December 11, 2017
S&P DEC FUTURES (SPZ7)
2547-8, 2639, 2631 Support
2670-2, 2679-81 Resistance
Three more weeks in the year and the Bloomberg World index has gained over 23% for 2017, with the majority of the acceleration this year coming between August and October. As daily charts can show, the rhythmic uptrend from early in the year led to a dramatic surge to overbought levels, which has recently leveled off a bit, with prices now that much higher than levels achieved back in October. Momentum has been tailing off since October despite mildly higher price levels, but this far, the slowing in momentum has not proven to be negative. Overall, higher prices look likely over the next couple weeks, but unless there is a noticeable jump-start to momentum, this could prove to be a selling opportunity early in 2018. November lows at 235 will be important going forward, and cant' afford to be broken without causing a pullback down to 230.
Stock indices have largely pushed back to new high territory this past week, outside of the NASDAQ, while many global indices have shown evidence of bottoming out and turning higher, with noticeable strength in the last couple days out of Emerging markets, and most of Europe and Asia. Technology looks to be starting to bounce yet again, while Industrials and Financials have also continued higher, with no real peaking out which was thought to be possible. Additionally, weaker groups like Healthcare have also shown some signs of turning back higher after recent underperformance, while the Defensive sectors like Utilities and Real estate have both lagged over the last week. Treasuries remain locked in tight trading ranges which have been ongoing since mid-October, while Commodities weakened, and the US Dollar index's gains from late November continued.
Overall, markets have only three more weeks in 2017, and the final two tend to be quite positive seasonally speaking, as the Santa rally gets underway. At present, a few technical improvements have occurred which are worth mentioning and present a more positive near-term picture than what was seen at this time last month. For one, momentum has snapped back in the US with strength back to new highs for SPX, DJIA, SML and MID, while the NASDAQ lies just fractionally below. While overbought conditions remain a problem on a weekly and monthly basis, the daily pullbacks in mid-November and early December helped the daily situation to improve. Additionally, price trends remain very much intact from both August and even from November lows, while sentiment has largely been optimistic lately. Bullish sentiment tends to be less of a negative in December given typical bullish sentiment this month, but will turn negative for the market likely in January.
The sector rotation has also been a largely positive force, with recent surges in Industrials, Discretionary and Financials not showing much consolidation and generally still trending higher. The recent push into Defensives also looks to have played its course, and we're now seeing flows back out of Utilities and Telecomm, Real estate which i feel are bullish for the market. Important to also note the degree that Demark's TD Sequential and TD Combo indicators failed again to confirm any type of sell after having been triggered in late November on both daily and weekly charts. The counts have reset for Daily charts (after 9-13-9 patterns produced a mere 3 days of weakness), while "Weekly TD 13 countdown Sells" were never confirmed. Many of the cycles which had given warning signs for early October also failed largely to trigger any real selling in the US,
SHORT-TERM/INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION
Short-term (3-5 days): Bullish- The breadth and momentum improvement have been helpful to trends in the last couple weeks, showing some of the participation from Industrials, Financials and also Healthcare, while Technology also showed signs of snapping back as of end of week. While the NASDAQ will need to join the SPX and DJIA back at new high territory to have greater conviction about the course of equities for the weeks ahead, the act of pushing back to new highs is constructive for most US indices, while Europe and Asia have begun to follow suit. Additionally, markets are now entering the most bullish part of December over the next couple weeks which should help to postpone any meaningful drawdown until early January. Overall, while pullbacks could happen at any time if Technology's bounce were to prove short-lived, SPX will need to get back under 2620 to think a test of 2600 should occur, which is thought to be more important support to buy dips. we'll need to see evidence of trends being broken to have concern. Until there is at least minor evidence of trend damage, it should pay to stick with a bullish stance, and buy dips
Intermediate-term (3-5 months): Bearish- Still likely that January/February should be a wake-up call for stocks, and persistent bullish sentiment/complacency, coupled with the start of Technology weakness in extreme overbought territory should offer limited upside. Breadth and momentum have snapped back, which is a temporary positive, but it remains very difficult to expect the market to continue up in the next few months even more given that Industrials and Financials are nearing extremes, and coupled with Technology these make up 50% of the market. At present, it's thought that the intermediate-term prospects are unattractive given these risk factors, and a defensive stance looks prudent. Rallies into mid-December are thought to be something to sell into, vs just expecting uninterrupted gains into end of year, and January should prove to be much more difficult than September into early December.
10 Attractive Risk/Reward ideas worth considering for the final 3 weeks of the year
1) Long BIOTECH -- Biotech looks to have turned the corner after the last couple months of consolidating gains. While the rally into October was technically positive, the move played out at a far steeper angle than was sustainable, and a corrective pullback ensued to bring prices back to life. Now after having touched key trendline support from the rally which began from last US Election lows, a breakout back higher looks to have happened in Biotechs which has helped the XBI to exceed the minor downtrend from October. Stocks like GILD, CELG, ALXN which have all underperformed, look to be attractive risk/reward longs within Biotech, while others like BIIB, AMGN which have shown 20-25% returns for the year but have also lagged since October also appear to be trying to stabilize and push higher. Overall, a test of former highs looks likely.
2) Long European Financials- This group has largely lagged the US Financial move over the last month, but now we've seen some sharp rally from minor trendline support in the Euro Banks ETF, while stocks like CF, BCS, and DB have all begun to push back to new weekly/monthly highs. These three are attractive for additional gains, and it's thought that some of the recent outperformance in the last week from the European Banks can continue.
3) Long Transportation Stocks - Transports showed very little sign of stalling out near prior highs, but managed to break out above this area of resistance that had held the last three occasions. Stocks like CSX, UNP, KSU all have demonstrated very good sign of Technical progress while breaking out, while Airlines have also participated, turning in some of the strongest performance in the last month after jumping up above five month downtrends from July. Overall, this group still looks to strengthen further into end of year, and the Rail and Airlines stocks look like overweights near-term, as does the IYT in general.
4) Long Emerging Markets & China for a Tactical bounce- Pullbacks in Emerging markets have been severe in the last month and China ETF, the FXI pulled back to attractive near-term support near its one-year uptrend which makes this attractive to buy dips for a counter-trend bounce. FXI which is shown above could rally to 47, and potentially $48 with stops at recent lows at $44.48.
5) Long Crude oil and Energy ETFs for near-term strength into end of year- WTI Crude managed to strengthen up to former highs hit back in January 2017 and has consolidated over the last few weeks. Yet this pattern remains bullish, and this consolidation should lead to a further rally up to the low to mid-$60's before any seasonal weakness takes place in January. XLE and XOP have outperformed on this recent Crude strength and still look to be better longs than OIH.
6) Favor GROWTH over VALUE- Growth vs Value- (IVW vs IVE- Favor GROWTH (IVW) for a snapback bounce after recent underperformance. This ratio chart of Growth vs Value has contained this uptrend for Growth during the entire course of 2017, and recent underperformance since early November now looks to be stabilizing and turning back higher. Given the rebound over the ratio chart of IVW to IVE, IVW should be able to steadily outperform into year end, and looks to be a better technical choice than favoring Value, in the near-term.
7) LONG JAPAN for a move back to new high territory- (DXJ preferred for Yen Hedging purposes) Japan's TOPIX, like many Asian and European indices, pulled back in early November, and threatened to break the two month uptrend before the late week surge helped prices regain this weakness. Overall, this chart remains very much intact, and should allow for a resurgence in Japanese equities over the final three weeks of the year. DXJ, the Wisdomtree Hedged Japan ETF, is a preferred choice given the recent Yen weakness, which very well might weaken further in the weeks/months ahead.
8) Play for a Steepening in the Yield curve into/after FOMC- The 2s/10s curve has flattened out substantially in the last few months, but now is at levels where further flattening looks unlikely into year end. So the 2yr note very well might weaken to allow for a relative steepening with long rates stabilizing, (which already have been largely range-bound in recent months)
9) Long Precious Metals- Initial Half-unit entry, looking to add on any weakness over the next week, or adding to Gold on a move above 1263- Precious Metals index looked to have broken down last week, though both Gold and Silver are now showing completed Counter-trend signals of downside exhaustion per Demark indicators from oversold levels which could lead to a bounce in the weeks ahead. The ability to hold above 1248 by this Wednesday's close would confirm Counter-trend buys, helping to lift Gold, while a move back over 1263 could result in real upside acceleration. This level represents prior lows from late October and getting back above would help Gold accelerate to test late November highs. Overall, Gold/Silver futures, or IAU, GLD, or SLV are all ways to play the precious metals. The Gold stocks themselves remain under severe pressure, but likely should bottom out by 12/21 and turn up as well.
10) Short Retailing - XRT charts show prices having pushed higher in recent weeks, which largely has gone hand in hand with seasonal times of strength. Yet, now that prices have reached mid-December, heading into a weaker time for this group, strength should be used to consider going the other way for Retailing, as the XRT hits a "brick wall" near longer-term trendline resistance. December has been negative for XRT over the last 4 of 5 years, while January has averaged more than -1.0% lower, so this area near $45 hits resistance from two different sources and looks appealing to take profits and/or consider shorting, for those looking. Stocks like FOSL, BBBY, M, JWN, URBN, FL, ANF are all stocks to consider avoiding, and/or for Technical shorts in the weeks ahead.
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