated additional evidence of trying to rollover.   Meanwhile, China's Shanghai composite hit the lowest levels since 2014 while Europe also fell on hard times, as the STOXX50 moved to levels which haven't been seen on a weekly close since late March.  Clearly a much different picture than has been seen nearly all year in Equities, and indices going in sharply different directions.  Elsewhere, the Dollar showed a few signs of trying to turn lower, while Gold and Crude managed to bounce fractionally into end of week after having experienced a very difficult August thus far.   To close out the week, the CBOE Implied Volatility index, or VIX, plunged down below 13 to violate the lows of the last four days, in a pattern many would describe as a Head and Shoulders top on hourly charts.  

While  factors like Declining momentum and poor breadth were important most of the week (outside of last Thursday), other warning signs included this Divergence highlighted above.  Seasonality tends to suggest the period between now and end of month is a negative and indices have just passed the most bullish part of August (the 8-13th trading day) while the rest of the month tends to be fairly negative in mid-term Election year Augusts  (Particularly in the NASDAQ which are down nearly 1.9% or the 2nd to worst month of the year) Furthermore, as has been mentioned, the NY FANG index (NYFANG-Bloomberg) peaked out in June and has trended lower, as has the SOX, the Philly Semiconductor index which often can serve as a leading indicator.   Bottom line, the MSCI "All-World" Ex-USA index falling to the lowest levels of the year seems to NOT be a positive, and eventually should lead the US to join suit.   Heading into this coming week, that might still prove premature, but signs of Technology waning further were present late last week, and this sector seems to the glue that's had the market together for now.  When Tech finally starts to turn down (instead of just wobbling and underperforming) one can make a stronger negative case for Equities in the short run.   Specifically for early this week, a retest of August 7 highs looks likely, but would cause the first Demark Sequential and Combo exhaustion signals to appear in unison for the first time this year.   Upside looks limited given SPX's push to test upper channel resistance highs in a manner which suggests a possible completion to a five-wave advance from the middle part of last week.  For this week, early week strength to test and exceed early August highs should be seen as an opportunity to pair down longs into this advance. 

The following support levels, specifically are important and should be watched carefully if indices begin to pullback and test/break July and/or  June lows in unison throughout September.

SPY-  280.16, 276, 268.49
SPX- 2796-2800, 2755-2760, 2691
DJIA- 24965, 24,000
NASDAQ 100- 7158, 6950
Nasdaq Composite- 7604, 7419


While an upcoming peak is anticipated for stocks, these reasons stand out as reasons why its Impossible to be that negative on an intermediate-term basis yet, and near-term pullbacks would represent buying opportunities when they arrive.:

 

  1. "All Stocks" Advance/Decline line still within striking distance of new highs (New highs in early August)
  2. No evidence of Credit trouble. If anything, high yield has remained fairly calm over the last few weeks. High Yield typically will turn down in advance of Stocks
  3. Sentiment could turn bearish pretty quickly given the Tariff threats and now EM stress as a 1-2 punch.  Thus far, the Turkish situation seems to be idiosyncratic and not as source of systemic risk.  
  4. Long-term trends are still in good shape for most, if not all US Equity indices and sectors, and no real intermediate-term trend breaks



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

Short-term (3-5 days):  Leaning Bearish for the week, but expecting that S&P likely challenges early August highs Monday or Tuesday before a late week pullback.  Upside should be contained at 2860-75 while initial warning levels on the downside lie at 2833, and then 2821.  Under 2821 should lead to a test and probable break of the August 15 intra-day lows near 2800.   Key support to look at buying on pullbacks under 2800 lies down at 2750-5.  Monday should allow for a final push higher as part of the wave structure since last Wednesday's lows, and it's expected that SPX should test, if not briefly exceed 2863.48, the intra-day highs from August 7, before stalling out and turning lower.  Note, to have conviction that a bear trend has begun, prices need to break 2821 on a close, but it's thought that a bullish stance in the last 2 weeks of August should be a poor risk/reward and difficult to monetize given the rampant sector rotation.  


Intermediate-term (3-5 months)-  Bullish-  While there remain ample reasons for concerns in the short run, now that markets have entered August with little to no evidence of any real downturn, the period between now and end of year will likely only suffer minor pullbacks between now and into early October before rallying into end of year, postponing the larger decline yet again.  Specifically, the fact that Advance/Decline for All-stocks pushed back to new all-time highs into early July is thought to be a bullish factor.   The fact that Small-cap and Mid-cap indices have rallied back to new highs is also thought to be constructive, as most bear markets start with a serious dropoff in Small and mid-cap performance.  Though some of that did indeed happen in July with the Russell2k, most intermediate-term chart patterns remain constructive.    Overall, the 2 month bias is more negative for a 3-5% drop.  However, on a 4-5 month timeframe, it's likely yet again that markets exhibit seasonal strength.  so given that markets have been able to absorb the relative underperformance in Tech lately with little to no damage, we'll need to see S&P drop under 2700 to have any real concern, and given the tariff taunts which have been ongoing, the sentiment is likely to reflect fear much faster these days than normally which bodes well for the bulls into year end.




SPX, 10-Year Yields, REIT ETF (VNQ)  and 5 Technically Attractive REITS to consider
 

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S&P 500 Index (SPX- 2850.13)  Trend bullish, but prices starting to "wobble" a bitwith prices up near highs of this trend channel.  The recent price action increasingly suggests that this rally might require some greater consolidation, particularly heading into a rough stretch of market seasonality.   Overall, the pattern in SPX remains positive technically and as daily charts show, has been trading within this trend channel for the last few months ever since stocks bottomed in early February.  While the trend itself has been positive in recent months, momentum has begun to diverge as a result of this recent failure to make headway above the upper side of the channel, and failed to follow prices when S&P moved up to make its high into August 7/8.   While not specifically bearish trend-wise until prices get down under 2800 (with larger support 2750)  the upside and risk/reward for stocks appears increasingly sub-par.  The risk of a reversal back lower in the next few weeks looks to be very real, and falloff in Technology in particular could be the culprit for at least a short-term decline.  This daily SPX chart should be watched carefully for evidence of failure  while upside should be limited over the next couple weeks into September.  
 

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10-Year Treasury Note Yield (TNX-2.86%) Yields have pulled back in recent weeks to key areas of near-term support just above 2.82%.   While a counter-trend bounce is likely, potentially into late August/early September, the long-term chart has grown more top-like given the extent of the recent yield decline, resembling a potential large eight-month Head and Shoulders pattern.   The positioning of the non-commercial traders right now adds some credibility to this pattern, as CFTC data shows shorts continuing to build to new records in the last couple weeks (-698k as of 8/14/18) This ongoing "building" of shorts by traders will likely result in this pattern breaking down for yields, potentially in the month of September, as the markets is anticipating another round of tightening in next month's meeting.   However, given that long rates have not moved up as anticipated, but are threatening a larger breakdown, it should still pay to favor defensive sectors, and among these, the Real Estate Investment Trusts, which is the focus of this week's Weekly Technical Perspective.   Overall, breaks of 2.82 would argue for a quick move down to 2.73, but would result in a larger yield decline before any turn back higher.  Note on daily 10-year Yield charts that momentum failed to match the yield spike into May and yields have subsequently made a much lower highs into late july before turning down sharply over the last couple weeks.   Technically one should use any minor lift in yields to consider buying Treasuries for an upcoming yield break in the weeks/months ahead, and any support violation should keep yield-sensitive sectors like the REITS as outperformers.  

 

Vanguard Real Estate ETF (VNQ- $84.06) (DAILY CHART) REITS look attractive technically given the ability of prices to have pushed up through the recent one-month "Cup and Handle" pattern started in early July.   Further gains look likely with targets up near $86 initially which marked the highs for most of 2017.   Daily charts show last Friday's breakout, along with the move in VNQ back over the prior lows that were in place for most of 2017 before this broke down early this year.   The act of reclaiming these lows is thought to be constructive in helping VNQ to outperform during an upcoming challenging time for US stocks in September.  Dips back down to 83-83.50 are thought to be attractive to buy into after a sharp four days of gains that led to this breakout.  Conversely any break of $81.38, last Monday's lows, would postpone any larger rally for now.  
 

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Vanguard REIT ETF (VNQ-$84.06)  WEEKLY chart- Bullish on break of two different trends back higher.   This weekly REIT chart presents a different view from what was seen above and shows the flattening out of this uptrend since bottoming out back in 2009. The minor support trendline representing the flatter pace of advance from 2011 was undercut briefly into this year, but the last few weeks have helped to regain this uptrend, along with exceeding another important trend from 2016 highs.   Given that yields are on the precipice of a potential breakdown while defensive stocks have improved, VNQ looks likely to rally up to challenge and exceed 2017 highs near $86 and could make a bit more headway to close in on 2016 highs before any peak occurs.  The trend from early 2018 remains positive and this recent progress is thought to be bullish for this sector, and an area to consider for the next 6-8 weeks which might bring about increased market volatility.  

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VNQ relative to SPX-  Bullish near-term on the ability to break the downtrend from mid-2016.   This daily ratio chart shows the recent progress in the REITS which have made this sector one to favor technically at a time when many are still focused on Technology.   The steady decline last year relative to the market coincided with a period of rising rates when the 10-Year bottomed out at 2% and steadily rose to near 3% into early this year.   Now that yields have begun to weaken back to key support and form a potentially larger topping pattern for the next few months, it's thought that REITS should continue to outperform, both from a positive structural standpoint, but also relatively speaking at a time when yield trends have been largely rangebound and more negative than positive in recent months.   If when this mild uptrend from early this year gives way, it will be important to address.  At present, between now and October, this looks like a sector to favor.   



Top Technical Long Ideas among the REITS
 

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Prologis Inc. (PLD-$67.43) Bullish with last week's rally back to new highs breaking out of the consolidation which has been ongoing for PLD since last November as part of the uptrend from early 2016.   Interestingly enough, after last November managed to exceed 2007 highs by a small margin, this required some consolidation which has now lasted eight months.  Last week's breakout, however, suggests that PLD is exiting this range and starting a new uptrend.   This is compelling technically not just for the act of exceeding a prior high, but also that PLD is also making a more meaningful move above the highs from 2007.  One should position long in PLD, using any dips to buy, with resistance initially found in the low $70s, but with intermediate-term technical targets up near $80. 

 

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Brookfield Asset Management (BAM- $43.98) Bullish, and while minor resistance lies near December 2017 highs, just above current levels, the act of BAM having begun to accelerate at a quicker pace in recent months bodes well for this to trade up to the high $40's without much trouble.  The act of surpassing 2015 highs helped BAM show some great momentum at a time which was generally poor for most REITS.   The consolidation between December '17 into February of this year proved brief in scope and duration and failed to violate any real support.  Pullbacks managed to hold at the former peaks which look to have now served as support to the decline. The last six months have seen BAM rally back to test the former highs and should pave the way for an upcoming breakout to follow the move seen in VNQ last week.  Overall the long-term symmetrical nature of this advance which has grown steeper in ascent in the last 12 months combined with it trading right at all-time highs makes it attractive to own for further gains in the weeks ahead.   Pullbacks to $41-42 should offer a better risk/reward buying opportunity for strength into the high $40's.  

 

CubeSmart (CUBE-$31.75) Bullish, and CUBE's pullback over the last month now looks to be complete and should offer a push higher to test and exceed recent highs made near $33.18.  Looking back at its weekly chart over the last dozen years, CUBE has carved out a very bullish technical pattern with its ability to exceed 2007 highs before consolidating since mid-2016.   This former high following the peak in April 2016 has already been tested once into early July, and last week's gains to turn back up sharply to new multi-week highs signify the likely start of gains which ultimately should break out to new high territory in the next 6-8 weeks.  The act of pulling back from early July has helped to alleviate the near-term overbought conditions, making for an excellent risk/reward at a time when REITS have begun to outperform given the recent downdraft in long rates.   Overall, CUBE is attractive to buy at current levels technically and pullbacks in the week ahead would offer a better suited risk/reward for buying with targets in the high $30's.

 

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Apartment Investment & Management (AIV- $43.91) Bullish for test of highs- Given the recent snapback in Apartment REITS over the last six months, AIV looks appealing to own for a move back to test and exceed all-time highs made back in 2016.   The structure from 2007 to 2016 showed a very steep decline followed up by a slow rally back to retest those former all-time highs, which happened nearly 10 years after initial highs were made.  The subsequent two years gave way to consolidation within striking distance of these former all-time highs, which now shows evidence of possibly being complete.  The rally over the last few months have proven strong enough to help monthly RSI regain 50, and MACD has rapidly been converging towards the signal line.  While some might view the break of the eight year uptrend as being bearish, the fact that AIV has managed to recoup the former lows that were breached in the low 40s is thought to be a real positive, structurally speaking.  Any push back to test $45-$47.50 will help this recent two-year consolidation take the shape of a "Handle" of a large Cup and Handle from the 2007 peaks.  Therefore, this looks attractive to own now as this makes its way back to former all-time highs.   While $45-$47.50 should offer at least some resistance, the long-term structure of this pattern is excellent and will grow more bullish on the ability of AIV to exceed $47.50 on a weekly close.  Only a pullback down under $40.50 postpones this move, and $37.97 would be an important area for risk that can't be breached without thinking this scenario is wrong.  At present, this should advance to test all-time highs technically in the weeks ahead.  

 

SL Green Realty Corp (SLG- $105.86) Bullish given SLG's ability to exceed intermediate-term trendline reisstance that had held this REIT in a downtrend since peaking out in 2015.   While progress back towards all-time highs will take time, the fact that this breakout just happened within the last couple months of a decline that had been ongoing for the last three years, SLG should show some above-average gains between now and October at a time when REITS have begun to outperform.   This has added attractiveness for those that prefer buying well off all-time highs, as SLG trades over 20% off all-time highs made three years ago, yet has begun to show some excellent signs of momentum acceleration in recent weeks.  Initial targets come in near $108, the 50% area of SLG's entire decline from 2015, while above that should pave the way for a test of $118-$120 near late 2015/mid-2016 highs.   Pullbacks in the days/weeks to come near $102-$104 should offer an even better risk/reward, while only a decline under $97 negates this pattern and would result in additional weakness.  At present, this looks like a great mean reversion candidate at a time when this group has begun to pick up steam.   

Odds favoring a pullback to S&P 2800 unless immediate recovery of 2833 occurs

August 13, 2018

Contact: info@newtonadvisor.com

S&P 500 SPDR ETF Trust- SPY
282.13, 281.24-281.83, 278.30, 276.43, 268.49      Support
283.85-284.37,  284.52, 285.85                              Resistance

 

As global markets have reached mid-August, it's important to see the extent to which the rest of the world has not joined the US Equity rally of late.  This chart features the MSCI All-World EX-US index, which peaked back in January, but yet came nowhere near these levels into May highs, as the rally recouped only about 1/3 of the prior 14-day decline.  After then selling off to new multi-month lows into early July, the recent rally into August  has only regained about half of the move down from May, keeping global equities in a difficult spot overall.   The break from early August highs has now violated this minor uptrend over the last couple weeks, and threatens another retest of lows and now August has been even weaker.  Last week's downturn caused this index to break the uptrend from late June, putting even further pressure on how equities are trading when looking at a broad-based global gauge.   So the takeaway here is that it's important in these times to focus away from the FANG names near-term, which have been more resilient in August, while carefully scrutinizing how the larger world indices are doing which might have a bigger effect eventually on how the US does.
 

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Summary:   The weight of the evidence seems to suggest that stocks have begun a correctional phase, and while most of the selling has occurred thus far in Europe and Asia with the Emerging markets having been hit particularly hard this past week, developed Equities have also begun to stall out and turn down, which happened for the World indices on July 26.   Growth has been increasingly shaky vs Value and has broken uptrend lines on respective indices, while the Bond market has been much stronger than anticipated, with rates having given back much of the yield rise into mid-July.   Trade tensions boiling over between the US and other countries, one by one, which seems to be increasing by the day, has coincided with extraordinary weakness in the currency markets of many Emerging markets, and slowly but surely seems to be affecting Equities as well.  While the world didnt't care much on Russia tension, despite a 10% decline in the Ruble, when the attention turned to Turkey, most developed Equity markets finally began to show some evidence of turning down.   Last Friday saw the rare combination of Equity, Treasury, and FX volatility and while Emerging market turmoil might be seen as something that's been ongoing, one should note that warning factors for this equity rally have also been present for the past couple weeks with a few added areas of concern just in the past coupe days that have seemed important.

Specifically, the following seem important and negative
1) Treasury yields broke down on the long end late last week, with 10 and 30 year yields cracking support and directly coinciding with Financial weakness.  Yields directly led Equity movement into mid-June for highs and then early July as lows.  
2) Europe broke down, as per SX5E severing uptrends of the last month and we're still seeing quite a bit more weakness in global equities than US
3) Technology's main SPDR ETF, XLK, rolled over to new four-day closing lows, confirming a TD Sequential sell signal in the process on daily charts.  Tech has been slowing down in the last month with the NY FANG index having peaked out in mid-June and making two consecutive lower highs.
4) Emerging market weakness has begun to show capitulatory parabolic declines in most currency markets with outsized declines in USDRUB and USDZAR while USDTRY got most of the attention late last week.  
5) The Defensive trade still looks to be in place, with a few minor days of weakness last week in Staples;  However, Utilities are outperforming Technology in the rolling 30-day period with returns of 1.71% vs 1.70% for Tech
6) Seasonally speaking, the month of August tends to be the 2nd worst for the NASDAQ, and averages -1.9% in mid-term election years.  (1971-2017) The S&P and DJIA typically also fare worse in mid-term election years, averaging -0.4% and -0.7% respectively
7) Implied volatility seems to be firming, and VIX closed last week at the highest weekly close since July 6, higher than the prior four weeks.
8) NYSE only showed 64 new 52-week highs last Friday, way down from early July and also well off peaks seen in January (340+) 
9) Momentum is showing negative divergence on NASDAQ with RSI having peaked out  in June, while DJIA and SPX both showed peaks in late July
10) Summation index still shows breadth having peaked in June, and while Advance/Decline did move back to new all-time highs, the dropoff in hotels, casinos, Financials, Industrials last week is a concern to the broad-based rally narrative.  

The following factors make it seem like perhaps a snapback rally might happenMonday-Wednesday before the pullback gets underway but that any minor rally likely would be short-lived
1) Breadth wasn't all that strong on last Friday's decline, although finished at 2/1 negative
2) Demark counter-trend exhaustion failed to signal "Sells' as of Friday, (No completed 13 countdown) and ideally, a small recovery rally into Tuesday/Wednesday would help these to materialize, creating a stronger sell
3) Seasonality for August, according to Stock Traders Almanac, tends to see most of the month's gains made in the 8th-13th trading days of the month, whereas the balance of the month is historically flat for DJIA, S&P and NASDAQ, though decidedly worse for mid-term election years


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

Short-term (3-5 days):  Leaning Bearish- Monday will be a critical day- Followthrough on Friday's selling under 2833(Under as of Sunday evening) means that a pullback down to 2800 is underway (which can't be said just yet given that S&P managed to rally up from early lows to stay above this level)  The ability to trade higher Monday likely means 1-2 days of rally attempt during a seasonally positive week for August before selling gets underway.  However, the action in US indices on Friday coinciding with Europe, EM weakness which doesn't seem to be ending, likely will cause a pull lower for the US into end of August.  (As of Sunday evening, Futures were down 9 ticks.)


Intermediate-term (3-5 months)-  Bullish-  While there remain ample reasons for concerns in the short run, now that markets have entered August with little to no evidence of any real downturn, the period between now and end of year will likely only suffer minor pullbacks between now and into early October before rallying into end of year, postponing the larger decline yet again.  Specifically, the fact that Advance/Decline for All-stocks pushed back to new all-time highs into early July is thought to be a bullish factor.   The fact that Small-cap and Mid-cap indices have rallied back to new highs is also thought to be constructive, as most bear markets start with a serious dropoff in Small and mid-cap performance.  Though some of that did indeed happen in July with the Russell2k, most intermediate-term chart patterns remain constructive.    Overall, the 2 month bias is more negative for a 3-5% drop.  However, on a 4-5 month timeframe, it's likely yet again that markets exhibit seasonal strength.  so given that markets have been able to absorb the relative underperformance in Tech lately with little to no damage, we'll need to see S&P drop under 2700 to have any real concern, and given the tariff taunts which have been ongoing, the sentiment is likely to reflect fear much faster these days than normally which bodes well for the bulls into year end.


5 Technical Long ideas and 5 Technical Shorts:
LONGS: TLYS, M, EXC, CLX and NI
SHORTS: ITW, LVS, AMBA, HLT and EXEL



LONG IDEAS
 

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Tilly's (TLYS- $16.33) Bullish long-term pattern breakout-  One of the more compelling long-term breakout structures of any of the stocks screened in recent weeks.   This small-cap Online Specialty Apparel maker has a market cap of just 480 million, but has EPS growth of over 47% in the past year and is expected to continue growing Earnings at over 17% on average over the next two years.   Technically speaking the price action has been compelling of late as TLYS has advanced by more than 50% in just the last three months alone but its consolidation from June has kept the stock from becoming excessively overbought. The reason for near-term optimism is based on TLYS advance to new 2018 highs just last week, on the verge of a giant 5-Year+ base breakout.   TLYS is within 10 cents of reaching the highest levels since 2012.   The pattern resembles a giant Reverse Head and Shoulders pattern which are rare to see on stock patterns longer than five years in length.   This move above $16.20 should help TLYS begin a lengthy intermediate-term advance, and is thought to be quite positive technically.  While volume has not yet risen to sizable levels above prior averages, it looks compelling technically to own here and looks right to add to upon moving above 16.50, for the start of a move to the $20's.  Only declines below $14.70 would change this thinking and postpone the advance.
 

Macy's (M- $39.97)  Cup and Handle pattern is bullish for further gains.  Heading into earnings this week, Macy's looks appealing to own for an upcoming breakout above its Neckline resistance at $41 for a move up to $45.50.  The stock has enjoyed some decent momentum in the last eight months, more than doubling, yet still lies more than 50% off its all-time highs made back in 2015.   The rally from this past May makes it particularly attractive technically given the sharp rally followed by bullish consolidation.  This churning in the last couple months has taken the shape of a Bullish Cup and Handle pattern, with Neckline resistance at $41, at the highs from two weeks ago.  Exceeding this should help the stock rally sharply to test the prior swing highs made just after the US Election,  and the upcoming earnings could be a catalyst for a move of this sort.   Overall, the Cup and Handle tends to be a very favorable pattern following a sharp rally for a chance for a stock of this sort to continue its advance, and one should consider positioning long, looking to add above $41 for a chance to reach the mid-$40's initially.  Only a pullback under $37.83 would postpone this move and would be a stop for trading longs.  

 

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Exelon (EXC- $43.13) Exelon's ability to exceed the highs of its own Cup and Handle pattern since last November bodes well for further gains to targets near $50.70 which represents a 38.2% Fibonacci retracement of the decline EXC made since 2008.   This Utility has been undergoing consolidation for the past eight+ years, so this recent surge in strength which began back in 2017 is seen as a very welcome development.   The initial breakout to new annual highs led to some mild consolidation, but now the stock has turned up again in the last six months and has just not only July 2018 highs but also highs from November of last year.  This brings EXC up to the highest weekly closing price since early 2012, making this appealing to buy with initial targets at $45.45, but eventual movement to $50.70.   Given that Treasury yields have just broken down again, defying most investors futures bets for higher yields according to CFTC positioning,  Utilities look likely to continue to outperform in this environment.   EXC looks like one of the better to favor given its move to new 52-week highs and is considered a technical overweight.  
 

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Clorox (CLX- $140.21)  Pullback last week represents buying opportunity- CLX has been the top performer of any of the Consumer Staples stocks in the last month, returning 5.83%, and outperforming all other 31 stocks within the S&P 500 Consumer Staples index.  Its breakout two weeks ago has been followed by a big pullback last week, which makes this far more attractive to buy dips.  Pullbacks are not likely to violate 136 before turning back higher to challenge 150, making this an attractive risk/reward to consider during a potentially tough time for equities.  Overall, CLX has been a leader in relative strength among this group, and technically speaking its move to the highest since early January is considered a bullish move and should allow for further strength to challenge and surpass early year highs.  Only a move down under $135 would postpone this rally. 
 

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NiSource (NI- $26.61) Bullish, and recent consolidation should allow for a move up to test late November 2017 highs near 27.68 and then higher.    NI has shown its own signs of forming a Cup and Handle pattern since early July and the rally into early August failed to show too much consolidation but remains within striking distance of early July highs.  Overall a very strong name within the Utility complex, and expect this to further its gains in the weeks again during a potentially tough time for Equities.  The drop in Treasury yields should only add to the allure of this stock within this defensive, yield sensitive group.   Bullish, looking to buy dips. 





SHORT IDEAS
 

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Illinois Tool Works (ITW- $136.47) No sign of relief for this ongoing downtrendThis stock's break of the minor uptrend from July lows suggests further selling is in store, and it's right to avoid buying dips and/or consider shorting for a pullback down to test and break recent lows on its way to $120.   While many in the Industrials space have been able to snapback and rally in the last couple months since early July, ITW has shown exactly the opposite.  The gap down into July failed to gain much ground and has just violated the early August lows which makes further weakness likely   Momentum has risen a bit from early oversold levels given the recent consolidation, so this recent rolling over shouldn't run the risk of shorting into an extremely oversold state.   The ongoing decline makes buying into this very much premature and last week's break in particular suggests that further weakness should result between now and October.  

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Las Vegas Sands (LVS- $67.85)  Bearish break of Head and Shoulders pattern-While this stock was touched upon in the Weekly Technical Perspective back in mid-July, it's still right to mention again given the additional weakness seen in last week.  The snapback rally attempt after the initial break of this Head and Shoulders "neckline" failed to offer much relief, and held right where it needed to for a continued bearish stance.  The last week has seen this pullback and now should begin its decline to the low to mid-$60's in this seasonally weak time.  Most of the Casinos remain in poor shape technically, but LVS stands out given its large Head and Shoulders pattern since January of this year, making this particularly negative for those considering buying.   One should avoid and/or short, technically for further losses in the next 3-5 weeks.  

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Ambarella (AMBA- $38.72) Consolidation during a bounce in Technology is not encouraging AMBA's last four weeks have failed to participate in any of the snapback rally in Technology and appear like a Bear trap which should result in this pattern being violated to selloff down to the low $30s to test prior lows made last Spring.   AMBA has shown very poor relative strength all year long, yet doesn't show any meaningful signs of trying to carve out a low of any sort.  The last few weeks should have shown far more evidence of rallying off the lows during a month when Equities have moved higher.   Prices lie under lows from last Fall and little support is present until the 2016 lows, which lie about 10% lower.  This looks to be a logical target for further weakness in the weeks and months ahead, and breaks of the most recent six-week low would represent a green light for technical shorting and/or to avoid buying into this weakness.  

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Hilton Worldwide Holdings Inc. (HLT- $75.65) Breakdown likely leads to additional weakness in an already weak sector. The break of June lows for HLT also represents a violation of the uptrend that has held since the US Election for Hilton, and is considered a bearish development that likely will lead lower in the weeks to come.   The entire Hotels space has been hit hard since earlier this year, with many stocks such as MAR, WYND having peaked out in January and have dropped off every since.  Most of these have been tied to the housing slump that seems to be slowly materializing, as per data since January.  Last week's decline warrants avoiding buying dips and/or considering shorting the stock for aggressive traders.  Movement down to near $70 looks likely in the short run, with intermediate-term targets in the mid-$60's.  

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Exelixis Inc (EXEL- $20.40) Lackluster consolidation should be sold into- EXEL looks ripe to turn back lower after a lackluster consolidation following its decline from late last year.  The last two weeks showed prices closing down right at the lows after early week rally attempts.  Looking at weekly charts, the breakdown earlier this year violated nearly a two-year uptrend in the stock.  This resulted in a quick pullback to the 50% retracement of the prior advance.  However, the resulting recovery attempt has proven to appear counter-trend in nature, not the start of a rally that should carry EXEL higher in the weeks ahead.  The decline from two weeks ago in particular represented a key reversal that engulfed the prior six weeks of trading.   Declines look likely to test $18.15, the 50% area that had held on the prior decline.  However, this should represent only minor support before a break of this level to reach technical targets at $14.75, which is right near the 61.8% Fibonacci area of support.   Overall, this looks like a good risk/reward short for a selloff that could prove to be 15% or greater between now and late October.  

10 attractive Long/Shorts with earnings in a pivotal week

July 23, 2018

Contact: info@newtonadvisor.com

S&P 500 SPDR ETF Trust- SPY
278.41, 275.84, 274, 272, 268.49, 266.90          Support
281-281.5, 283.5-284                                          Resistance

 

The CBOE Volatility index, or VIX, managed to close Friday at the highest levels of the week and as this four-hour chart shows, has begun to stabilize near former lows from mid-June at a time when Equities have started to show a few signs of stalling out.   Prior lows in VIX also occurred right near this 12 level and bodes well for buying implied volatility for a 2-3 week hold, and/or also a three-month hold, as recent uncertainty likely won't be alleviated anytime soon, and "VOL" is now down near the lows for the year when breadth and momentum have been slowly but surely stalling out.   Any early week Equity rally that coincides with implied volatlity dropping would be a good chance to average down (<12) while movement up above 14.25 would serve as a trend following buy signal for VIX for at least a 20-30% spike in implied volatility.  At current levels, after having dropped from near 20 to 12 in just one month, this looks like a very appealing time to consider buying VIX.
 

Summary:   US Equity indices have shown increasing signs of stalling out over the last week which likely has begun the topping process of this latest rally which began on June 27.   Signs of mean reversion in some of the weaker sectors allowed both Financials and Industrials to stage bounces last week, making up two of only four sectors which recorded positive gains.  (Technology and Staples were the others)  While the net change in the broader indices over the prior week has been very minimal (+/- 0.25% for DJIA, SPX and NASDAQ) the slowdown in breadth and momentum remains a key theme that needs to be re-emphasized.  McClellan's Summation index remains lower than it was in mid-June, despite S&P and NASDAQ having attempted to push higher.  Moreover, the All-stocks advance decline peaked out on July 9 and has also not confirmed this move up in the indices these last couple of weeks.   Meanwhile, S&P's "breakout" over June and March highs certainly has not allowed for any acceleration.   Although it was healthy to see some signs of rally in a couple of the weaker sectors, i.e.-Financials and Industrials, this bounce has not broken out above key trendline resistance drawn from January highs (So both of these sectors merely have bounced within downtrends)   Additionally, counter-trend Demark based exhaustion Sells have in fact been confirmed for the NASDAQ Composite and 100 index, and should limit the degree to which these indices are able to rally in the weeks ahead.   While indices didn't decline on cue as of July 13th, like we've seen over the past five months, breadth certainly peaked out at that time.  Any ability to hold up intoThursday/Friday of this week would be thought to coincide with an even greater near-term top, producing weakness into early August before prices can stabilize.   Bottom line,  It looks far more likely that at least a minor pullback should get underway, so a defensive stance is recommended for this coming week, using any rallies that happen Monday-Wednesday as a chance to pair back longs.   

Of the six reasons given last week as to why a cyclical pullback to this rally could get underway sooner than later, none of the six concerns have been alleviated.  Breadth and momentum remain lackluster and many gauges peaked between July 9-13.   Sector Non participation still shows Financials and Industrials to be weak sectors, which have not broken downtrends from January highs.  While Technology and Discretionary have led the charge over the last three months and also YTD, Discretionary showed some evidence of stalling late last week and starting to rollover, as XLY pulled back to new multi-day lows.  Technology has lost quite a bit of momentum, having performed "on-par" with the market in the last month, and barely was able to register any gains last week (+0.22%)  The "FAANG" group meanwhile has not gotten above June highs and NFLX showed some evidence of peaking two weeks ago, while GOOGL and FB have earnings this coming week, and both are up against difficult resistance.  Sentiment has continued to weigh in as bullish, despite the threat of tariff escalation.  Investors Intelligence polls have now widened out to +35% spread between Bulls and bears, and  the Equity put/call ratio is trading at .66 while the VIX has been basing and still under 13 (despite having firmed all of last week)  With regards to Demark exhaustion, we've seen more confluence into late last week with counter-trend sell signals for NASDAQ Composite and NDX, while the cycle that provided peaks to the US indices in late January points to July 26-27 as being important for a possible turning point.   Rallying into this time zone would present a good shorting opportunity for traders, while selloffs into late week likely would be buyable.  Yet it's thought that this rally from late June should be largely erased in a short-term selloff which given the longer-term uptrends intact, likely would be buyable initially, with losses proving no greater than 3-5% initially. 

What were the key developments for the past week?  And does this get us closer, or farther away from thinking a pullback should begin in the next 3-5 trading days?  

1) The mean reversion bounce in Financials and industrials was largely the biggest development sector-wise, but as mentioned, this bounce occurred within the framework of a bearish pattern for both. 

2) Markets showed a minor breakout in Yields on the long end, with 30-year Treasury yields rallying back up above 3% and look to test 3.08-3.10% before any peak. 

3) The Yield curve steepened pretty dramatically late in the week with the breakout in 30yr yield which also coincided with 10yr yields moving up to 2.89  (Doubtful that yields can exceed 3% in the 10year near-term and should provide a buying opportunity for Treasuries)

4) The Dollar's pullback late in the week seems important and coincided with the start of a bounce for Emerging market currencies which could also trigger bounces in EEM and in China.  If global risk assets peak out, however, this might put a damper on this rally.  However, ratios of MXWO to MXEF look to be peaking near-term, so my thinking is a selloff starting in late July likely proves small in scope, as Emerging markets should be able to rally in the month of August.

5) Commodities undercut the 2-year trend from 2016, yet time-wise look to be 1-2 weeks away from a very attractive trading bottom in the group.  This has bullish implications for precious metals, energy, grains, and Softs.  CCI should have limited downside this week and should be favored for August outperformance



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

Short-term (3-5 days):   Bearish as risk/reward has grown poor for longs over the next few weeks and momentum and breadth are both suggesting upside should prove limited.   Pullbacks to 2770 are initially important, than 2747-50 and 2700.   Resistance to sell into lies at 2815 and above would lead to a quick but short-lived move to 2830-45

Intermediate-term (3-5 months)-  Bearish-  Trends likely should be negative overall in July and any larger selloff into late July would merit turning more positive for a bounce into September/October.  While it's thought that November/December likely can be positive, the next couple months are difficult just yet to think are positive, despite the extent of the pullback we've seen over the last few weeks.   Until some evidence of sector stabilization happens in Financials, and Equities start to rally on more broad-based participation and good volume, the intermediate-term trend is still thought to be vulnerable.  Intermarket divergence is a concern for equities also at this point, with US ignoring the selling being seen globally which can only last for so long.  Furthermore, intermediate-term momentum dropped off very sharply into early February and has not really recovered, despite a choppy mild back and forth rally.  This should set up for more traditional negative momentum divergence on longer-term charts on any move back to new highs, so this is the one bearish factor which has been missing over the last few years, and is more suggestive that the larger trend is gradually changing from bullish to neutral and then should turn to negative sometime late this year or early next.  For now, we'll need to see the larger trend give way before thinking the larger peak is already in place, and despite the loss of momentum of late, there just has not been sufficient deterioration to think this is the case just yet.   Intermediate-term support to buy lies down at 2450-2550. 


10 Charts of stocks with earnings this week are shown below with comments.  While playing earnings is a tricky game, for either a technical or fundamental discipline near-term, these charts give some guidance as to the current trend and typically will show signs of exhaustion before stocks peak out


GOOGL-  Minor stalling out near former highs, but structure argues to buy any dips given the chance

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Alphabet Inc (GOOGL- $1197.88) A few signs of stalling out, but structure still suggests buying dips is correct.   GOOGL has pushed higher about 7% since late June, and as weekly charts show, this move has been constructive technically, rising above June peaks, as well as March and January.  However, the last few days show some evidence of this stalling out as opposed to accelerating on this breakout, while momentum gauges like RSI are well below levels hit back in January when this peaked out along with the market near 1/26.  Near-term, one can make the case for a mild pullback given the multi-week rally up to former peaks which is now stalling, yet one would look to buy all weakness near 1140-60 if given the chance, as GOOGL has shown precious little evidence of any trend deterioration on a larger scale, despite momentum starting to tail off a bit.  Counter-trend signs of weekly exhaustion remain at least 2-3 weeks away, arguing for a push up to 1280-5 before this starts to weaken.   So, given earnings it looks right to position long with a time frame of 4-6 months, looking to use any pullback into late July/August or in September to buy dips until/unless this structure starts to give some indication of failing.  Initial support to buy lies at 1140-60 while under would bring about a test of GOOGL's two-year support at 1050.
 

TD Ameritrade (AMTD- $57.43) Bearish and recent gains should represent a chance to sell strength.  AMTD had been a very positive stock within its sub-sector of Financials up until June, when this snapped an eight-month uptrend on above-average volume.  Its subsequent rebound into mid-July has occurred on less volume than the breakdown and now prices are right near former lows that were violated, creating an attractive risk/reward opportunity to sell strength.  Momentum remains negatively sloped on weekly charts, so a 10% rally in the last couple weeks as part of a suddenly bearish structure represents a good technical opportunity to sell strength.  Resistance lies at $57.50-$60, while downside has support near former lows at $53.27.  Breaks of this would lead to a much lengthier correction down to $48.50.

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Eli Lilly (LLY- $88.47) Bullish and recent push to new monthly highs should allow LLY to make a beeline towards former all-time highs at $109. This month's success in getting over prior highs resembles a bullish triangle breakout, and likely should help LLY climb further in the weeks and months ahead.  The stock began its ascent like many during the latter part of 2008/early 2009.  A six-year rally ensued before nearly three years of sideways consolidation.   This now looks to be giving way to a push higher to the highest month-end close since the early 2000s at current levels.  While the last days have pulled back , this sets up well to buy dips at $87-$88.50 for a push back to new high territory to end the month on a good note.  Pullbacks under $84.50 are needed to change the bullish forecast.  Until then, this looks technically appealing going into earnings and it looks right to use recent consolidation in the high $80's to buy dips. 

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United Technologies (UTX- $130.26) Bullish, but short-term extended-  UTX has largely gone nowhere for most of 2018.  The selloff from $140 managed to get down to just under 120 before turning back higher, and its success in getting above Spring highs should help this rally continue.   While the last couple days have backed off after an early month surge, the push back above $129 allowed momentum to turn more positive.  Weekly MACD has turned bullish and UTX maintains an attractive intermediate-term uptrend which intersects near July lows at $123.  As long as this area is not undercut, one should use any dips post earnings to buy UTX, with upside technical targets found near $139 which was hit in early February right when stocks peaked out.  Support to buy pullbacks lies initially at $127.50-$128.

New Oriental Edu & Tech (EDU- $93.30) Bearish and pullback to multi-day lows likely allows for a test and break of $90 in the days ahead.   EDU has largely traded sideways over the last couple years with a few volatile spikes that have been immediately given back.  The last few weeks showed this attempting to rally back after a big decline into early July, but EDU managed just a fractional bounce before rolling over late last week.   The larger structure is unappealing and pullbacks look likely to near $88-$90 with under $88 leading to a lengthier decline down to the low $80's.  To have any bullish opinion, this would need to reclaim last week's decline and move back up above $95, which looks unlikely technically speaking.  

 

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Las Vegas Sands (LVS- $73.85) Heavy volume decline in recent weeks gives reason for concern about further weakness.   LVS has been a pretty stellar standout among the casino space over the last couple years, more than doubling off early January 2016 lows, and rising to within striking distance of 2014 peaks.  However, the stock began to falter this past Spring, and its higher high into June was not confirmed by a similar move in momentum.  Since that time we've seen LVS pullback sharply on heavy volume, and while prices managed to hold the former Spring 2018 lows, this near-term pattern has begun to take on a much different shape than it has in the past.   Rallies in the last couple weeks have created a chance to sell into strength, as the stock has largely stalled after this first bounce ahead of earnings.  However, after filling this gap from June, LVS looks right to sell strength, expecting a pullback to test its most recent lows.  The area at $70 is an important area of support which lines up with the two-year uptrend in this stock. Breaking $70 would constitute the first meaningful long-term trend violation in the last couple years, putting LVS on the list for a good likelihood of more intermediate-term trend damage.  At present, the near-term setup is short-term bearish only.  

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Baxter International Inc (BAX- $75.00)   BAX is bullish technically and further gains look likely to the high 70's with additional near-term targets at $80.  The art of pushing back up above January highs into mid-June was reason to have confidence in BAX and then the mild consolidation over the last month failed to do much damage, holding above the area of the breakout.   Last week's gains then managed to rise to surpass the last four weeks' highs, rising to the highest levels since early June.   This kind of mild breakout on the heaviest volume in over a month (last Friday) is very encouraging for BAX to follow through higher, and longs are recommended, looking to buy any weakness given the chance.   The area at $73.59 should serve as a trading stop for longs, while upside into the high $70's/low 80s into Fall looks very much achievable, technically.
 

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Align Technology Inc (ALGN- $375.38) Bullish and movement up to near 400 likely before this stalls out.   Overall this has been one of the top performers in all of Heatlhcare this year, rising nearly 69% on a YTD basis through 7/20/18.  The recent pickup in acceleration in the last few months has helped this start a new parabolic trend, and last week's gains helped to push back up above the prior highs from June.   Overall the act of making just a minor consolidation over the last month which then results in highs being reclaimed is normally a very bullish development, and bodes well for this to continue higher in the weeks ahead.   Momentum has been overbought on weekly charts for some time, but its the art of holding up near its highs throughout this minor correction into early July followed by a thrust back up to new highs which gives reason to embrace technically.  Pullbacks post earnings would be used to buy at $357, or below at $339, neither of which would cause any issues with the ongoing uptrend.  Under $332, which isn't immediately expected, would postpone any further rallies.

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Amazon.com Inc (AMZN- $1813.70)   Short-term correction likely within uptrend-  AMZN remains difficult to fade on any timeframe other than a few days given its long-term uptrend and little to no evidence of any deterioration.  However, after having gained 12% since late June, or nearly a 200 point rise, we've begun to see the first evidence of this stock starting to rollover within its uptrend.  3-month trendline support intersects near 1735 and could be tested on pullbacks into late July/early August.   The key reasons for near-term concern involve near-term overbought conditions where the stock is now beginning to stall out and turn lower, as seen by the minor pullback which started late last week.  Counter-trend exhaustion signals are present, while momentum is at lower peaks than what was seen back in June at the former peak.  On a longer-term timeframe however, the stock's structure remains quite attractive and despite being overbought , which has been ongoing for some time, AMZN would need to show at least some evidence of undercutting the prior months lows to have the opinion that this might start to slow its rate of ascent.  Currently, this intersects at 1635, so minor weakness in the next 3-5 weeks likely should constitute a good risk/reward to buy.  

Starbucks (SBUX- $50.91)  Bearish-   Long-term uptrends have been broken in SBUX as of the month of June, with a heavy volume decline that saw volume spike to the highest levels in over five years on monthly charts.   Prices have pulled back under the lows from 2016/2017, and this bounce in recent weeks from $47.50 to $51 should provide an attractive area to sell/short SBUX for a move down to the low $40's.   the area at $41.43 would represent the first 38.2% Fibonacci retracement area of the entire rally up from 2008 and is thought to be good initial support.  Movement under this could reach $34-$37.50 on an intermediate-term basis, but should set up for a decent risk/reward to buy.  For now this stock is unattractive heading into earnings and requires a move back over $55.31 to have any hope of this pullback being complete.  

Trend reversal likely in risk assets this week

July 16, 2018

Contact: info@newtonadvisor.com

S&P 500 SPDR ETF Trust- SPY
275.84, 274, 272, 268.49, 266.90              Support
279.93-280, 280.41-280.75, 281-281.5      Resistance

 

The S&P might look to some to have broken out last week, but important to see the degree to which momentum has begun to diverge with price, not joining on this push to new monthly highs.  Counter-trend indicators of exhaustion are also present, and sentiment has taken a big step higher in the last couple weeks, as tariff escalation has not led to any dismantling in Equityland.   Given the price march into what I believe to be an important time cycle-wise early in the week, my feeling is it's right to take profits on this move, expecting prices to stall out and turn lower.  Key areas for the S&P lies at 2805-10, which aligns with quite a few Gann's Square of Nine targets from prior lows in June, February and early May.   Financials meanwhile failed to get any meaningful lift from initial earnings last Friday, and broke down relatively yet again vs SPX which looks to be an additional near-term Headwind.  The strength in Treasuries in not selling off to coincide with the Equity move along with Technology reaching key upside levels also looks important and could lead both yield and Tech to also turn down this coming week.  Watch for signs of 2770 being broken, which would lead to a more severe pullback down to 2747-50 initially, but then likely 2700 area.
 

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Summary:   The Equity trend has been bullish for the last two weeks now as part of a larger consolidation that is ongoing since the January peaks.  While the SPX has structurally improved with its ability to get over June highs, Equities have begun to show evidence of slowing momentum and breadth that likely can produce the same kind of trend reversal seen back in Mid-March, Mid-April, mid-May and Mid-June.  Sector non-participation and divergences between US indices and global indices are rampant and show this market to be far different than what many might feel upon just looking at "FAANG stocks like FB, AMZN, AAPL, NFLX, or GOOGL.   It's thought that this week brings about a peak in the near-term trend, and while it might prove minor initially, a selective, more defensive stance looks proper heading into this time.   Bond yields are thought to move lower this week, and the Dollar looks to have just a bit more upside before turning lower into August which should bring about some relief for the commodity trade.  

Looking back, Equities finished the week with a string of two consecutive days higher that allowed SPX to close above the mid-June and March closing highs and the highest levels since early February. After the first seven of nine "UP" days, equities have now started the quarter with gains of over 3%, as indices managed to bottom on schedule into late June and turn back higher.  Healthcare, Technology, Discretionary have been the leaders this month, each with gains of greater than 3%.  However, when looking back over the last month, it's been a much different story.   Utilities, Real Estate, Staples and Telecom have all outperformed in the rolling 30-day period, a much more defensive time than Equity performance would have us believe.   Additionally, two of the key "risk-on" groups like Financials and Industrials, have both shown losses of greater than 2.5% during this time.  While it's thought that Equity indices "ignoring" the volatlity inducing news such as tariff escalation is a positive, the lack of broad-based participation in this rally seems to be a larger concern which could serve to hinder Equity progress in the weeks ahead and should be addressed.  I'll list what I believe are the five biggest near-term concerns at this stage of the rally  (Note, given that long-term trends are intact, these deal purely with short-term concerns, and until the long-term trends give way

The 5 Warning signs that a pullback could get underway this week

1) Breadth & Momentum slowdown-   This is always an important factor to watch during rallies, as the lack of strong breadth normally can warn that a rally is tiring, despite prices being "up" over any given time period.   The Advance/Decline peaked out on or around July 9, and McClellan's Summation index (Smoothed breadth indicator) made its highest peak for the last month in mid-June.  The last few days of trading last week saw breadth nearly flat, barely more stocks rising than falling, which is a far cry from what happened in early July at most recent lows.  Momentum meanwhile has begun to diverge negatively on 4-hour charts and the latest push up to new highs last week was not accompanied by Momentum.   This is an important and negative development.

2) Sector Non Participation-  ( Deterioration in Financials while Technology and Discretionary shows upside exhaustion.)  While many realize SPX and NYA are trading well below their January peaks, it's important to see how the lift above June highs in SPX really hasn't been followed by many of the leading sectors.  When looking at the five major sectors by SPX weight, Tech, Healthcare, Financials, Discretionary and Industrials, these comprise over 3/4 of the market currently.   However,  Financials are now trading nearly 5% below June peaks and Industrials also are 4% below levels hit in mid-June.  Technology meanwhile and Consumer Discretionary have snapped back to test or briefly get over June peaks, but yet both sectors show counter-trend signs of exhaustion that might now limit their upside.   Healthcare is the true standout that shows excellent technical structure which looks to outperform further.  The key message here is that one by one we're starting to see leading sectors fall by the wayside, (in this case, Industrials and Financials)  so any hint of stalling in the Tech and Discretionary sectors this week would likely cause index prices to turn lower.

4) Sentiment-   The Equity Put/call ratio lies in the low 60s and its 13-week moving average has been dropping since late April and lies at .61.  Both Investors intelligence and AAII polls have rebounded, as might have been expected with equity rallies in the last two weeks.  So trend-wise, sentiment has continued to get more and more optimistic given Equities resilience in managing all this "potentially market moving" negative News and holding up.  While certainly not at extremes, the quickness with which sentiment went from bearish to bullish of late is worth mentioning, given that Financials and Industrials trends are under pressure. 

5) Demark exhaustion- The daily counts on SPX, NDX, INDU all show evidence of Counter-trend exhaustion now and in the case of NDX, the first TD Sequential sell signal on daily charts since it peaked in late January.  IWM got a signal back in mid-June and still lies beneath these June peaks, while intra-day charts on S&P have lined up to show the first 240 minute (4 hour chart) Sell since the lows in Late June.   Historically, when these signals tend to cluster on different time frames and different equity indices, they can be importnat in producing turns.

6) Cycles-  While the key 6-month 180 degree cycle from late January hits in late July, indices have now reached mid-month yet again, a period this year that's had importance given the last five months and should be watched carefully for evidence of turning down similar to recent months.  Gann's Square of Nine chart pinpoints the area at 2805-2815 to have much importance for SPX in being important for a possible key area of resistance this coming week, so aside from 7/26-7/27, it's thought that the first few days of this week could cause a stallout.  

Other issues such as Defensive outperformance has been ongoing for the last month, as discussed above, while most of the Developed and Emerging market world has shown far less superb performance of late. Additionally, we still see US intermarket divergence with DJIA and SPX not confirming the NDX's push back to new highs.  The intermarket divergence has been an issue for most for most of the last couple months, along with divergence to overseas, as Europe and Asia are well below June highs. 

With regards to the positive issues, I feel the Advance/Decline pushing back to new highs is a positive towards thinking any near-term pullback proves to be buyable and does not lead to any deterioration right now in excess of 3-5%.  Additionally, the SML and MID push back to new highs also seem like intermediate-term bullish factors.  Most major market peaks normally begin a pronounced period of breadth deterioration before larger peaks unfold, and we don't seem to be there, despite being nine years into this rally.  However, given the momentum dropoff from late January, it's going to be unlikely that equity indices can regain that peak in momentum, and for the first time in years, we're setting up for classic intermediate-term negative divergence.  Finally, the degree that sentiment has turned bearish quickly into late March, April, May and June all are factors that have limited the equity weakness, and for now are putting a floor onto any larger pullback.  All in all, the longer-term trends are obviously very much intact, and a near-term pullback is expected only for now, with a chance for greater technical damage in September/October.   This goes towards the thinking that the intermediate-term thesis remains bearish and prices should ultimately be lower over the next few months before turning up.


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

Short-term (3-5 days):   Bearish as risk/reward has grown poor in the last couple days, with S&P up against prior highs from March and June while breadth and momentum have given warning signs at a time when indices have reflected upside exhaustion.    Pullbacks to 2770 are initially important, than 2747-50 and 2700.   Resistance to sell into lies at 2805-15.    

Intermediate-term (3-5 months)-  Bearish-  Trends likely should be negative overall in July and any larger selloff into late July would merit turning more positive for a bounce into September/October.  While it's thought that November/December likely can be positive, the next couple months are difficult just yet to think are positive, despite the extent of the pullback we've seen over the last few weeks.   Until some evidence of sector stabilization happens in Financials, and Equities start to rally on more broad-based participation and good volume, the intermediate-term trend is still thought to be vulnerable.  Intermarket divergence is a concern for equities also at this point, with US ignoring the selling being seen globally which can only last for so long.  Furthermore, intermediate-term momentum dropped off very sharply into early February and has not really recovered, despite a choppy mild back and forth rally.  This should set up for more traditional negative momentum divergence on longer-term charts on any move back to new highs, so this is the one bearish factor which has been missing over the last few years, and is more suggestive that the larger trend is gradually changing from bullish to neutral and then should turn to negative sometime late this year or early next.  For now, we'll need to see the larger trend give way before thinking the larger peak is already in place, and despite the loss of momentum of late, there just has not been sufficient deterioration to think this is the case just yet.   Intermediate-term support to buy lies down at 2450-2550. 

LONG/SHORT IDEAS for the week:

    Attractive Technical Longs           Attractive Technical Shorts
1)  XLV- Healthcare                                       KBE-  Banks ETF
2)  TLT-  20-yr Lehman Bond ETF                SMH-  Semiconductor ETF
3)  ACN-  Accenture                                      IWM-  Russell 2000
4)  MRK- Merck                                             QQQ- NASDAQ 100 ETF
5)  XOP- Exploration & Production ETF        EL-  Estee Lauder
6)  CXO-  Concho Resources                       UAA- Under Armour inc
7)  MTN-  Vail Resorts                                   DFS-  Discover Financial
8)  KFY-   Korn/Ferry Intl                               SYF-  Synchrony Financial
9)  AAOI- Applied Optoelectronics                WDAY- Workday
10) TNDM- Tandem Diabetes Care Inc         BKNG- Booking Holdings
11) BAX-  Baxter Intl                                      T-   AT&T
12) MDU- MDU Resources                            AMBA- Ambarella
13) MELI-  MercadoLibre Inc                         VGK-  STOXX 50 ETF
14) GWPH- GW Pharmaceuticals                 JNPR- Juniper Networks
15) APC- Anadarko Petroleum                      RF-  Regions Financial
            


Five charts are shown that illustrate some of the recent technical developments that are importnat to know going into this week


XLV- Healthcare-  Ongoing push higher makes this one to favor technically

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Healthcare continuing to make positive strides and should still be overweighted, despite short-term market concerns.  This chart of XLV has now advanced to the highest levels since January exceeding both June and March peaks.  Biotech initially took the lead, but Pharma has since been playing catchup, along with a number of former laggard Biotechs which have made an above-average bounce in recent weeks.  This sector still is the one to favor for the weeks and months ahead, despite Biotech ETF, XBI getting a bit ahead of itself.  XLV should be able to rally up to 90 and above to test January highs before any stalling out.  Key stocks to favor within this space: MRK, LLY, PFE, UNH, ABMD, REGN, ALXN, VRTX, BAX, BDX, and BSX.
 

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Financials have pulled back to new relative lows last week, an uncomfortable development for Bulls hoping this sector would be able to carry the market higher after its recent underperformance.  After earnings in C, JPM and WFC last week, the sector deteriorated relatively vs the SPX again to the lowest level since last June.  This makes any sort of broad based market rally premature until this sector finds its gripping and for now, this group should be avoided, expecting additional relative and absolute weakness over the next couple weeks.  

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QQQ has reached an area which looks right to take profits and consider betting the other way for a pullback into late July before any real low is in place.  For the first time since early April, the NASDAQ 100 ETF, QQQ is showing counter-trend exhaustion signals, similar to what it showed back in late January at the peaks.  Additionally, we're seeing evidence of negative momentum divergence on this rally back to new highs, as neither RSI, nor MACD is nearly to the same degree that it was back in June when it peaked out last month.  Overall, it's thought to be likely that QQQ can back off into late July similar to what happened into late June before this can turn higher.  While the longer-term trend in Tech and Biotech remain very much in place, they both look to have moved a bit too far too quickly and prices lie at unattractive levels to think this rally continues. 
 

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Treasury yields remain key to Equities and for now, the trend still looks to go lower.   After peaking out in mid-May coinciding with bearish positioning, Yields dropped sharply then made lower highs before pulling back again.  Given how this yield trend seems to coincide with Financials performance, no thorough look at Equities is complete without examining the bond market given the degree of correlation in the last couple years with yields and stocks.   IN the short run, a pullback in 10-Year Treasury yields down to near 2.76% looks likely and should lead the Yield curve and Financials lower.

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Commodities have pulled back sharply in the last month largely coinciding with the strengthening in the US Dollar since early June.   While it was thought that the outperformance early this year and CCI index breakout in early June were constructive, the recent downward pressure does not look complete near-term, and might coincide with weakness into late July before a turn back up into August/September.  Weekly CCI chart shows the break of the Uptrend since last Summer and last week's selloff puts this exhaustion count on a 6, indicating that at least another 2-3 weeks of weakness are possible before this reaches support and turns back up.  Precious metals, Energy and Grains have all been hard hit of late and the Dollar rally still looks to be in only a gradual topping process and oculd lead to a bit more strength in the next week before peaking.  Therefore investors should hold off on buying this dip in the commodities space in July, and this weakness has negative implications for Materials likely also in the coming weeks.  Late July likely should coincide with this group starting to stabilize and turn higher.

Trend shows mild improvement, but No time for complacency

July 9, 2018

Contact: info@newtonadvisor.com

S&P 500 SPDR ETF Trust- SPY
271, 268.49, 266.90, 266.20, 263     Support
276.58, 278.73, 279.48, 280.41        Resistance

 

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The NY Composite's daily chart shows the extent to which US Equities have largely gone nowhere in the last five months, despite many concentrating on FANG stocks moving back to new highs and overall market resilience in the face of Tariffs.   this Daily chart shows the price as of last week's 5th day of the month, with closing prices ranging from 12493-12680.  So while the trends have been sporadic and given way to sector rotation, we've largely seen very little net change in US Equities and this index, the NY Composite, contains all NYSE listed stocks and a much more broad-based index to study.   Note that last Friday's gains did help prices make some minor progress after prior stalling out was more suggestive of weakness given the trendline from early April being undercut.   It's thought that last Friday's gains should lead a bit higher near-term, while any reversal back down which erases Wed-Friday gains would be thought to turn trends immediately bearish.  

Summary:   Equities finished the week not unlike what we've witnessed now for the last few months, with Gains, but now are approaching a time that might be important at the end of this coming week in providing a peak again, not unlike what we've seen also in recent months as early month gains give way to mid-month peaks and then back month weakness.   Overall the gains on both Thursday and Friday seemed like true positive near-term developments after about eight straight days of range-bound trading.  Breadth expanded in ways markets hadn't shown in at least a few weeks time, while sector indices like XLI, TRAN, XLY, XLV, XLB all made short-term breakouts, as did the NY Composite.  So short-term momentum and breadth improved last week, despite this being a shortened holiday week with below average volume.   The threat of Tariffs last week had cast a thick cloud of uncertainty over markets, and the consensus seemed to be that stocks would selloff sharply after tariffs were announced, as the uncertainty would certainly be heightened.  Well, we saw the deadline come and pass with no meaningful "pullout" from this threat, but yet stocks advanced, and managed to do so on above-average breadth.  This was one of our key reasons to be optimistic going into this past week.  Sentiment had shown signs of getting too skittish on the possibility of a selloff. AAII, Investors intelligence polls contracted, while the Total Put/call all rose early  in the week.  The second reason for optimism this past week revolved around the thinking that pullbacks to former important lows for TRAN, XLI, XLB would all hold and likely attempt to bounce.  this happened as well.  and Third, as discussed, equities obeyed the early month bullish seasonality which had been seen before.  So where do the problems lie?   

Unfortunately the negative momentum on weekly charts remains intact, while we're still witnessing pretty meaningfully wide divergences between US and the rest of the world.   Additionally, sectors like Tech and Financials remain broken technically after recent deterioration.  These two sectors along with industrials and Materials were all down over 2.50% for the month of June, and have not rebounded sufficiently, (despite Thursday andFriday gains last week) to turn technical trends back to positive.  One of the key worries is the extent to which bond yields have plunged in recent weeks with the 30-year having arguably just broken down out of a month-long head and Shoulders pattern, which should make rates move lower a bit more quickly.  The yield curve has flattened out substantially while credit has wobbled a bit of late, and all of these have combined to put pressure on Financials in a way where technical trends still haven't recovered after the June weakness.  So Technology and Financials remain trending down, while a few other sectors have attempted small bounces from initial support. Overall, while the last couple trading days were a technical positive, it's tough putting too much stock in this as something which will lead back to new highs.  I still expect a difficult trading environment  in the weeks ahead, so gains should be used to

Where to from here?   2 Distinct scenarios are possible given many of the disparities and divergences:  First, equities move up into July 12-13 before reversing course sharply and selling off into July 27-August 2.   Second, Equities could show the opposite, and give back a couple days after recent gains before moving up in the back half of July before making a larger peak come end of month in this same time frame.  The end of July has real importance given that it lies 180 calendar days from the former peak in late January, cyclically,  It also lies 45 days away from the mid-June peaks and 135 days from the mid-March highs.  (Those that follow my work know how much importance I put in confluence of various timeframes from former peaks and troughs.)  Bottom line, I view July 11-13 as being important, along with July 26-29, and would use strong moves into these time zones to buy or sell accordingly, expecting a reversal. 


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

Short-term (3-5 days):   Bullish given S&P's ability to recapture 2747 and get over this level which had been troublesome for stocks since late June.  Any near-term weakness from 2763-5 should likely hold 2747, before attempting to push higher again.  In the event that 2747 does not hold on pullbacks, this would be a minor warning, with a larger warning on any weakness down under 2731.  For now and for the remainder of July, it looks right to have a very selective stance on what to buy and own, and utilizing tight stops is key, given a market of many moving pieces and not all of them up.  

Intermediate-term (3-5 months)-  Bearish-  Trends likely should be negative overall in July and any larger selloff into late July would merit turning more positive for a bounce into September/October.  While it's thought that November/December likely can be positive, the next couple months are difficult just yet to think are positive, despite the extent of the pullback we've seen over the last few weeks.   Until some evidence of sector stabilization happens in Financials, and Equities start to rally on more broad-based participation and good volume, the intermediate-term trend is still thought to be vulnerable.   Intermediate-term momentum dropped off very sharply into early February and has not really recovered, despite a choppy mild back and forth rally.  This should set up for more traditional negative momentum divergence on longer-term charts on any move back to new highs, so this is the one bearish factor which has been missing over the last few years, and is more suggestive that the larger trend is gradually changing from bullish to neutral and then should turn to negative sometime late this year or early next.  For now, we'll need to see the larger trend give way before thinking the larger peak is already in place, and despite the loss of momentum of late, there just has not been sufficient deterioration to think this is the case just yet.   Intermediate-term support to buy lies down at 2450-2550. 

LONG/SHORT IDEAS for the week:

    Countertrend Longs                    Trend following Longs           Attractive Technical Shorts
1)  DBA-  Grains                                   XLV- Healthcare                             KBE-  Banks ETF
2)  EEM- Emerging mkts ETF              TLT-  20-yr Lehman Bond ETF       SMH-  Semiconductor ETF
3)  FXI-  China ETF                              ACN-  Accenture                             UUP-  Invesco DB Bullish USD
4)  EURUSD- Euro/USD                       LLY-   Eli Lilly
5)  Gold-  GC_F, or GLD, IAU               MDCO-  Medicines Co      
 


Five Key charts are shown that illustrate some of the recent technical developments of this past week


S&P

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S&P's move above 2747 was constructive, but likely will need to be consolidatedTuesday/Wednesday before further gains can happen.  S&P's move above 2747 was a minor positive for US Equities last week, as this coincided with similar moves from XLI, TRAN, and minor breakouts in XLY and XLV.  However, now prices lie near the next make-or-Break area at the minor trendline from mid-June.   What's troubling however is the bond market seems to not be paying attention, as Yields broke down in the 30year Long bond, cracking key support that should allow for another leg lower in yields which has already caused some concern given the extent that the flattening yield curve has raised alarms about upcoming inversion.   Additionally, Financials certainly will be hard pressed to show proper gains if yield and yield curve are pulling back, while Technology already looks to have peaked in mid-June.  Breadth did expand favorably both Thursday and Friday of last week, at amounts which hadn't been seen on this recent bounce from late June.  Yet holding these gains will be important in the week ahead, heading into a cyclically important time at mid-month.  The sector gains in the oversold sectors which had stabilized, like XLB, XLI and TRAN are vital to hold and produce further sharp followthrough next week.  Any failure which results in Tech and Financials turning down and S&P reversing its gains to pullback back below 2747 would be the first warning, while under 2731 represents greater proof that this bounce was purely a counter-trend move and should begin another leg down into late July.  
 

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Bond yield weakness likely to persist- Bond yields have been pulling back sharply in recent days and last week witnessed a breakdown on Friday of the two prior lows in this reversal pattern for Treasury yields which has been ongoing most of the year.  The 30-year yield's close under 2.95 is thought to put further downward pressure on yields and 30Year Treasury yields could fall to near 2.75-2.80% before finding much stabilization.  10 Year Yields also look vulnerable heading into this week, and could drift lower to near 2.75-7%, right near the lows from late May before stabilizing.   Financials likely will continue to underperform in this environment and it's right to avoid buying into the Banks on this weakness given the ongoing pullback, which doesn't look complete, for XLF, nor KBE, nor KRE.

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Healthcare Breakout has begun to accelerate-  Favor this group for Outperformance-  Healthcare's rise should be revisited as the Weekly technical Perspective from 6/18 highlighted this group has having an above average chance of outperforming.   Last week this group was the best performing group of all 11 major S&P GICS Level 1 groups, higher by 3%.  The charts have improved relatively speaking as well as XLV vs SPX on ratio charts has furthered its recent breakout by exceeding June highs, and as the chart shows, this breaks out above the entire downtrend for the group since last September.  Biotechs had kicked off the strength a few weeks ago along with Medical device stocks, and many of the downtrodden Biotechs which had underperformed in in the last 12 months have suddenly shown sharp rallies off the lows-   Regeneron, Vertex, Alexion, Gilead, Celgene, and even Non-Biotech laggards like Allergan and CVS have shown improvement.  Meanwhile the Pharma space looks attractive as well with stocks like Pfizer, Merck, Eli Lilly all setting up with bullish patterns which bode well for these to outperform even further.  

 

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Russell 2000 vs SPX-   Time to Sell Small-caps?    Getting close, but arguably still not quite there Still looks early to sell Small caps given the ratio of RTY to SPX having broken out above the longer-term consolidation trend from late 2013.  Just in the last couple weeks we've seen this ratio exceed early 2017 peaks, which is a definite technical positive.  Additionally, counter-trend Demark exhaustion remains at least 2-3 weeks away from forming any type of peak.  Therefore, while July has had seasonal headwinds in Small-caps historically, we'll need to see more weakness to think that this area underperforms.   Near-term, IWM has shown a few signs of faltering on absolute terms, but does not yet look like a relative short.  
 

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Developed Markets vs Emerging-   Despite the recent stabilization in EM, it still looks early to fade the underperformance in EM, and Developed market strength looks to accelerate-  The relative chart of MXWO vs MXEF still looks to extend in the short run, given the breakout of this pattern in the last couple years.   This pattern is not unlike the chart above of Small-caps to large and for near-term, it shows that underperformance is still likely for Emerging markets, even if EEM bottoms out and makes an absolute rally.  Most of Developed markets should still show better than average strength vs Emerging, and Demark indicators are also premature in calling any sort of relative top in this relationship.  

Reasons for early month Optimism, despite ongoing Downtrend

July 2, 2018

Contact: info@newtonadvisor.com

S&P 500 SPDR ETF Trust- SPY
268.49, 266.20, 263                      Support
273.66, 276.58, 279.48, 280.41    Resistance

 

The 2nd quarter,while positive, came to a close with a whimper and S&P hourly charts put this recent churning into perspective.  Key areas are thought to lie at 2747 and also near 2770, while on the downside, holding last week's lows will be absolutely vital in hoping that an early month bounce can get underway.  Regardless of whether it happens later in the week, or in the weeks ahead, any break of 2693 at this point, structurally for S&P futures, turns the trend even more negative and could bring about acceleration.  Charts of XLF, XLK, XLI, TRAN, NDX, DJIA should all be watched along with SPX for evidence of weakness under last week's lows.  This would be the signal that a selloff into mid-month happens, and no bounce until thereafter.

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Summary:   Equities finished the week, month and quarter in an ugly fashion last Friday, selling off sharply in the final hour to bring the month's returns back to negative territory.  The DJIA's -1.48% returns for June were nearly in line with its historical averages going back since 1950, and as we've discussed here, June has been seasonally the worst performing month of all 12 in Mid-term election years.   As for the year as a whole, US indices remain fairly mixed, and we've seen fractional gains (+1.67%) for the SPX, a more robust +8.79% for the NASDAQ, while the DJIA is lower by 1.81%.  While Tech gains have been impressive, there seems to be some recent evidence of this reversing course and Tech starting to reverse back lower to join some of the other sectors, not the others rising to join Tech as many expected.   Elsewhere, Bond yields have shown increasing signs of rolling over in recent weeks, while the US Dollar index has proven incredibly resilient.  Overall as we enter the month of July, trends have not yet stabilized sufficiently to think markets have the "All Clear" to begin moving back to new highs.  Trends, and momentum remain bearish from mid-June, with the SPX, DJIA and NASDAQ having broken their two-month uptrend.  Many broader gauges of US Stocks, like the NY Composite, has been languishing in sideways consolidation since the early part of February and despite the trade war heating up, the FOMC hiking rates while stressing a robust growing economy and earnings data coming in fairly strong, equities have largely gone nowhere, to the consternation of both Bulls and Bears.  

Overall, there are reasons to be optimistic about early July, for three distinct reasons:  First, Sentiment has begun to turn more negative, as per polls like AAII, Investors intelligence which have all contracted of late.  Additionally, we see the Total Put/call ratio spiked north of 1.2  last week which on a monthly close, represented the highest close for the Total Put/call ratio since 2011.  So investors seem to be fearing the worst with regards to possible Trade tension and the resulting implications.   Second, the early part of the month for the last four months, has been bullish, and from a cyclical standpoint, we've seen markets bottom out into end of month, while trade higher to peak mid-month.   Until this changes, it's thought to potentially happen again in July which would make this coming shortened holiday week positive, along with potentially the following.   Third, Sectors like Transportation, Industrials, Materials and Technology are all down near initial support and have begun to show evidence of trend exhaustion on this June decline.  Thus, while trends are certainly bearish over the last couple weeks, there're a few things that support the idea of a bounce, based primarily on stabilization within this decline after sentiment has grown more negative and markets have reached early month positive seasonality ahead of a major US Holiday.  However, this will have to be watched carefully, as any break below last week's lows in Technology ETFs and Stock indices would immediately paint a more negative picture for downside acceleration into mid-month, and rallies would be postponed..  

Of the 10 reasons listed back on 6/18/18 that were concerning about the market and had warned of a potential pullback, a number of these remain valid concerns and have not been alleviated.  I'll list these below with a short reply
-Intermarket divergence-  SPX, DJIA remain well below this year's highs, and now NASDAQ has shown signs of rolling over
-Price divergence with many world markets-  While the NASDAQ rose to new highs into mid-June, China's indices have been poor enough to push these into what the media would define as "bear market territory" while most of Europe peaked out in late January and also May and well below these peaks. 
-Lack of relative strength/weaker price action out of Financials and Technology (Financials was down -1.01% for the month of June, while Technology just barely eked out gains, +0.35%, but trailed seven other sectors) Financials trends have worsened substantially in the last two weeks, with intermediate-term trend breaks in KRE, KBE, while the XLF made the lowest monthly close since last September, 2017.  As a reminder, these two sectors make up more than 40% of the SPX
-Cycles-  The thoughts of a mid-June peak proved correct, and now looking at the month of July the key timeframe seems to focus on July 11-13 and then late Month, 7/27-8/2, which both could be important areas for trend change. 
-Seasonality-  Even though we're now past the bearish month of June, this is a concern typically for markets between now and October, particularly when momentum is negative and markets have been struggling.



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

Short-term (3-5 days):  Early week Bullish, but reclaiming 2747 likely only provides strength to 2770, while under 2693 would be an immediate negative, suggesting further downward pressure.  Difficult to have too much conviction yet on the long side, but heading into the new month, last Friday's downdraft should allow for a good risk/reward long with tight stops near 2693, so risking 28 points to potentially make 50.  It's thought that breadth and volume should be suspect on any rally in the next couple weeks, and that indices still have an above-average chance of turning down into late July.  However, for this week, a positive stance initially looks correct given some of the recent stabilization attempts while sentiment has shown a few signs of worsening.  

Intermediate-term (3-5 months)-  Bearish-  Trends likely should be negative overall in July and any larger selloff into late July would merit turning more positive for a bounce into September/October.  While it's thought that November/December likely can be positive, the next couple months are difficult just yet to think are positive, despite the extent of the pullback we've seen over the last few weeks.   Until some evidence of sector stabilization happens in Financials, and Equities start to rally on more broad-based participation and good volume, the intermediate-term trend is still thought to be vulnerable.   Intermediate-term momentum dropped off very sharply into early February and has not really recovered, despite a choppy mild back and forth rally.  This should set up for more traditional negative momentum divergence on longer-term charts on any move back to new highs, so this is the one bearish factor which has been missing over the last few years, and is more suggestive that the larger trend is gradually changing from bullish to neutral and then should turn to negative sometime late this year or early next.  For now, we'll need to see the larger trend give way before thinking the larger peak is already in place, and despite the loss of momentum of late, there just has not been sufficient deterioration to think this is the case just yet.   Intermediate-term support to buy lies down at 2450-2550. 


Five attractive risk/reward ideas are examined through ETF's along with targets, stops and brief writeups.   Given the ongoing bearish trend from mid-June, this necessitates a tactical hit-and-run appraoch with tight stops and not emphasizing any timeframe longer than 4-6 weeks.   When trends start to improve, we'll take a look at some longer dated ideas.  


Gold

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Gold (Spot Gold - $1251)  Target 1370 initially and above leading to 1550-  Stop under 1235, representing 5 ticks under last December 2017 lows  Gold has reached an attractive area for buying dips after selling off down to near 1240, which lies up near December 2017 lows.   Near-term momentum has gotten oversold while sentiment has contracted substantially in Gold in the last couple months.   The metal has pulled back over 7% in the last couple months, losing more than 100 points from its important resistance highs near 1370.  Counter-trend buy signals based on Demark exhaustion are now present after this recent selloff  and should be important in helping this downtrend cease and begin to stabilize and eventually reverse course.  Seasonality is also turning favorable for Gold, and the time between July and October has historically been the best time of the year to own the Metal, expecting outperformance.  While a turn back lower in the US Dollar is important to precious metals finally turning back higher, the combination of near-term oversold conditions, negative sentiment, counter-trend buys and positive seasonality bode well for Gold to turn higher.  Buying Gold at current levels with a tight top at 1235 while expecting a rally back to 1370 makes for a very good risk/reward. 
 

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Emerging Markets - Ishares MSCEI Emerging Markets ETF (EEM- $43.33) Target initially $45.12, while a move over this on a weekly close should begin the start of a larger bounce to the high $40's.  Stop a $41.90. EEM has shown its first signs of turning back higher after a fairly severe pullback over the last few weeks which violated key support which began back in early February.  Counter-trend signs of exhaustion are present, while prices have just exceeded the downtrend from mid-May.  Movement up near $45 looks likely based on last Friday's positive close, while a turn in the US Dollar back down should help Emerging markets to stage a decent bounce at a time that sentiment has turned quite negative
 

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Pharmaceuticals ETF-  SPDR S&P (XPH- $43.01)  Upside target initially $47.50, then $50, Stops under 41.25.  While Healthcare has gradually begin to improve, much of this has taken place in the Medical Devices and Biotech while the Pharma stocks have largely lagged of late.  However, stocks like MRK, LLY, PFE have begun to show signs of strengthening in recent weeks as part of bullish bases.  The rally from early May has pulled back in the last couple weeks and given back roughly 1/3 of the prior rally.  Yet this group likely should perform better as Equities show some evidence of tiring, and should be overweighted for a pushback up to the mid-to-high $40's.  Stops on longs should be placed under $41.25.  Bottom line, it appears that this pullback has created an attractive risk/reward opportunity to buy dips for a push back to test January highs.  
 

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Agriculture (DB Agriculture ETF-  DBA- $18.03)  Target initially $19.25 and press longs above 19.54 for a move to $20.95-$21.05.  Stops at $17.50  Agriculture looks attractive here after a very severe correction throughout the month of June, a month that seasonally has proven to be quite negative for the Grains.  Signs last December of the grains trying to bottom out was confirmed in January with a very sharp move higher and breakout in Grains like Soybeans, but yet the last few weeks have given back all of these recent gains.   However, the turn back higher late last week managed to breakout of the downtrend from late May, and the move to multi-day highs should allow DBA to continue higher with targets near 19.25 initially and eventual targets up near $21.  
 

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Short IWM- Russell 2k (IWM-$163.77)  Target of 160 initially with the potential for 153 into late July before this bottoms.  Stops at  166.52 for half and balance at 169.20.  Last week's pullback in IWM broke the trend going back since early May and given the extent to which this had gotten extended above its longer-term trend, it's likely that we see weakness in the weeks ahead with initial targets down near 160 but the potential for a larger selloff to 153 before this bottoms.  Russell 2000 traditionally has performed quite poorly during the month of July in mid-Term election years, the worst month of all 12 months.  So while the uptrend is still very much intact for IWM, a pullback looks possible for July before Small-caps continue their outperformance.  Overall, given bearish seasonal tendencies coupled with near-term overbought conditions, it looks right to bet against Small caps in the weeks ahead, thinking IWM should weaken further from a technical perspective.  

Healthcare attractive with relative strength starting to pick up

June 25, 2018

Contact: info@newtonadvisor.com

S&P 500 SPDR ETF Trust- SPY
273.71, 270.90, 267.76    Support
279.48, 280.41, 281.45    Resistance

 

As the 2nd Quarter grinds to an end. we see the degree to which stocks have largely gone nowhere in recent months, a far cry from how resilient Technology and Retailing have performed and how most view this rally in recent months to have been  parabolic in nature.  Given most of the attention on Big-Cap Technology, it's no wonder, as stocks like NFLX, AMZN, GOOGL, FB, have all risen 30% or more in the last few months.  Yet, the trend in the NY Composite, one of the more broad-based measures of the stock market that exists, one sees a pattern that's more like the DJIA, than the NASDAQ or S&P.   Stocks have fallen off since mid-June, not much different than what's happened in May, April, or March.  Now as we near the final week of June, prices have yet again pulled back to what appears to be an attractive risk/reward entry point for longs headed into July.  Until markets start to show greater signs of Tech deterioration, it's right to use broader market weakness which gets down to key levels, as daily NYA charts illustrate,  to cover shorts and expect that last week's out-sized decline should be nearing its end.  While one can't rule out one final pullback early in this coming week to test or even take out last week's lows, particularly in Industrials, or Financials, Materials, all three sectors look to be near support to buy, for short-term tactical trading purposes while Technology is not turning lower..  So until this trend and seasonality starts to change, we'll look at recent pullbacks as a chance to buy dips.  

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Summary:   A very schizophrenic market to say the least in recent weeks..  The NASDAQ pushes back to new highs largely on Technology, Biotech strength, while the DJIA nearly sets a record for the longest number of consecutive down days since the late 1970's.   Trends arguably remain lower from mid-June after replicating the mid-month peaks seen in recent months, though the broader indices really have been more lifeless and range-bound, and have not really accelerated to the downside, which was thought to be a possibility heading into last week.  While Industrials and Materials certainly suffered some real carnage, Technology and Healthcare acted quite well relatively and the Defensive sectors garnered the most inflows with Utilities, REITS and Staples outperforming all the other eight sectors, outside of a last minute Energy surge helping this sector squeeze in the top 3.    Breadth had fallen off heading into this past week, and momentum based on traditional gauges like MACD had rolled over to negative on daily charts.   Yet, Technology and the NASDAQ have still not meaningfully broken uptrends from the early May lows.   The Small-cap surge has certainly not been followed by Large Caps and Growth is still largely outperforming Value, though this trend has stalled out a bit in recent weeks after a stellar run-up in April and May.  Meanwhile we've seen Treasury yields largely stall out very similar to what has played out in Equities this past week, while the Dollar has shown a few signs of trying to peakout.   While a pullback in USD could positively affect Commodities, it seems to be setting up for an upcoming bounce in Emerging markets which have been beaten up badly in recent weeks.

Overall, given the negatives of Momentum divergences and index divergences coupled with Sentiment having gotten complacent in a rough period of seasonality, what do the Technicals suggest can happen this coming week?   When scanning the sectors and indices, it looks apparent that this recent pullback should be close to nearing an end.  The drawdown in Industrials, Financials and Materials have not been successful in pulling the larger market lower, and now XLI, XLB and XLF are all within striking distance of price and time based support this coming week.  While a move back under this past week's lows still looks likely, my thinking is, this should prove short-lived and provide yet another buying opportunity as markets enter the beginning of July.   While the sentiment and seasonality issues won't go away anytime soon, if equities are to bottom out, it's right to focus on both Technology and also Small-caps, as it's thought that this stock rally likely should persist as these two areas gain ground.  Upon nearing the middle part of July, if indices are able to rally into this timeframe yet again, it would be right to sell into this move, expecting another drawdown, which this time around, might prove a bit stronger into late July to the downside.

Outside of Equities, Yields look to have largely stalled out this past week, but short-term Treasury strength still looks like a possibility, while the Dollar has shown some evidence of turning back lower.  Charts of AUDUSD, EURUSD and GBPUSD all seem to support rallies in the short-run, while the Grains look interesting to rally after having suffered a very seasonally bearish few weeks, which has been a historically great bearish trade for the month of June.  Precious metals look apt to begin turning back higher in the near future, and could begin sometime this next week.

Sector wise, this week's Weekly Technical Perspective focuses on Healthcare, as this group has shown above-average performance and its constructive rally of late suggests this group should continue to make strides in outperformance at a time when Technology has gotten very overbought and looks like a poor risk/reward in comparison.  Healthcare managed to break out of its intermediate-term downtrend vs SPX which has been in place since last September,  and while Biotech has broken back out to new high territory (XBI) many beaten down stocks within this sector are beginning to make meaningful signs of rallying off the lows for the first time in months.   Stocks like REGN, VRTX, ALXN, BMY to name a few, which had lagged substantially, are now showing convincing signs of bottoming out in the near-term.  We'll review the charts of these and the absolute charts of several Healthcare indices below. 



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

Short-term (3-5 days):  Early week Negative, but Bullish for a turn back higher this week- The first couple days I expect very well could be bearish this week, as prices retest and violate recent lows, but my forecast for the week is for weakness to prove short-lived and turn up to close the week positive.   Early weakness should not violate 2709, and XLI, XLB and XLF all look very close to trading lows, but structurally and time-wise, all require a move back down to new low territory first.  So initially one should hold off from being too aggressive in buying early in the week, but on evidence of price pulling back down to 2735-40, look to start covering shorts and utilizing pullbacks to buy.  Small long positions are how we're starting out this week, looking to increase on early weakness.  

Intermediate-term (3-5 months)-  Bearish-  It's thought that markets are nearing an initial inflection point given the seasonal trends combining with other cycles which could allow for gains to be met with solid resistance throughout the back half of June.   An above average pullback looks likely into July, and if sentiment can contract sufficiently, this might warrant a bullish stance into the Fall before cutting back exposure again.  But it's thought that Technology is nearing important resistance and the bounce in some of the other sectors hasn't proven nearly strong enough to combat a slowdown in Tech.  Whereas longer-term uptrends from 2016 are intact  and Advance/Decline is back at new highs, the risk/reward for equities rallying through the balance of June is sub-par, and gains should be used for profit-taking.    However, it's thought that a larger pullback likely should still constitute a buying opportunity for a push higher into the Fall before any larger selloff gets underway.  While short-term support lies at 2740 and then 2675-85, the Intermediate-term support to buy lies down at 2450-2550. 


This week we'll look at some charts of the Healthcare space, which looks technically like some of the better risk/reward ideas to consider in a market that's shown all types of divergences.   This group traditionally tends to outperform in the Summer, and with Biotech having broken out to new highs, many of the former laggards within the Biotech space are shaping up quite nicely to end the 2nd Quarter.  



XLV-  Healthcare Sector SPDR ETF

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XLV- Healthcare gaining momentum-  OVERWEIGHT- Healthcare has begun to show convincing signs of strength in the last month which bode well for this sector to outperform at a time when many other sectors simply aren't performing that well, or in the case of Technology, have risen parabolically to levels which represent a poor risk/reward for the next 4-6 weeks.   Healthcare is one of four sectors that is positive for 2018 out of 11, and its gains thus far for the month of June have helped it take the third spot thus far sector-wise with +3.35% gains which have taken this sector back to positive territory for the year with +2.83% gains YTD.   Biotech and Medical Device stocks have shown stellar signs of outperformance recently, with XBI moving back up to new all-time highs and a definite pattern of mean reversion happening in some of the laggards, which have begun to show real signs of mean reversion.   Technically, the selloff from late January has been nearly half recouped, but the rally into early June managed to break out above the prior highs from April/May, turning momentum back to positive.  Following just a brief consolidation, this has now pushed back higher above $85, setting the stage for a rally back to the high $80's.  One should overweight Healthcare given this pickup in strength, favoring further near-term outperformance.  

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XBI-  S&P SPDR Biotechnology ETF- ($99.08)  A sharp rally back to new high territory has caused many stocks within the Biotech space to begin showing above-average strength, with strong gains in May/June from many issues within Biotech, both the leaders and laggards.   While near-term stretched after recent gains, technically this pattern is attractive in having exceeded highs last made in 2015.   this should bode well for further gains, though one might consider some of the former laggards, which are now beginning to stabilize and turn back higher.  (This ETF seeks to replicate the performance of the S&P Biotechnology Select industry index, which is an equal-weighted index.  Given 120 holdings, it seems to be a better gauge for this space, than viewing the NASDAQ Biotechnology ETF, or IBB.  )

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Healthcare vs SPX-  Relative chart  (XLV/SPX)  Healthcare's gains have been sufficient in the last couple months to officially break out above the downtrend in this group which has been ongoing since last Fall.   After having been tested already on two separate occasions, this move over the downtrend can allow for further near-term outperformance from this group, suggesting ongoing outperformance.  One should consider buying into Healthcare given this relative break of a nine-month downtrend, which argues for gains at a time when many sectors simply don't look that appealing.  

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Alexion Pharmaceuticals (ALXN- $127.53) Bullish- Mean Reversion rally off the lows looks to be starting- The rally last week to exceed highs going back since January bodes well for further gains in ALXN which has slowly but surely begun to demonstrate signs of trying to bottom out following nearly a 50% loss in value since 2015.  Volume expanded on gains last week  with weekly charts showing price having moved up to the highest levels since late January.  This uptick in momentum at a time when the group is starting to show better relative strength should carry ALXN up to near-term targets at $139, with additional levels near $152, or the 50% retracement of its pullback since 2015, a key level.   The ability to get over this level, while not expected right away, would suggest a much more positive intermediate-term trend for ALXN, helping this stock to begin the process of recouping much of the damage since 2015.   Near-term, last week's gains seemed like a meaningful step in the right direction to helping this stock start to move higher.  Longs are recommended with stops near $114 for traders.  

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Regeneron (REGN- $332.50)  Trendline breakout and recouping of former lows is a real positive. Bullish weekly gain above prior 2016 former lows bodes well for additional gains in the weeks ahead.   Overall, after having lost more than 200 points since last Summer, equating to a loss of more than 40%, REGN is finally showing some signs of turning back higher.  The gains in the last couple weeks have broken out above the downtrend from last year's highs, made this exact week last June, while prices have moved to multi-week highs above the prior low levels carved out in 2016-7.   This is important as the former area of support that had broken, has now been regained.   Upward progress looks likely in the weeks ahead, with targets initially near $375, and then near $409 on further rallies.   While a rise from current levels likely doesn't move in a straight line, the next 4-6 weeks look positive for REGN, and long positions are recommended, looking to buy any minor dips.  

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Bristol-Myers Squibb (BMY- $55.23)  First meaningful bounce off the lows looks to carry further- Last week's ability to push up over the highs of the six week consolidation should allow for further gains in the weeks ahead into July.   Momentum has turned positive and has shown evidence of turning up sharply last week, as BMY has slowly but surely begun to rebound after its very steep decline from early February which produced a 20% + decline in just two-months' time.  Movement back to $57 looks initially likely, and then over would produce gains to near $60-$62 which should prove to be the first area to consider profit-taking given this first meaningful rise off the bottom.  While intermediate-term charts require additional strength before weighing in too positively on the broader structure, the near-term picture looks technically bullish, arguing for long positions here and pressing gains after last week's rise, thinking that the first upside target is right around the corner.  
 

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Becton Dickinson (BDX- $238.49)  Minor Cup and Handle breakout last Friday part of a larger bullish base from January- BDX looks quite positive near-term after its ability to gain ground over both April and early June highs last week. The stock formed a mini Cup-and-Handle pattern from mid-April, and its breakout of this pattern in the last two weeks should allow for a push up to $245-$250 without too much trouble.  While some might choose to avoid BDX given the monthly overbought conditions, the ability to have consolidated gains since early this year has managed to form a nice bullish base that bodes well for this turning up more sharply to test prior highs.  Long positions warranted here, looking to add on any early week pullback.  

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CVS Health Corp. (CVS- $72.34) Bullish trendline breakout along with exceeding former highs bodes well for further strength. CVS has begun to show compelling signs of trying to bottom out and begin to work its way higher after moving to new monthly highs as part of an existing monthly downtrend from 2015.  However, the daily chart shows the reason for optimism, as CVS has just broken out above its near-term downtrend from late January along with getting back up above the former peak from late April.  This recent price action is constructive and should allow for further gains up to near $79 which intersects a minor two year trend from 2016.  The larger area of importance with regards to its broader monthly pattern lies at $85.  So while the longer-term pattern has some definite work to accomplish before getting its uptrend back on track, the near-term success should help this to make some further progress over the next 4-6 weeks before its next challenge.  

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Merck (MRK- $61.56) Consolidation post breakout looks complete-  Higher prices likely to Mid-$60's initially.  MRK remains a bullish stock to own technically and last week's ability to snapback up from near $61 to multi-day highs was a good indication that its minor pullback likely was complete.   MRK made excellent progress back in early June after having broken out of its base since last Fall.   The stock consolidated for a few weeks and has now turned back higher as of late last week, holding its uptrend from late March/early April lows while remaining above its intermediate-term trend from last Fall's highs.   This latest progress should help to carry MRK back to March 2017 highs at $66.80 while getting over that level would successfully complete a breakout of a long-term bullish base in this stock since 2002.  Overall, it's thought that MRK should be starting its climb back up to the mid-$60's with intermediate-term targets up near $91.50 from December 2000.

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Vertex Pharmaceuticals (VRTX- $159.65) Breakout to new monthly highs bodes well for this stock starting to turn higher- VRTX has struggled so far this year, peaking out near $180 in March before selling off down to just under $145 over the last few months.   However, its recent ability to bottom out near early May lows and then exceed the prior highs cements this pattern as a Double bottom formation, and should allow for VRTX to continue trending higher in the weeks to come with initial targets near $165.20 and above leading back to $178.  In the bigger picture, VRTX has consolidated in the last few months after having more than doubled from late 2016.  The stock's daily pattern shows its recent progress, while the weekly chart (not shown) illustrates how VRTX still lies within a few percent of its all-time highs, so any minor backing off in recent months hasn't done much to alter its larger structure and this remains bullish.  

Newton Weekly Technical Perspective 06/18/18

June 18, 2018

Contact: info@newtonadvisor.com

S&P 500 SPDR ETF Trust- SPY
274.70, 273.20, 270.90, 267.76    Support
279.29, 280.41, 281.45                 Resistance

 

As we enter the third week of June, sentiment has steadily gotten more optimistic, with sentiment polls like Investors Intelligence having risen now for the 5th straight week, while Bears have dropped down under 18%.  The net plurality now stands at 35%, which is worrisome given that Equity put/call data has also dipped down to levels last seen in late January when equities peaked.   A lack of bears is often more important than Bulls being at high levels, but the net between the two being over 30% always puts a selloff on watch.  Given the recent deterioration in sectors like Financials, and Aerospace/Defense within Industrials, and a flattening out in breadth last week, this looks even more important to pay attention to.  While buying fear is often much easier than selling complacency, when a number of factors suggest we're getting close to a near-term peak in prices.

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Summary:   For all the potential market moving events this past week, SPX surely failed to show much volatility and by Friday's close, SPX was within 1 point of levels hit the prior Friday's close, despite two Summits, 3 Central bank meetings, the T/TWX merger announcement just to name a few of the events from last week.  Last week was billed as one of the biggest weeks all year with regards to potential market moving events, but just goes to show how little these events often matter in the short run. 

The inaction in the SPX however, didn't quite do justice to the sector rotation that was ongoing, nor to the drawdown in positive breadth while investors continued to pile into call options to take advantage of FANG stocks.  The Equity Put/call ratio has now approached nearly the same low levels which were seen back at the late January highs.   Moreover, while SPX and DJIA, along with TRAN have not joined the NASDAQ at new highs, other more broad based indices have shown even weaker price action lately and the NY Composite index, which includes all common stocks, including ADR's REITS and listings of foreign companies fell to the lowest levels in about 7 trading days last Friday.  

Below I list the 10 concerns that I shared in this past Thursday's Morning Technical Comment, but for the benefit of those who do not receive these reports during the week, here they are:   The combination of these factors suggest upside should truly prove muted in the upcoming weeks, and likely to coincide with equities turning down:

 

1)  Negative momentum divergence is present on intra-day charts  of S&P while weekly NASDAQ and SOX charts have shown negative divergence in momentum.

2) Percentage of stocks trading above their 10-day moving average has reached 85% as of 6/11/18 the highest since April, while the percentage of stocks above their 50-day m.a. reached 75% yesterday, the highest since February.  While momentum is not really overbought on daily nor weekly basis, Overbought conditions have been present on monthly charts for some time.

3) Intermarket divergence is present, as the NASDAQ's push to new highs has NOT been met with similar movement by SPX, DJIA, TRAN, or other indices, and the Russell 2k moving back to new highs might seem encouraging, but it's certainly not a broad-based move among the broader market averages and indices like New York Composite are still below March highs.   NY Composite, as the charts show below, fell to the lowest level in over seven days last Friday, which certainly tells a bit of a different picture. 

4) Price divergence with many of the developed world markets outside the US has also been an issue, as NASDAQ's push to new highs was certainly not followed by Europe's SX5E, SXXP, or most of Asia.  This looks to be another important cautionary market "tell" 

5) Decidedly weaker price action out of Financials (-1.90% last week) which has been lagging nearly for a month now, and Technology also has dropped off meaningfully in the last one and three months.  Technology was barely positive last week and has dropped to third place in 1 and 3 month rankings.  Financials meanwhile is down for the year performance wise and the second to last sector performance wise out of 11 on a three-month basis (-4.81% - S&P 500 Financials index through Bloomberg 6/14/18)

6) Technology has gotten quite overbought, with SOX and NASDAQ near March highs and relative charts of Tech to SPX showing evidence of trying to peak out, not unlike what was seen in March, or last November.   After such a strong run in the SOX and FANG in May, this looked to bring many investors back into the fold while now Tech could underperform

7) Sentiment concerns-  We've seen bullish sentiment per Investors intelligence now rise for the 5th straight week to 55%, above March highs, while Bears lie at 17%.   Ned Davis Research (NDR) Crowd Sentiment poll is the highest they've seen since early February, while Equity put/call data had reached the low 50s as of early last week on its 10-day moving average, the lowest reading since late January when stocks peaked.

8) Seasonality concerns-   June tends to be a very poor month seasonally in mid-term election years the worst of all 12 months, showing an average return since 1950 of -1.7% (SPX) and thus far gains have proven robust in the first two weeks to the tune of over 2% until yesterday.  The last couple weeks could very well help to spoil the Bulls party as mean reversion and bearish seasonality kicks in again this year.

9) Demark signals of exhaustion-  We've seen NDX, DJIA, SPX all signal evidence of counter-trend exhaustion on this rally for the first time since the bounce began in early May.  Now many sector ETF's also show similar signs, and this could grow in nature in the event S&P were to attempt to push back up to 2805-2815 into early next week.  It's unlikely in my opinion that seeing these across many indices and sectors means they should be ignored.  

10) Cycles point to mid-June for a possible turn, and this area lines up with former mid-month peaks that have been seen also in recent months.   When just casually looking at February, March, April and May, weve seen a specific pattern of these indices bottoming early in the month and peaking mid-month.   This looks to potentially be the case in June and also in July of this year. 

 


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

Short-term (3-5 days):   Bearish-   The downturn in Financials lately along with industrials caused breadth to flatten out substantially this last week, a troublesome development when sentiment has gotten back to such bullish levels during a seasonally bearish time.  Technology looks prone to weakening in the upcoming week,  and should cause equities to fall into late June before any near-term bottom.  Given the rally into mid-month, June is likely to play out like the last few months, and produce selling pressure now into end of month before any bottom.   Technically this should be a short-term correction only at this time but a breach of 2740 would allow for a test of late May lows near 2676 while a more extreme pullback likely reaches 2650 before stabilizing. 

Intermediate-term (3-5 months)-  Bearish-  It's thought that markets are nearing an initial inflection point given the seasonal trends combining with other cycles which could allow for gains to be met with solid resistance throughout the back half of June.   An above average pullback looks likely into July, and if sentiment can contract sufficiently, this might warrant a bullish stance into the Fall before cutting back exposure again.  But it's thought that Technology is nearing important resistance and the bounce in some of the other sectors hasn't proven nearly strong enough to combat a slowdown in Tech.  Whereas longer-term uptrends from 2016 are intact  and Advance/Decline is back at new highs, the risk/reward for equities rallying through the balance of June is sub-par, and gains should be used for profit-taking.    However, it's thought that a larger pullback likely should still constitute a buying opportunity for a push higher into the Fall before any larger selloff gets underway.  While short-term support lies at 2740 and then 2675-85, the Intermediate-term support to buy lies down at 2450-2550. 


AThis week we'll look at some charts of five distinct charts that illustrate some of the troubling technical developments within the Equity market and sectors, followed by five Stock write-ups.  Three bullish, and two bearish.  Stock-wise, TSG, EMN ,and HCA on the positive side, while negative developments and attractive short setups recently in BA and FOSL.



NY Composite- (NYA)-  Far weaker than SPX, NASDAQ

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New York Composite(NYA)-  This index is arguably one of the more broad-based indices that incorporate all NYSE stocks, so when it fails to rally to the same extent of NASDAQ, or SPX of late, its wise to pay attention.   NYA fell last Friday to the lowest levels in over seven days' time, and as the daily chart shows, price is lower than May peaks and remains on par with levels hit back in March.  This sideways pattern in the broader market since mid-February is far different from the bullish charts seen in many Technology names and other indices, and shows a far more neutral trend.  This inability to climb back to even retrace 50% of the move down from late January is a bit disconcerting, and will be important to see when this pattern is broken either to the upside or the downside.  Into the end of June and potentially July, it's likely that trendline support down near 12500 is tested.

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XLF/SPX- (Financials vs SPX- Relative) Financials initially peaked out right when the broader markets did in late January and have moved steadily lower since February, violating uptrends vs SPX back in April of this year.  This is a negative development and given signs of Treasuries extending gains lately (Yields pulling back and failing to move back over 2.94%, it's likely that this sector weakens even further in the short run.  One should be quite selective when trying to own the Financials sector.  For those that feel the need to be positioned long, stocks like TCBS, V, CME, AMTD, SCHW, are among the best to own, and many of the Exchange and E-brokers, not to mention Regional banks have acted far better than the Money-center banks of late.  

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Industrials ETF-  (XLI)   Industrials have also fallen out of favor lately, but much of the near-term weakness has occurred within the Aerospace and Defense group, not really the Rails.  While the Airlines have tried to stabilize lately, this group remains a longer-term laggard in performance and should be avoided.  Technical trends from early May show prices having violated the uptrend and now price has given back nearly half of the gain from the May rally.   Overall, the need for selectivity in this group is paramount to success.

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Technology vs SPX-   Tech has shown increasing signs of peaking out in the last week and has been gradually underperforming since early May-  TD Sequential sell signals (13-Countdown) was just triggered last Friday on S&P 500 Information Technology index vs SPX on relative charts, and this shows the extent to which Tech has gone through periods of above-average performance, followed by mean reversion and underperformance.  Last November and this most recent March were both periods where Tech peaked out and fell , and ratio charts suggest this recent Boom in "FANG" stocks has put Tech in a similar position to underperform in late June/July.  

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NYSE Advance/Decline-  The A/D line looks to have peaked out over a week ago, and daily charts show the presence of counter-trend exhaustion indicators having appeared on this key breadth gauge for the first time since bottoming out in February.   The downturn in breadth, with minimal breadth readings of 3/2 positive or even "Negative" breadth, is important during times when equities are trying to mount a rally, and suggest that equities need to be watched carefully in the days ahead for evidence of stronger selling and violation of key support.  

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The Stars Group (TSG- $37.80) -Bullish for move to $40+  This stock looks quite attractive in the short run, following its push back to new weekly highs after having consolidated for the last five weeks at a level right above prior highs in 2014.  The ability of price to have pushed back to new highs the last two days of last week is a real positive and should lead to an upcoming rally back to new high territory.  Weekly and monthly momentum are overbought, yet structurally TSG is in good shape technically after having moved above 2014 highs and consolidated to relieve some of the near-term overbought conditions.  Until this begins to show evidence of giving back its recent consolidation and falling to new multi-week lows, it's right to position long, expecting a push up to over $40.  Under $36.40 postpones the advance.
 

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Eastman Chemical (EMN- $108.92) Constructive Base bodes well for upcoming breakout-  This pattern is quite bullish given the structure of this chart since March of this year, when EMN began its consolidation following the early year runup from February lows.  As daily charts show, the lowest low happened in April, followed by two successive higher lows, while highs have roughly all occurred near the same levels.  This pattern typically suggests a move back to new high territory and given the constructive price action recently in the Chemicals, EMN stands out as one to own and add on strength.  Key upside areas of importance in this chart lie just above $110 at early June highs.  Last Friday's bullish engulfing pattern make a test of this level likely, and should result in this being exceeded, driving EMN back to test May highs and over.  Overall, this appears like a good risk/reward for longs, despite markets showing some shaky signs of late and long positions recommended, with upside targets near $112, then $115, with a move back under $105 postponing the rally.  

HCA Healthcare (HCA-$106.51) Bullish Cup and Handle breakout- Despite a looming broader market pullback, HCA stands out as one to own, as the recent Cup and Handle pattern which was exceeded and now challenging January peaks, remains quite bullish and should give way to additional gains in the weeks and months ahead.  Daily charts show the uptrend giving way back in March of this year.  Yet the resulting damage proved minimal and HCA has pushed back to new weekly all-time highs just in the last week.  The recent strength looks to signify a breakout of its larger weekly/monthly Cup and Handle pattern which began back in 2015 (not shown).  Rallies up to $110-$115 look likely in the short run, while a pullback down under $99.48 would be necessary to cancel out the bullish factors in this daily chart.  Overall, long positions are recommended, looking to buy any minor pullback. 

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Fossil (FOSL- $29.49)  Attractive to fade this rally from $29.50-$30.50 early this week.  Overall, the near-term FOSL pattern certainly seems anything but bearish, yet this rally from single digits to near $29 since late 2017, rising over 4 fold, has occurred  after some stabilization following the 90% correction from 2013 into lows late last year.  While the near-term rally is certainly impressive, it will take some time before this can manage more gains off its lows.  To put this rally into perspective, even after this very sharp advance, FOSL has still not even recouped 20% of its entire decline off the 2013 highs.   Now near-term momentum has become quite overbought while counter-trend signals of exhaustion are present for the first time off the lows on daily charts.  This looks to be one case where going against this momentum could pay off in the near-term, and to be on the lookout for evidence of a greater peak in the rally from late last year, thinking any larger rebound off the lows will take time.  

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Boeing (BA- $357.88) - Further weakness likely after having reached the most overbought levels in 30+ years, then breaking down.   In the short run, BA is unattractive at current levels technically, and looks to have begun a short-term correction which started in the last week.  Further downside appears likely in the next 4-6 weeks to near-term technical targets at $336, then $311 which marked the late March intra-day lows and lies just above its 200-day m.a.  Technically, the break of its one-month trend is a concern, along with evidence of bearish momentum divergence after reaching the most overbought levels in over 30 years.  The stock traded down to $102 in early February 2016 before ratcheting up to over $350 in just a bit more than two years time.  Looking back, monthly RSI has only reached above 75 on six occasions in the last 30 years, and four of those six resulted in corrections of at least 50% in the years ahead. (See 2006, 2000, 1996, 1990, 2013, 1986 for examples of stock behavior when momentum grows this overbought for BA.   Overall, the consolidation over the last four months is merely neutral, not bearish, and would take a break of $311, so this is what to look for in the months ahead to think the longer-term pullback is getting underway.  At present, just short-term weakness is expected into late June/July.   

In a Pivotal week, these 10 Technical Breakouts are worth considering

June 11, 2018

Contact: info@newtonadvisor.com

S&P 500 SPDR ETF Trust- SPY
276.87, 275.50, 272.80         Support
279.56, 280.41, 280.94         Resistance

 

The negative inter-market divergence shown by the SPX and DJIA along with the TRAN  not joining the NASDAQ back at new highs is at least a temporary issue, and it's difficult to call this too broad-based until we see more evidence of a widespread move back to new highs.   The Small-cap rally has been encouraging lately, and mid-Caps have just made new all-time closing highs last Friday.  Yet, the large caps have been faltering of late, so this is something to note.   Most European indices and China also are quite a bit weaker than what's been seen in the US, and this divergence also can't be ignored.  Many of the rallies back to highs have far more conviction when they happen all together, and when US and Europe and Asia are all rising in Tandem.  So while there are reasons to be optimistic given recent progress, there also are concerns that need to be alleviated.  

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Summary:   Equity markets are entering the 2nd full week of June on a very optimistic note, despite the huge number of Potentially market moving events that lie directly ahead.  After what looks to have been a less than successful G-7 meeting, rife with combative talk and threats of reciprocal tariffs, Trump now has flown to Singapore for the historic meeting with North Korea's Kim Jong Un.  This week also brings about the long-awaited decision of the US case to block the mega-merger of AT&T and Time Warner which might have implications to other deals.  Additionally, we have the long awaited June FOMC meeting along with an ECB meeting this week.  The FOMC's projections for 2018-9 and also ECB detailing plans for any Bond tapering will be watched with great interest.  

Overall, technically speaking, these last couple weeks have been largely positive in producing some breadth improvement and structurally bullish developments with constructive short-term technical breakouts in Healthcare and Materials to join the recent lift in Industrials and Discretionary. The lift in Yields ahead of this week's FOMC meeting has helped Financials to bounce as well while the Defensive sectors have underperformed dramatically.  The Dollar has shown signs of turning down, which has fueled a rise in the Metals and Ag stocks, but largely much of the rally in the last month has been largely dominated by Technology and Retailing which have both shown sharp outperformance, largely fueling the move in Consumer Discretionary back to highs.   Advance/Decline line for "All Stocks" is back at new highs, while popular technical momentum gauges like MACD have now turned back to positive on both a Daily and weekly basis and are also positive on a monthly basis.  

However, all is not positive in the markets as we continue to grapple with intermarket divergence between the NASDAQ and DJIA, SPX, where the latter two have not shown the same degree of strength in being able to push back to new highs like NASDAQ.  Sectors like Financials have broken down relatively on weekly charts, where even a minor bounce in the banks likely will not be sufficient to turn this momentum back to positive.  Moreover, cyclically there are two different cycles that suggest a change of trend this week, while Demark's TD Setup count is within 2-3 days of reaching conclusion.   (This could make a further advance quite difficult into end of month, and lines up directly with this week's FOMC meeting)   Additionally, sectors like Technology  look to be very close to peaking out after having turned in some very pronounced outperformance in the last month.  Tech has had a history of showing outsized performance which then is given back, most recently in September-November 2017 as well as February-March.  Now the rally from late April looks to be nearing conclusion, and also might bring about a peak.   There also stands the issue of Sentiment having widened back out between Bulls and Bears, while speculators have taken to buying up calls to take advantage of this rally, as Equity Put/call ratios are down near levels which marked the peak from late January in the SPX.   Finally, seasonal headwinds lie directly ahead for US stocks, and given an average "June Swoon" pullback to the tune of -1.7%-1.9% for S&P and DJIA during mid-term election years, this will take quite a degree of selling to erase the +2.7% we've seen during the first six trading days of the month.  (Both NASDAQ and SPX are higher by 2.73% MTD, while the DJIA is up by over 3.6%)  

All in all, it seems like the market has been able to successfully weather almost everything that's been thrown at it lately, and regardless of the uncertainty of a potential trade war on the direct horizon, geopolitical unease, or the possibility given lackluster GDP growth that the Fed could be hiking into a fragile recovery, stocks have pushed higher nearly 3% in a seasonally weak month, while the broader Equity market structure still needs a lot of help to turn bullish. Prices still lie under March lows and under January, and this negative divergence between the US indices, or vs Europe which has lagged, does not seem to be dissipating anytime soon.   Technically I suspect that Technology should stall out this week and turn down, and Yields also could face weakness again post FOMC meeting, (given ongoing huge CFTC Spec Short positions in Treasuries ) and the combination of these should result in weakness in both Technology and Financials again starting late this week.  Given that these represent over 40% of the market, I suspect stocks should have difficulty in making too much more progress.   However, at the start of the week, trends remain intact and the recent progress still looks to have more upside early in the week.  So one should bet on a final push this week, but one which should be utilized for profit-taking and weakness over the last two weeks of June. 


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

Short-term (3-5 days):   Bullish- (With Stop and Reverse on any move under 2740)  Markets still haven't shown much signs of technical weakness, outside of a bit of stalling out in Technology, which has been directly replaced with strength in Retailing, and various Materials and Healthcare stocks.  Yet, the combination of bearish seasonality, cycles, Demark Sells and overly optimistic sentiment ahead of FOMC could all come together to cause some serious headwinds late in the week, and one should be cautiously optimistic, but with an eye on the exits.

Intermediate-term (3-5 months)-  Bearish-  It's thought that markets are nearing an initial inflection point given the seasonal trends combining with other cycles which could allow for gains to be met with solid resistance throughout the back half of June.   An above average pullback looks likely into July, and if sentiment can contract sufficiently, this might warrant a bullish stance into the Fall before cutting back exposure again.  But it's thought that Technology is nearing important resistance and the bounce in some of the other sectors hasn't proven nearly strong enough to combat a slowdown in Tech.  Whereas longer-term uptrends from 2016 are intact  and Advance/Decline is back at new highs, the risk/reward for equities rallying through the balance of June is sub-par, and gains should be used for profit-taking.    However, it's thought that a larger pullback likely should still constitute a buying opportunity for a push higher into the Fall before any larger selloff gets underway.  While short-term support lies at 2740 and then 2675-85, the Intermediate-term support to buy lies down at 2450-2550. 


As with last week, we'll look at some charts of what appears to be some of the better risk/reward ideas heading into this current week.    Below is Technical Analysis of 10 Attractive stocks which look to trend higher over the next few weeks, and look like appealing technical longs



Costco Wholesale (COST- $203.76) 

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Costco Wholesale (COST- $203.76) Breakout from four month base bodes well for future gains-   COST has been churning since January, but after bottoming out in late March, has quickly moved back up to test former highs, and these were just exceeded in Cup and Handle fashion as of late last week.  This is a bullish development technically and one should look to consider COST and particularly on any minor backing off, as the stock looks appealing at 200-1 for a move up to 210-15.  Stops on longs are placed under 195, as this can't be breached without changing the structure of this pattern.  

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O'Reilly Automotive Inc. (ORLY- $283.13) Bullish two-year breakout- ORLY's breakout of early year highs also managed to exceed the mild consolidation resistance that had held the shares dormant since 2016.  Technically, the act of getting above early year highs changes the structure for the better, and should allow for a push up to test former highs near $292.  Only under $272 would this rally be postponed, arguing for a move down to $265.  Near-term, it's thought that ORLY should be considered  for a move back to test highs, and over that would allow for a much sharper move in the weeks ahead.

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UnitedHealth Group (UNH- $250.68) Bullish with Cup and Handle breakout likely leading UNH up to test $275.  This Healthcare standout has largely been under pressure since early this year and the peakout led to more than a 15% decline into early February before this found support, retested, and then started moving higher.  The initial retest came in late May, but this has since been exceeded as of late last week, which is a bullish development and bodes well for further gains.  Upside targets lie near $275 while one would utilize $240 as a stop for longs, technically.  

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Zoetis (ZTS- $86.78)  Bullish, with upside targets initially near $90 and additional strength likely to find its way to $100 without too much trouble before finding resistance.  ZTS has been trading in a very narrow range over the last few months, with highs near $86 and increasing lows since early May.  Last Friday's ability to close up over the highs of the prior couple months is thought to be quite constructive technically, and bodes well for additional gains as the Healthcare space gradually begins to try to rebound.  Only a move back down under $82 would cancel the positives in this chart and for now, its right to expect additional gains.  

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Old Dominion Freight Line (ODFL- $160.64) ODFL's ability to breakout of the consolidation since January, churn sideways without any meaningful pullbacks, and then push back higher is considered a real positively technically, and bodes well for additional strength up to near $170 before this finds any meaningful resistance. This stock has managed to exceed recent consolidation in a much more bullish fashion than many within Transportation, and while many within the Airline space are range-bound and have made zero progress for the last few months, this stock has clearly been a standout.  Minor dips in the next couple weeks could present even a better risk/reward, but it's right to be long at current levels, looking to add, while utilizing $150 as a level for stops on Bullish bets. 

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RH- (RH- $113.28) RH's bullish breakout over its large Cup and Handle resistance highs since 2015 bodes well for this to continue pushing higher with initial targets near $120.  The six-month Cup and Handle pattern has quite bullish implications given how deeply prices fell before recovering just as quickly and the 25% plunge and roundtrip in short order should help this push higher without much trouble in the near-term.  Only on a pullback down under $106 would this postpone the rise.  

 

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KMG Chemicals (KMG- $70.43) Bullish, with targets near $77.50 then $80.  KMG's ability to push higher to surpass April and May highs is a positive development for this stock given the triangle pattern in place.   The start of the turn back lower for the US Dollar has helped many chemical and metals names outperform, and KMG's pattern here resembles a Bullish pattern which as traded in a very unorthodox, choppy, yet positive pattern since the middle of last year.   The last few months in particular resemble a triangle pattern of slightly lower highs and higher lows while last week's ability to exceed the prior few weeks should mark the start of the breakout higher.  Movement up to near $75 looks likely, while a move down under $66 is necessary to postpone this rally.  

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New Oriental Education & Technology Group, Inc (EDU- $105.00) The increasing number of tests of $105 since January is quite constructive for this pattern, which had largely shown no real net change since last Summer  when it began to consolidate following the push up off the lows from the US Election.  The act of moving from highs near $120 down to under $85 before pushing back higher to test this same level back in late May was important and now has been revisited in short order just in the last week.   Movement up to near $115 looks likely technically as EDU has formed a minor Cup and Handle pattern just since January, and should be overweighted for a push back to new highs.  Movement back down under $100 would postpone this move, but for now, the technicals are pointing for higher prices in the short run.  

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Resmed (RMD- $106.79) RMD's breakout in late April helped this to claw back to test and exceed all-time highs from January just in the last week.   This is a bullish development and bodes well for further near-term strength up to near $110, then $115 before any major resistance.  RMD's pattern has become more parabolic in its rate of ascent during the early part of this year.  The consolidation in recent months has helped to alleviate the overbought conditions, while the breakout last week should help RMD to now accelerate higher in the weeks to come.  Counter-trend signs of exhaustion are premature, and pullbacks should provide an even better risk/reward for a push higher in the days/weeks to come.  

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Umpqua Holdings Corp. (UMPQ-$24.86) The recent act of building a "base" on top of a former base is very encouraging for UMPQ to rally further in the weeks to come.  The consolidation in the last month happened while holding the $23 level which had marked highs in this stock since last November.  The case for near-term bullishness however, is a result of the push higher back to new highs and exceeding the former peak back in April.   This should allow for an upcoming push up to near $26.50-27 and is thought to be quite constructive.  Only a move back lower under $23 changes this structure sufficiently.  

10 Technically attractive Stocks to consider ahead of possible mid-month June swoon

June 4 2018

Contact: info@newtonadvisor.com

S&P 500 SPDR ETF Trust- SPY
267.75, 264.46, 262.14, 259.29   Support
274.08, 276.61,  280.41        Resistance

 

Heading into June, the NASDAQ remains the strongest of the major US Equity indices, fueled by Technology, and returned over 5% for the month of May.  As of end of last week, price had pushed up above the highs of the recent range to make the highest close since mid-March, putting this in much better shape than either the SPX, or the DJIA.  Upside resistance could challenge this Tech rally once XLK reaches former March peaks, and this is something to watch carefully for in the upcoming 1-2 weeks (evidence of Tech slowdown)  Heading into the first week of June, it's thought that Discretionary and Financials might play catchup a bit to tech, but markets will need to show real strength to show sufficient broad-based participation to allow markets to rally.  Even with Tech's strength last month and in the last few weeks in particular, the net progress for equities has been largely NIL, and lots of sideways consolidation lately.  So while breadth slowly improving would be thought to be good, the lack of broad-based sector participation continues to leave the larger structure in consolidation from late January.   

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Summary:   Overall, still a difficult Equity market to have much conviction in, and despite the multiple 1% up and down days over this past holiday shortened week, this see-saw trading really hasn't accomplished all that much technically.  Last Friday's close left prices within 3 ticks of SPX levels hit back on May 14  So, still very much range-bound for most of the last three weeks, and under highs made back in March and also back in January.  None of the trade drama, or emerging market currency woes seem to have affected US stocks too dramatically, and even the near-parabolic drop in rates hasn't spooked many sectors outside of Financials.  On the other hand, reports of unemployment dipping down under 4% and better than expected earnings haven't affected stocks all that positively either.  The bond yield drop does seem to have some importance though for the weeks ahead, as does the spike in Italian Yields which hasn't been taken too seriously thus far by Equities.  (Credit , meanwhile, is a whole different story)  

For now, heading into the month of June, it should be noted that this remains a challenging time seasonally for stocks, as S&P and DJIA tend to turn in negative returns on average for Mid-term election year Junes , with -1.7% and -1.9% returns going back to 1950. (courtesy of Stock Traders Almanac)  Small-caps have begun to outperform meaningfully in recent months, while Growth has shown far better returns than Value, and outperformed meaningfully during the entire month of May.   S&P's returns of 2.67% for the month of May have helped the index move back to positive territory for the year, though the DJIA is still negative, showing a -0.34% return.  The Russell 2k's surge back to new highs certainly has not been matched by either the SPX, nor DJIA, and broad-based indices like the NY Composite remains down more than 1000 points from its late January highs, which equates to -7.3%.   So a real lack of strength has been seen in recent months, despite how good we're told earnings have been, or how confident the Fed is on the economy, or the fact that potential Tariffs lie on the horizon, Despite being told that these are just grounds for negotiation.  The geopolitical backdrop tends to be ever-changing but the bond market in particular hasn't really given a sound vote of confidence with rates pulling back moderately from the former 3.11% peaks down under 2.85 recently.  The market has rapidly dialed back expectations for further increases and the futures market is now just pricing in one more rate hike post the one expected at this month's FOMC meeting on June 12-13.  

Technically speaking, stocks remain muddled, as Technology strength has been diametrically opposed by Financials weakness. So while most FANG stocks are near 52-week highs and resilient, the European bank decline looks to be specifically hurting US Banks over the last couple weeks.  Financials were the worst performing sector last week of the major S&P LEVEL 1 groups, down more than 1.72%.   While there has been some encouraging movement lately in Industrials, and Transports specifically, these remain well off 2018 highs, and many of the other large sectors which make up SPX have treaded water in recent weeks.  This makes for a difficult environment, and despite Advance/Decline being back to new all-time highs,  the broader Equity index tape has shown all sorts of divergences and anything but broad-based participation.  SPX still only shows about 55% of all stocks above their 10-day moving average while the options market shows about 2 Calls being bought for every put as of last Friday, despite the ongoing uncertainty of a possible trade war and no conclusive evidence that the Trump/North Korea Summit will prove all that constructive.  Popular technical gauges of momentum like MACD are still negatively sloped on both daily and weekly charts, so to say it's been a tough market lately has been an understatement.  Rapid Sector rotation necessitates climbing onboard at just the right time and being quick to change if trends begin to turn. 

At present, it's though that last week's late week surge might be able to carry prices higher into mid-month, just like we've seen in the last few months.  Each of March, April and May showed distinct patterns of stocks rising from early month and topping mid-month, then decidedly weaker trading into end of month.  Given the breakouts lately in Industrials and ongoing Tech outperformance, it looks like this pattern very well could continue for the month of June also.   Some of the key technical developments to watch are shown below, along with 10 bullish opportunities heading into June which look technically appealing, despite the above-average chance of a June Swoon in the latter part of the month.  

10 Important Developments to watch for in the month of June

1) Credit spreads widening further-   Last week saw a meaningful  breakout in the High Yield derivative OAS Spread which shows the spread of High yield credit over Treasuries by means of the derivatives market.   The current 3.56% spread of High Yield to 5-Year Treasuries did successfully break out of a long-term downtrend, which suggests that this FX and rate volatility might be a bigger deal than the market is pricing in.   So to some extent, this move was akin to "warning Bells" going off to suggest that credit is widening, (Always something to pay attention to given the past relationship of credit turning down prior to equities) 

2) Signs of Yields continuing lower for US Treasuries and Bunds.  The breakdown in the US 10year Treasury yield looked serious and damaging technically early last week, violating a level that had held since yields bottomed last September.   While Yields did in fact bounce late week which coincided with equities following suit, it's important to watch Treasury yields given that yields seem to have led Stocks in recent months

3) Signs that Financials either mean revert and start rallying to join Technology, or fall further, both would be important.  Charts of XLF show daily charts to have TD Sequential 13-Buy Countdown signals for the first time all year.   This could be helpful in coinciding with the Banks starting to strengthen again after the meaningful weakness we've seen (Note- while confirmation of this signal would be a positive, there does stand a chance of Weekly charts reflecting TD Sells if SPX runs up over 2786.24, so this is a level to keep in mind and watch carefully, if 2741 is broken and then 2760. )   XLF daily chart could possibly confirm TD Sequential buys as early as today, Monday 6/4, with a close over 26.92.   This would be a huge positive given the negative developments in this group breaking down in recent weeks, and could coincide with XLF rallying up to 28.50

4) Sentiment needs to be watched carefully in June, as both Investors Intelligence and AAII have begun to widen out again in showing the spread between Bulls and bears.  Additionally, we've seen the Equity put/call data dive to the low 50s last week,  so this is clearly a concerning sign when expecting that Equities should be able to pull it together and rally back to new highs to join Small-caps

5) The US Dollar index (DXY) has broken its trend from mid-April last week, so an upcoming Dollar decline could be important in causing a relief rally in some of the Emerging market currencies that had gotten hard-hit, and oversold bounces look likely for both EURUSD and GBPUSD.  Note, the Bloomberg Dollar index which has half the exposure vs Euro as the DXY, failed to get up above last Fall's highs and shows a similar picture to the DXY.  So it's likely that the Dollar rally runs out of steam this month.  

6) Some evidence of Consumer Discretionary breaking out makes this sector one to watch in early June.  While the Equal-weight Discretionary ETF has lagged badly since 2015, near-term progress in AMZN, NFLX and CMG, HD should be particularly helpful to XLY, and help this climb back to near 109.  
7) Small-caps vs the broader market in ratio form has broken the downtrend from 2014 and now challenging highs seen since the Election.  This has been ongoing since February and is thought to be a positive for the market, which had been diverging lower in recent years.  Whether one sees this as a sign of a broader rally with Small-caps participating, or that Small-caps are the last part of the market to rally to mark the end of an economic cycle, it's worth noticing, and near-term does look to extend further.  

8) The Developed market outperformance vs Emerging markets could be set to reverse if the Dollar turns down in the weeks ahead.  This has shown pretty dramatic EM lagging since late March, but weekly charts show this ratio to have arrived at levels where reversals could take place.  this should mean that for now, the European volatility seen in rates and FX should not have an effect on the US. EEM could be due to snapback, and it's thought that any rally back over $47 would be bullish and lead to EM outperformance

9)  Commodities have been showing some meaningful signs of rallying lately, with breakouts in the Grains, while Coffee and Sugar have both seen above-average strength lately. Precious metals still haven't shown above-average strength, but this looks to be right around the corner.  So despite Crude oil having begun to pullback lately, the move in commodities as a group has been impressive, lifting the CCI index to its highest levels since 2015.  This should continue to be watched, and could offer better signs of strength than Equities between now and the Fall.

10) Market cycles tied to both March highs and mid-December both pinpoint mid-June as being important for a change in trend.  It's also thought that the ongoing trend of bottoming early in the month and rallying into mid-month before a peak occurs, could persist, so technically i'm on the lookout for a possible stalling out into the Fed meeting and trend reversal.  



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

Short-term (3-5 days):   Bullish- (With Stop and Reverse on any move under 2685)  Last week's Tech resilience still looks to have further upside, while Financials have begun to stabilize, so the combination of these very well would send S&P up to near 2741 and then higher to 2760 into mid-month before any stalling out and/or reversal.  Industrials, Discretionary and Healthcare all look to pick up the slack for Financials, but its thought that the next week can still turn out positive.  Movement back down under 2685 would postpone the rally.  

Intermediate-term (3-5 months)-  Bearish-  Trends and momentum remain negative from late January at a time when currency and rates volatility are on the rise.  While the upswing in Tech and industrials are indeed important, equities really haven't shown all that much progress in recent weeks, and the seasonal bias remains negative for the months ahead.   Market cycles seem to suggest a downward bias into late July, and for now, this might materialize given that implied volatility generally has been very low while Equity Put/call ratios have been trending lower in recent weeks, despite the global volatility getting more pronounced.  Initially, selloffs that breach S&P 2700 would cause this pullback into July to get underway.  However, it's thought that a larger pullback likely should still constitute a buying opportunity for a push higher into the Fall before any larger selloff gets underway.   Intermediate-term support to buy lies from 2450-2550. 


Technical Analysis of 10 Attractive stocks which look to trend higher over the next few weeks, and look like appealing technical longs



TD Ameritrade-  Move to mid-to-high $60's looks likely

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TD Ameritrade (AMTD- $60.13) Bullish, expecting a test and breakout of resistance highs near $63 which could carry prices into the high $60's.   The late week upswing in AMTD helped its near-term structure improve at a critical area of support near its intermediate-term trend.  This neutral churning over the last couple months is thought to be constructive base-building that can lead back to new high territory.  So while most of the FInancials space has been hard hit in the last couple weeks, AMTD has held its ground in resilient fashion, and should be well positioned to gain ground in the next couple weeks. 

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Five Below (FIVE- $71.39) FIVE looks technically well positioned to continue its rally that started last Summer post the Breakout above its four-year bullish base.  The last couple weeks have seen FIVE pullback after nearly getting to $80, but the weakness since that time has proven minimal and has shown signs of trying to stabilize near its intermediate-term trend.   Given this near 10% pullback within its longer-term uptrend, this looks particularly well positioned to turn back up to the high $70's in the weeks ahead.  Long positions look attractive here, with trading stops under $69, expecting a move back to the high $70s/low $80s, making this a good technical risk/reward.

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Grubhub ($107.77) - Bullish for move back to new highs- GRUB's ability to make a weekly close up at the highest since mid-March creates a very bullish technical profile that should result in this continuing higher back to new all-time highs into mid-June.  The act of consolidating its gains from $110 in the last couple months failed to show any meaningful technical damage, and in the last few weeks this has been able to push right back up to near former highs.  This technical pattern remains quite constructive, and weekly counter-trend exhaustion looks premature by at least 2-3 weeks.  Thus, last week's success in pushing higher should actually be seen as a chance to buy, with targets up between $115-$120 before this stalls out.  
 

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HCA- Bullish, with upside targets near $120.   HCA's breakout late last year managed to exceed highs going back since mid-2015.  This was a bullish development, but left the shares overbought and prone to consolidation in the short run.  This looked to have happened and now HCA has pushed back up o test these former peaks from back in March.  Given last week's move back to new all-time highs on a weekly close, this is quite bullish technically and further gains look likely to technical targets near $110 and possibly $115 before this reaches any type of resistance.  This remains one of the more bullish charts within the group given its long-term structure and recent bullish progress back higher.  

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Merck (MRK- $60.56) Last week's bullish breakout of the downtrend that's held MRK intact for most of 2018 is a very positive development, and should lead to this pushing higher to test former highs made in the early part of 2017 and higher.  The stock maintains a bullish uptrend from 2009 but as the larger long-term chart shows, it's bullish base from the early 2000's makes it even more attractive from a long-term basis as this starts to turn higher to challenge former highs in the mid-$60's.  Initially, MRK could stall out in the mid-$60's, but its long-term prognosis remains quite bright technically given this structure.  Now the near-term breakout should serve as a technical catalyst for this to trend up sooner than later, and Technical longs are recommended. 

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Union Pacific (UNP- $146.92) UNP is quite bullish within the Rail space, but not as overbought as CSX, making this technically more attractive near-term.  The reasons for short-term optimism center on UNP's breakout late last year above the highs near $125 that had held this since mid-2015.  This largely required consolidation in the last couple months but has just broken back out to new all-time highs.  This should allow for additional near-term outperformance and gains which should reach $155 without too much trouble before encountering resistance.   Long positions recommended, looking to add on weakness down to $140-2.   

 

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Veeva Systems (VEEV- $79.78) Bullish, with upside targets near $90 before this stalls.  VEEV has engineered a very bullish structure with its early year breakout which was consolidated in the last couple months.  The last couple weeks have seen this push back up to new all-time highs, and signs of exhaustion remain premature.  The act of getting back to new highs after consolidation following a very sharp advance typically bodes well for the stock to continue moving at a quick pace higher, and this still looks right to buy into with targets about $10-15% higher given its technical structure.   

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Progressive Corp - (PGR- $62.43)  Bullish Reverse Head and Shoulders pattern should allow for an upcoming push back to new all-time highs which can result in PGR moving back to the high $60's.   This structure has been largely range-bound since mid-March, yet this neutral churning has been making higher lows since early May.  Now in the last couple weeks, prices have pushed back up to challenge this level near former highs, and is thought to be quite constructive for an upcoming breakout.   It looks wise to be long here, buying dips for the push higher whih would happen on any daily close back up above $63.50 and likely lead this up to the high 60s without much trouble.  

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Kohl's - (KSS- $68.37) KSS has just begun to turn higher again after its first breakout from late last year helped the stock to regain nearly 60% of the prior decline.  The last couple weeks has seen the stock push back up to challenge former highs near $70, and should be exceeded, allowing for further progress up to the high $70's.   Overall, this is seen as one of the more bullish structures within the Retail space given its push back to new 52-week highs, and additional upside here looks likely in the weeks ahead.  One should buy in small size, using any dips back to 66-67 to add fr a move up to $73-74 and then to near 80. 

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NRG Energy (NRG- $33.91) NRG's consolidation over the last few weeks following its bullish run looks right to buy into, as the stock has minimal upside resistance until this gets to near $38, which lies about 10% above current levels.  Given the momentum acceleration in the last six months, this remains one of the stronger stocks within its sector and should be able to push higher into late June/early July before facing too much resistance.  Longs are recommended here technically, looking to buy dips
 

Breakouts in Leading sectors like Semis, Transports a temporary positive despite FX/Rate volatility

May 28, 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

 

S&P chart shows the Push/pull effect of recent sector rotation that's resulted in no net change in US equities for the last two weeks, despite some volatile sector swings.  In general, it's better to keep position sizes small, and look to "hit Singles" vs swinging for the Fences.  While Industrials and Transports remain in good shape, Financials and Energy are certainly not , and might continue to cause consternation. The key cycle date in mid-June which was thought to potentially lead Equities lower very well might turn out to be a high, not a low, but suggests that gains should be used to sell within two weeks for a possible drawdown, which might arrive from levels not too much higher than currently.  Overall, keeping a close eye on 2700 is important over the next week, as any violation of this would turn the trend lower;  Conversely, upside might contain prices just above 2740 this week.  Unfortunately this likely won't be very satisfying for bulls and bears alike, but some pattern resolution is required before adopting too bullish or bearish of a stance right now.

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Summary:   Sector rotation and diametrically opposing forces still should be likely to cause a push/pull effect on indices over the next couple weeks, with no strong directional bias for Equity indices.   Incredibly enough, the markets have shown very little net change despite quite a bit of potentially market moving events which have taken place.   Equities barely budged given the "On-again/Off-again" denuclearization meeting with North Korea, nor given the massive downside volatility in emerging market currencies in the last couple weeks which brought about 15-20% moves in currencies of countries like Venezuela, Argentina, and Turkey.  Now the failure of the Populist movement in Italy to form a government has resulted in a dramatic spike in its bond yields while Italian Banks have turned down sharply.   The spread between Italian and German bonds reached the highest level in over four years, and Italian political turmoil seemed at least partly responsible for sinking the recent European equity rally over the first few weeks of May.  Yet in the US, there remains relative levels of calm, with major US Stock gauges up between 0.15-0.31% for DJIA and SPX respectively, over the last week.

Overall, it's tough to have a lot of conviction on Equities in the short run with Financials and Energy moving lower while the S&P is trapped in a narrow sideways range. Last week saw Utilities and Real Estate outperform all other nine S&P Sectors.   The breakouts in Industrials, Transports seem to have had little overall effect on markets, and even the stabilization and upturn in Semiconductors has only provided a bit of strength to the Technology sector.  Yet, Tech indeed has been on better footing this past week, which is a minor positive.   However, the bond yield rally experienced a dramatic reversal over the last week (despite what was perceived as a very dovish Fed)  and rates plunged in both US and Germany, with Bund yields having been cut in half over the last few months.  Given the degree to which equities have followed the action in Treasury yields this year (bottoming in early April while making minor peaks in Mid-April and Mid-May) this should be something to keep an eye on.    Credit spreads have widened out a bit in recent weeks, and given the CDS showing some stress in EU Financials, this might also need to be watched carefully in the weeks ahead.  Having a strongly bullish thesis when European banks are plunging and sovereign yields are skyrocketing in Italy coinciding with EM currencies falling in parabolic fashion doesn't always go hand in hand.  For now, it's thought that Tech and Industrials could tilt the odds towards market gains this week vs losses. Until the currency and rate volatility begins to affect US equities more dramatically, it shouldn't pay to give this much concern.  However, any SPX decline under 2700 changes the thesis from bullish to bearish and would be respected in the weeks ahead. 


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

Short-term (3-5 days):   Bullish- (With Stop and Reverse on any move under 2700)  It's thought that Technology's resilience along with Transports and Industrials strength might carry the market a bit longer, as Financials weakness really hasn't led to Equities moving lower in recent weeks.  Yet on any signs of Emerging market currency volatility leading to contagion in the US, or Financials, or geopolitical worries rising again in a way that lead S&P down under 2700, this would be thought to be important.  Overall, the expectations are for mild gains this week, led by Tech, and Industrials


Intermediate-term (3-5 months)-  Bearish-  Trends and momentum remain negative from late January at a time when currency and rates volatility are on the rise.  While the upswing in Tech and industrials are indeed important, equities really haven't shown all that much progress in recent weeks, and the seasonal bias remains negative for the months ahead.   Market cycles seem to suggest a downward bias into late July, and for now, this might materialize given that implied volatility generally has been very low while Equity Put/call ratios have been trending lower in recent weeks, despite the global volatility getting more pronounced.  Initially, selloffs that breach S&P 2700 would cause this pullback into July to get underway.  However, it's thought that a larger pullback likely should still constitute a buying opportunity for a push higher into the Fall before any larger selloff gets underway.   Intermediate-term support to buy lies from 2450-2550. 

Summary:   Sector rotation and diametrically opposing forces still should be likely to cause a push/pull effect on indices over the next couple weeks, with no strong directional bias for Equity indices.   Incredibly enough, the markets have shown very little net change despite quite a bit of potentially market moving events which have taken place.   Equities barely budged given the "On-again/Off-again" denuclearization meeting with North Korea, nor given the massive downside volatility in emerging market currencies in the last couple weeks which brought about 15-20% moves in currencies of countries like Venezuela, Argentina, and Turkey.  Now the failure of the Populist movement in Italy to form a government has resulted in a dramatic spike in its bond yields while Italian Banks have turned down sharply.   The spread between Italian and German bonds reached the highest level in over four years, and Italian political turmoil seemed at least partly responsible for sinking the recent European equity rally over the first few weeks of May.  Yet in the US, there remains relative levels of calm, with major US Stock gauges up between 0.15-0.31% for DJIA and SPX respectively, over the last week.

Overall, it's tough to have a lot of conviction on Equities in the short run with Financials and Energy moving lower while the S&P is trapped in a narrow sideways range. Last week saw Utilities and Real Estate outperform all other nine S&P Sectors.   The breakouts in Industrials, Transports seem to have had little overall effect on markets, and even the stabilization and upturn in Semiconductors has only provided a bit of strength to the Technology sector.  Yet, Tech indeed has been on better footing this past week, which is a minor positive.   However, the bond yield rally experienced a dramatic reversal over the last week (despite what was perceived as a very dovish Fed)  and rates plunged in both US and Germany, with Bund yields having been cut in half over the last few months.  Given the degree to which equities have followed the action in Treasury yields this year (bottoming in early April while making minor peaks in Mid-April and Mid-May) this should be something to keep an eye on.    Credit spreads have widened out a bit in recent weeks, and given the CDS showing some stress in EU Financials, this might also need to be watched carefully in the weeks ahead.  Having a strongly bullish thesis when European banks are plunging and sovereign yields are skyrocketing in Italy coinciding with EM currencies falling in parabolic fashion doesn't always go hand in hand.  For now, it's thought that Tech and Industrials could tilt the odds towards market gains this week vs losses. Until the currency and rate volatility begins to affect US equities more dramatically, it shouldn't pay to give this much concern.  However, any SPX decline under 2700 changes the thesis from bullish to bearish and would be respected in the weeks ahead. 


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

Short-term (3-5 days):   Bullish- (With Stop and Reverse on any move under 2700)  It's thought that Technology's resilience along with Transports and Industrials strength might carry the market a bit longer, as Financials weakness really hasn't led to Equities moving lower in recent weeks.  Yet on any signs of Emerging market currency volatility leading to contagion in the US, or Financials, or geopolitical worries rising again in a way that lead S&P down under 2700, this would be thought to be important.  Overall, the expectations are for mild gains this week, led by Tech, and Industrials


Intermediate-term (3-5 months)-  Bearish-  Trends and momentum remain negative from late January at a time when currency and rates volatility are on the rise.  While the upswing in Tech and industrials are indeed important, equities really haven't shown all that much progress in recent weeks, and the seasonal bias remains negative for the months ahead.   Market cycles seem to suggest a downward bias into late July, and for now, this might materialize given that implied volatility generally has been very low while Equity Put/call ratios have been trending lower in recent weeks, despite the global volatility getting more pronounced.  Initially, selloffs that breach S&P 2700 would cause this pullback into July to get underway.  However, it's thought that a larger pullback likely should still constitute a buying opportunity for a push higher into the Fall before any larger selloff gets underway.   Intermediate-term support to buy lies from 2450-2550. 


Technical Analysis of some of the key index, sector, commodity, currency charts that are important for this coming week

This week we'll take a look at some charts of the sectors which are moving in opposite directions and largely are responsible for necessitating a tactical short-term view, vs thinking markets simply trend higher through the Summer. Until more sectors are lined up positively or negatively, the market indices seem to be very accurately depicting this push/pull effect with the overall net effect being no net change.   Some attractive Technical longs and shorts are listed below. 


20 TECHNICAL LONGS
IYT, ODFL, UNP, VEEV, TWTR, GRUB, ADBE, NOW, PANW, AKAM, WIX, MRK, BAX, LVS, WYNN, V, IBKR, KSS, M, ZUMZ

20 TECHNICAL SHORTS
XOP, LL, DISH, DKS, CHS, GES, BBBY, USB, CBOE, DB, MAS, ITW, AAL, BLL, R, OC, MMM, SWK, CMI, AYI




TNX-  US 10yr Treasury yields have pulled back dramatically in the last two weeks, & now near critical levels

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TY Yields nearing initial support- One of the bigger surprises in recent weeks has been the extent to which Treasury yields have pulled back sharply following the FOMC's recent dovish bent.  The thought that the Fed would be in no rush to hike rates, given economic strength ironically coincided with yields pulling back, not escalating.  The European spike in yields might have contributed to some demand for Treasuries, but not surprisingly, this coincided with a period of excessive bearishness (which still largely hasn't evaporated) not dissimilar from this time last year when Yields peaked out and turned lower for six months.    Bottom line, technically this area near 2.90-3 coincides with a meaningful uptrend in yields since last September along with April lows and an area near February highs in yield.  This is thought to likely coincide with at least a temporary bottom in 10-Year yields.  However, momentum has begun to turn lower and any failure to rally sharply off these levels which then turns lower to take out 2.90% would be thought to result in a more meaningful decline in yields in the months ahead.  Heading into the last week in May, one should look at fading the moves which have been successful in the last week, namely going against both Utilities and REITS and looking to buy TBT. 
 

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Transports Breakout should favor further strength in this sub-sector.   The breakout week in the DJ Transportation Avg. was seen as bullish technically, as this exceeded an area of four prior highs going back since February.  This followed a similar move in the XLI and generally is thought to be a positive near-term force for Equities at a time that other sectors are stalling out and/or underperforming.   Given its leading tendencies, a positive near-term Technical breakout like we've seen likely can help Stock indices to hold up in a very uncertain time heading into the month of June.  Stocks like UNP, CSX, FDX, EXPD, ODFL and DAL are thought to be outperformers within the Transport space, and can be favored for further gains.  

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Semis strengthening appears to be another positive in the short run-   PHLX Semiconductor index- (SOX) managed to exceed  the former highs from May last week, which bodes well for additional near-term strength at a time that many markets indices have begun to stall out.  Given the positive leading tendencies of Semi stocks, along with the Transports, both sectors look to show further strength in the near-term and could help to buoy this market.  Near-term strength up to 1425-30 looks likely in the days ahead, making SMH something to favor in a market that's become quickly more prone to violent sector rotation. Given the symmetry of this price action since last November, it would be meaningful if prices were to peak at lower levels than March highs, and this is something to watch for in mid-June.  
 

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Financials - Underperformers since February and ongoing headwind to Equity rally-  The Financials have continued lower in the last couple weeks, as US Treasury yield weakness has coincided with real weakness in this group, on a relative basis to SPX and to some extent on an absolute basis as well.  The demand for US Treasuries given the start of real escalation in yields throughout the European periphery has warranted a less than bullish stance on this group until it can begin to stabilize.  While various stocks within Financials are still attractive, like V, MA, AMTD, IBKR, others like CB, CNA, BX, GS, LYG, CBOE have been quite weak for some time.   This makes a selective stance on Financials necessary, and given the 14.46% weighting in SPX, goes a long way towards showing why the market has had a difficult time making further headway this year.  No immediate support looks to be present on relative charts of XLF v SPX, but could materialize after this ratio chart tests April lows.  

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Energy- The quick about-face in the Energy space doesn't yet look to be complete, and a bit more weakness appears possible into this final week of May and potentially early June before it stabilizes.  This has served to hurt the commodity space at a time when many commodities have turned higher like Coffee, Sugar and many of the Grains.  Overall, this sector still looks to weaken a bit further before finding support as momentum has turned bearish while trends have rolled over on the breakdown in the last few days.  One could utilize further drawdowns to buy Energy into the end of this week most likely, but this group will now lead to show some major leadership before thinking anything more than just a minor bounce is at hand.  

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Retail- Much improved, but yet selectivity still key, as sector remains ripe for Post earnings mean reversion-  Retail is another area which has improved quite a bit in the last six months technically speaking following a prior time of generally poor returns since 2015.   However, as Barron's reported this past weekend, many of the moves which have happened this earnings season have proven to be opposite of the prior direction, showing some real mean reversion.  Stocks like KSS, TGT, BBY which had all rallied this year thus far, all slumped post earnings.  Meanwhile others like TIF, LOW, LB which had suffered in YTD terms leading up to earnings, all reversed very sharply positive post earnings.  Given that 20 Retail stocks are due to report earnings this week, this trend could very well continue.  Stocks which look ripe to reverse course technically based on counter-trend indications of exhaustion and/or overbought/oversold readings that are present in the charts are as follows:   Technically bullish ahead of earnings for a bounce:  BIG, KORS, DG, & DLTR, while Negative for a possible selloff: LULU, ANF, GES, CHS, DKS.  Other names which might continue lower post earnings which remain technically quite weak and have not benefitted from a rally in the Retail space whatsoever in recent months:  GME, while from a trend following perspective, the bullish pick heading into this week is AEO.  
 

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Euro-Banks continue their slide- Something to watch carefully-  The dramatic movement in Italy's yields in recent days can't be overlooked, and seems to be coinciding with demand for both German Bunds and US Treasuries.  Another consequence has been the downturn in many Italian banks, and the Banking sector overall in Europe has acted very sub-par over the last few years, not enjoying nearly the extent of the rally seen in the US.   The selloff in the last few days has been particularly worrisome and the Europe 600 Banks index has fallen to the lowest levels since early April, but as of last week, managed to make the lowest weekly close of the year.  US Financials have certainly followed suit to some extent in the last two weeks, but still should be favored over their European counterparts.  Movement under April's 168.46 lows would likely result in a decline down to 156.85 to erase 50% of the prior rally.  Overall, the extent of the damage in European banks in the last couple months is definitely something to pay attention to, and it's important to watch for signs that this could metastasize into the US a bit more severely

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Credit spreads gradually widening when eyeing derivative Spreads to Treasuries-Above 3.60% could allow for upward acceleration/credit widening-  The Bloomberg Barclays Corporate High Yield Average OAS shows the Option Adjusted Spread to 5-Year Treasuries of a basket of High yield corporates, something watched to gain a feel if Credit is widening or tightening. While this represents just one piece of the puzzle in this regard, it would grow more worrisome if this starts to uptick in any serious fashion.  Technically speaking, this chart has grown more bullish despite showing this spread having remained under the intermediate-term downtrend since early last Spring.  The Spread has made a higher low and has turned up sharply in the last month.   Moving over 3.60% would constitute a breakout, allowing for this to begin trending higher, indicating a widening of the spread of High yield credit to Treasuries.  This will need to be monitored closely given the uptick of late.  

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Wheat looks to be the strongest of the Grains, and further strength likely.   The Teucrium Wheat ETF has managed to exceed an area of prior highs going back since early March.  This helps out its chart substantially, allowing for a further push up in the Grain complex at a time when the US Dollar rally looks vulnerable to reversing course.  One should favor further rallies in the grain complex over the next 2-3 weeks before this reverses lower to begin its seasonal June Swoon.  Technically the breakout of these two former hjghs is quite positive and should allow for a runup to at least $7.50 from its current $7.06 close before this reverses.   However the larger picture continues to improve and even on a minor pullback in late June, this should present buying opportunities for intermediate-term progress.  At present, Wheat should be overweighted the most, followed by Corn, with Soybeans lagging, given tariff concerns.  

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Bitcoin-  The Decline in many crypto-currencies which began again in early May doesn't yet seem over, yet Bitcoin appears to be close to an area of real importance to its support trend which coincided with lows this past February.  Weakness down to 6650-6850 should translate into an excellent buying opportunity for traders looking for support.  The combination of a meaningful prior low along with trendline support, oversold conditions, pessimistic sentiment,  and lack of interest these days by the modern media might help to put in a good trading low as the month of May comes to a close.  Movement back over 8,000 is necessary to expect that this recent one month downtrend could be complete, while any move back over 10,000 would be very bullish technically and also something to watch for in the months ahead that would propel this back higher to test highs made back last December, 2017.  
 

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.