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

January 9, 2017

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

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

 

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

 

 

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

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


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



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

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

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

 



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


LONGS
 


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


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

 


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

 


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

 

 


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


SHORTS
 

 


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


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

 

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


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

 

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

 

Disclaimer:

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

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