Please enable javascript in your browser to view this site!

10 Technical Shorts to consider after recent rally

March 21, 2016

S&P JUNE FUTURES (SPM6)
Contact: info@newtonadvisor.com

2000-1, 1982-3, 1968-70, 1937-42 - Support
2035-7, 2040-2, 2046-8, 2074-6-    Resistance

WTI and SPX have been moving nearly in Lockstep over the last few months, so Crude remains an extremely important piece of the puzzle, for now

WTI and SPX have been moving nearly in Lockstep over the last few months, so Crude remains an extremely important piece of the puzzle, for now

In This Issue

S&P Remains Bullish, despite TNX, USDJPY not following rally

 

Unusually positive breadth remains more positive, than Short-covering is negative

S&P likely will push back to highs, while TNX reaches 2.15, USDJPY 114.50, 116

 

Summary

After five straight weeks of rally to enter the Spring season, the trend remains positive, but overbought, and markets have improved technically enough to expect that any pullbacks likely prove minor before additional gains ensue into late Spring.   Historically, gains have been difficult to come by in the week directly following March expiration.  Yet it's tough to sell and take profits without any real evidence of trend change.   Overall, there are a few factors present which could lead to such a pullback, but we'll await a close under the 10 day moving average in SPX before expecting even a minor correction, as the bullish trend remains strong, and underowned in the near-term.

Looking back, after rallying more than 13% of the intra-day lows on Feb 11 of this year, or at a rate of more than 2% a week, the SPX is now back in positive territory for the year.   Breadth has been unusually strong, while momentum has closed in on overbought levels on daily charts and turned positive on a weekly basis (which still registering negative on a monthly)  S&P has been tracking WTI Crude oil with uncanny precision in the past few months, with Crude itself logging gains of more than 40% off the lows.   Emerging markets, meanwhile, aided by commodities and a declining US Dollar, have surged at an even quicker pace than developed markets of late. Overall, equities seem to have moved up far further than what was thought "SHOULD" have occurred if this was purely a bear-market rally based on the percentage retracement level along with Momentum or breadth.  Both of these have spiked up to levels that weren't seen back in 2000-3 or 2007-2009,

The positives are pretty straight forward:   Breadth has expanded sharply to very strong levels by most measures (McClellan Oscillator, Summation index,  Advance/Decline Averages, and percentage of Stocks trading over their respective 50, 200 day moving averages.)  Additionally, the rally has begun to broaden out, and what began as a merely defensive lift has spread to both Industrials and Financials of late, two very important pieces in the puzzle, while laggard groups like the DJ Transports and Russell 2k have both moved back up above former lows (Often, areas of Support violation like what occurred last Fall will tend to be major resistance on a retest, as Resistance)  which didn't really hold on gains in the last month.  Another reason for optimism has to do with the ongoing lackluster Sentiment readings of late, as the Percentage of Bulls seen in Investors Intelligence and AAII polls have barely budged since the month of March began, while Equity funds have still seen outflows over the last 14 of 16 weeks.  Seasonality also favors the Bulls, as according to Stock Traders Almanac, March tends to be positive, with average gains of 1.68% with April even better, at 1.95%.  (However, the year as a whole is typically down an average of 3.63%)

To balance this out, on the flip side, a few cautionary signs have appeared of late.  First item of concern: the degree to which stocks and bonds are suddenly moving in unison.  The sharp drawdown in both TNX and USDJPY is unusual when it doesn't drag down stocks in sympathy, as both have had moderately positive correlation with SPX over the last few years which has been consistently over +0.60 (r)  Last week was the first week of this rally thus far where stocks, bonds, Crude oil and Gold were all positive.  The second issues concerns the degree to which the Russell 2000 began to slip vs the SPX last week, and we saw a few more signs of peaking in the Russell than we did in SPX, which could be important, as it remains at a key area.   Third, upside looks limited in many Sector ETFs which have now rallied up to or near prior highs, which might not be apparent when looking merely at SPX structure.  Some of the key drivers for SPX like the Banking stocks within the Financials( BKX), or Industrials (XLI), Discretionary(XLY), all look to be at, or near resistance highs which could present at least a temporary stalling out.  Fourth, time factors suggest this rally has now mirrored the prior rally in Time from late September 2015 lows into November 2015 peaks, both being 35 calendar days of length, while the Spring Equinox period typically can usher in some change of trend.  Finally with respect to this week following March expiration, Stock traders almanac tells us that the week after March expiration has been positive only 30% of the time, going back the last 40 years.


S&P 500
Short-term Thoughts (3-5 day) Bullish- While indices have become stretched across the board, that remains a poor reason to expect weakness in the period ahead.  Until we see movement back under SPX 2009, the trend remains sharply positive, and its thought that the strength in breadth and momentum are bigger positives,than relying on the rally being largely "short-covering" or "overbought" as a reason to sell it.  At present, there's still no technical evidence that stocks look ready to immediately reverse course.  However, on breaks of 2009, it would be likely that S&P could erase 3-5% quickly before stabilizing and pushing back higher.


Intermediate-term Thoughts (6-8 Months): Bearish-Despite the improvements in breadth suggesting that rallies likely can take indices ever higher on a 2-3 month basis, it will be very difficult to erase the downturn in momentum which started over a year ago and has accelerated on the pullback into last August's lows as well as into February of this year.  Indices like the Russell 2000 have not yet moved back up above former August lows, while the broader Bloomberg World index along with the NY Composite still show this rally to be a counter-trend bounce, structurally speaking.  The selectivity of this market which caused Small-caps to turn down nearly two years ago followed by Mid-caps and then Large hasn't been dramatically reversed by the sharp rally of the past three weeks, and markets are still well overdue for a 20% correction which normally follows long bull markets which begin to rollover, similar to what we saw back in 2000 and 2007.  Historically, drawdowns average 40-50% after lengthy rallies, like markets experienced from 2009-2015.  Overall, given the extent of the momentum downturn, along with the structural weakness, gains into late Spring should be used to pare back longs with the idea that intermediate-term weakness between June-September/October remains very likely.



10 TECHNICAL SHORTS TO CONSIDER

Technically speaking, the following are stocks that appear like good sell candidates for the weeks and months ahead.  Many have experienced dramatic rallies since mid-February within the context of poor larger formations that make them interesting to consider taking profits if long and/or selling/shorting for potential downside over the next 6-9 months.  These are listed alphabetically, and are considered solely on the basis of Technicals, without any Fundamental inputs involved. 

Armstrong World Industries Inc (AWI- $45.01) Technically speaking, AWI looks unattractive following nearly a 25% rally from its lows in the mid-$30's just five weeks ago.  Despite the talk about the upcoming Spinoff potentially unlocking value for the company, when looking at the broader pattern in play, prices have rallied into an area of major resistance which likely will put a stop to recent gains.  The area in the mid-$40's coincides both with downtrend line resistance from last Fall's peaks, along with several former lows (now resistance highs) in the mid-$40's that are likely to halt this rally, technically.  The bounce from mid-February remains part of a larger consolidation for AWI that broke down at the end of 2015, severing the lows of this giant range that had been in place from 2012.  While regaining $50 would postpone any decline for the near-term, at current levels, upside looks limited, and it appears like a better technical short given the structural deterioration from last Fall.  Monthly MACD has turned negative and diverging, while the broader pattern resembles a Rounding Top formation.  Technical targets on the downside lie near $36, then $34 which would be a 50% retracement of its entire rally from 2009-2015.

Bed, Bath, & Beyond (BBBY- $50.50) BBBY remains technically bearish following the breakdown of a large four-year Head and Shoulders pattern late last year, and the stock's 26% rally in five weeks was nearly double what occurred in the SPX, which makes this an interesting risk/reward short for technical reasons.  The Topping pattern in BBBY began back in late 2011 where the stock made little upside progress for nearly four years before violating the Neckline of this pattern in the high $50's.  While near-term momentum has turned positive in BBBY, the monthly momentum remains quite negative while the structure suggests that rallies back to the base of the breakdown should constitute excellent opportunities to short into gains.  Near-term resistance lies near $52 and if exceeded, one should hold off on selling into this right away until the high $50's.  However, a larger pullback in BBBY looks to be in store given the breakdown of this multi-year bearish formation.  Movement back lower to test and break its February bottom in the low $40's which might bring about an eventual selloff to the mid-to-high $30's before this can stabilize.  For now, BBBY is one to consider avoiding on the long side which might offer better opportunities to play short, Technically speaking, between now and October.

3D Systems (DDD- $14.49)  DDD looks apt to stall out in the days ahead following over a 120% gain in price since February alone.  The stock's gains since January lows are running into two separate areas of strong downtrend resistance formed by highs made in the early part of 2014, nearly two years ago.  While weekly momentum has accelerated on this rise, the daily momentum indicators have begun to stall out and show a few signs of negative divergence that should cause this to fail to make further upside progress above $16.  Fundamental analyst Paul Coster from JP Morgan downgraded the stock to an "Underweight" early last week, saying that "investors seem to be pricing in Unrealistic expectations of a V-shaped recovery"  While the rally in the last two months certainly looks like a sharp uptrend, the weekly chart puts this in perspective, and details why this likely should be a good place to take profits on longsand/or consider as a technical short.  The area from $15 up to $17 should be ideal to consider "avoiding" DDD in thinking this stalls out.  Furthermore, pullbacks back down to $9 or below certainly look possible given the stock's current trend.  Near-term, $12 is a downside area which intersects the uptrend, and if broken, would help DDD to accelerate down at a bit quicker pace.
 

Fossil (FOSL-$45.37)  FOSL remains unattractive technically, despite the large gains seen in the last two months, and its recent dip back under $50 suggests that the stock might require some "backing and filling" which could take this stock down to fill its gap in the mid-$30's.  FOSL has shown a few signs of stalling out recently following over an 85% gain in share price from mid-January 2016 lows, less than two months ago.  However, it's worth pointing that shares remain down over 65% from peaks made back in early 2012,   Outside of February's gains, FOSL had been lower 21 out of the last 27 months, and it remains difficult to make much of a positive case for this stock, technically, despite the rally last month from severe monthly oversold conditions.  How that FOSL has bounced back over $50 in recent weeks, it appears like a much better technical short which would pullback 20-30% without much trouble in the months ahead.
 

Harley Davidson (HOG- $49.60) Similar to many others listed here, HOG has become short-term overbought as part of a bearish intermediate-term structure that suggests upside likely proves limited at current levels.  After breaking a five-year uptrend, HOG managed to lift nearly 36% off the lows to its current price just since early February.  Near-term trends remain bullish, but signs of negative divergence are appearing on daily charts just at at time when the stock has approached major resistance near a multitude of prior lows (now resistance highs on the retest) along with downtrend line resistance from early 2015.  Movement up above $53, or roughly 6.8% above current levels, should prove quite difficult to overcome, while pullbacks to retrace at least 50-62% of what was achieved in the last month looks quite probable.  Daily closes back under $47 would signify an opportunity to press technical shorts, for a move down to near $43.  For now, HOG looks unattractive here with limited upside after this recent rally.

Michael Kors Holdings Ltd. (KORS- $ 56.97) KORS has begun to slip in the last week after nearly doubling in price over the last couple months and it appears like upside is limited after KORS filled its own gap in trading from last Spring just in the last month.  Prices have become overbought, while momentum has begun to wane after KORS reached resistance near where the stock gapped down from last May.   Given that it remains a difficult call to think that the Apparel business is coming back, and KORS has now rallied nearly 85% int he last two months into an area of former resistance, the stock doesn't appear attractive here and could face weakness back to the mid-to-high $40's technically.

 

Polo Ralph Lauren (RL- $98.12) RL remains bearish after its mild rally has now reached just below the area of trendline resistance which suggests further gains should be difficult to come by with key areas to sell found near $103-$107 on any further rally.   RL had previously turned down hard back in early 2015 by violating the lows of its own large topping patternwhich began back in 2012.  Volume has expanded on the decline and it remains below the area where the stock gapped down from last November.  Given that technically this doesn't need to retest the area of its breakdown necessarily (but would be an ideal risk/reward short up another 5%) it looks appealing to take any long profits now on gains from early February purchases, technically speaking.  RL lies near the lows from both January as well as last August which suggests that this stock shouldn't have too much more upside from here. RL does look like an initial fade here, but ideal area would be between $103-$107.   Downside targets technically speaking lie in the mid-$70's

Shutterfly (SFLY- 45.78) Upside looks limited for SFLY after a near 25% gain in prices in the last month to the highs of the recent range.  While turnaround chatter was rampant back in February, the stock seems to have fully priced this in with its move back up to the high $40's which has been an important area for the stock over the last few years.   Given that its near-term trend is bullish, overbought and now stalling while its intermediate-term trend is neutral, with the stock at the top of its range, upside seems tough to come by under this scenario.  Pullbacks down to fill the recent gap look likely in the low $40's, while if SFLY gets back up over $47.50, that would postpone gains and allow for a test of last July's highs near $49 before this stalls.  Conversely, pullbacks under early March lows would suggest this drawdown is underway and allow for a test of SFLY's 50 and 200-day moving averages right over $42.

Splunk (SPLK- $47.76) SPLK looks to have reached a difficult area of resistance which lies near the 50% retracement of what the stock has given up since last November, when it fell more than 50% in absolute terms to lows down near $30.  Since that time, SPLK has managed to recoup nearly 50% of this drop, yet remains trending lower from last Fall, as well as being under two prior lows from last year that should definitely be considered important as resistance.  Given that stocks have rallied in recent weeks, while SPLK stalled out upon reaching $48 is telling, and likely means that some Backing and Filling remains necessary before this can move higher.  For now, SPLK is bearish technically, with prices up near key areas at $48 to think a stallout and reversal back to the downside should get underway.

 

USG- (USG- $23.42)  USG's 45% rally since late January has taken this stock back to near key overhead resistance which should have some major importance in allowing this rally to stall out and reverse course back lower.  Its breakdown late last year caused momentum indicators on weekly charts to drop to the lowest levels since late 2011 nearly five years ago.  Meanwhile, given that the stock had gotten oversold, shorting into declines proved difficult over the last couple months.  However, at current prices, the upside looks difficult to come by between $24-$25 on gains from lows near $16.  Using rallies to sell USG looks prudent until/unless this were to embark on a fairly major rally to get back up above the areas that were broken near $26.  For now, USG lies in No-Man's Land but is expected to have difficulty climbing back up above former lows.   Downside targets lie near $19, then $16.50.

Disclaimer:

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

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

 

 

NEWTON ADVISORS WEBSITE

 

 

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