February 21, 2017
S&P MAR FUTURES (SPH7)
2345-7, 2335-6, 2331, 2300 Support
2360-2, 2373-6 Resistance
SPX's push up above 2340 puts prices in parabolic mode where gains are tough to fight, despite the many warning signs. Many can attempt to short current levels with stops at 2360, looking to revisit near 2375, but prices should not experience too much more upside in the next couple weeks before giving back recent gains. Timewise, there are a plethora of time and price based indicators that suggest selling into this rally by early March if prices have failed to turn down, as the period from LOW - to - LOW that has coincided with the last few bottoms since 2015 projects into this time. For now, the trend is stretched well beyond where it should be based on recent slope of the trend. Yet, we'll need to see some evidence of trend reversal to have any kind of confidence, which thus far, has been lacking.
Not a real satisfying week for the Bears, despite many of the mounting signals that a change of trend should be near. Prices rose to close near the highs of the weekly range, producing the best full week of performance thus far in 2017.. The recent breadth acceleration that arose when SPX, DJIA moved back to new high territory managed to help sectors like XLF move back to highs, while Small-caps also outperformed as Russell 2000 also hit new high territory. Meanwhile, breadth gauges like Advance/Decline (All stocks) moved back to new all-time high territory while counter-trend indicators continued to mount, with last week's daily charts showing Demark indicators having TD 13 Sell confluence on SPX, DJIA, NDX, COMPQ, VALUA index now being joined by XLK, XLI, and XLU, with XLY, XLV, XLF still 3-4 days away. (Meanwhile, IYZ, XLP, and XLE remain well off last year's highs.) The Percentage of stocks trading above their 10, 50-day and 200-day moving averages have both risen to the low-to-high 70% range in the last couple weeks.
Many have attempted to attribute the positive equity performance of late to optimism regarding President Trump's policies despite an overwhelming amount of uncertainty in Washington with the Budget proposal upcoming on February 28th. This cautious optimism on Business and markets while the anxiety is ever-growing makes for an interesting take on Sentiment, which has gradually become increasingly more bullish. The Equity put/call ratio last week produced the lowest readings of the year, while Investors intelligence surveys also have widened out to the highest Spread between Bulls and Bears in the last few years. However, as many who have talked to professional money managers can attest to, it still certainly doesn't FEEL this complacent. Most remain begrudgingly invested, and hopeful, despite no end to the mass uncertainty.
Overall, from a directional standpoint, there does look to be a small window for shorting this week with prices having stalled near last Wednesday's highs. Momentum remains overbought and seasonality is bearish for post-February expiration weeks. Demark indicators have flashed "13-Sells" on many indices and would just require a minimal multi-day low close to confirm these signals, suggesting ther start of at least a minor pullback. Yet we still haven't seen any real evidence of a downturn in stocks, but merely a couple days of stalling out. As the saying goes.. "A watched pot never boils" For this week, movement above 2360 would most certainly put the focus on later in the week, if not early March, where many advances have encountered serious Time-based resistance. Movement UP to 2375 in this instance, would be likely, as this would represent a 50% absolute retracement in price of the prior rally from Pre-Election into mid-December.
Interestingly enough, we've witnessed signs of both Treasury yields and the US Dollar index produce minor trend reversals in the last few trading days. The action in USDJPY along with TNX should always be monitored as they've shown remarkably high positive correlation to SPX in the weeks and months past, and often can serve as a leading indicator to equities. Treasury yields backed off down to 2.41 from Wednesday's highs of 2.52%, a meaningful drawdown, yet one which had little to no net effect on Financials, which continued to outpace the broader market, leading all other 10 sectors last week, with returns of 2.95%.
So most of what was written last week really hasn't changed too dramatically. Still quite a few bullish technical themes in stocks, while the negatives have only recently begun to surface and haven't really done too much damage thus far. The bearish technical reasons of prices being stretched outside of Bollingers, Counter-trend Demark sells, an uptick in optimism, coupled with bearish seasonality have not yet produced any real reversal.
SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION
Short-term Thoughts (3-5 days) : Bearish- Shorting last week's gains from a counter-trend perspective looks to be a good risk/reward, though with realization that movement back above last week's highs would likely carry indices higher into early March before any peak. For now, the upside looks limited, and should be ideal to consider lightening up and hedging gains for at least a minor pullback in the weeks ahead. IF prices move directly above last Thursday's highs, however, this would serve as an immediate Stopout for Shorts, so it's best to keep stops tight until there is evidence of at least some type of trend reversal.
Intermediate-term Thoughts (2-3 months): Neutral- While the intermediate-term trend remains positive and seasonality dictates that prices could hold up into late Spring, it's looking increasingly likely that at least some type of pullback should get underway, which could prove to be 5-10% before a rally back to near highs into late Spring/summer. Given that weekly and monthly Demark signals have not been confirmed, and have largely begun new counts, (SPX and DJIA.. but not NDX) pullbacks should prove short-term only and constitute buying opportunities. degree of lift since the Election that has carried prices well above the Bollinger band 2% Standard Deviation on weekly and monthly charts. Yet the longer-term structure for Equity indices certainly remains structurally bullish, and until there is evidence of some type of technical deterioration, it's difficult to go against the trend outside of making a short-term tactical call based on seasonality, sentiment and overbought conditions. For now, we look to have either short-term tops, or bottoms in early March which lines up with a couple short-term cycles. But it's tough putting out bullish thoughts for the next few months when a change of trend is overdue. Hence, a neutral stance for now looks right until the pullback gets underway.
This week we'll concentrate on five charts of factors which suggest upside should be extremely limited in the near-term, along with five stocks which look to be attractive risk/reward shorts, largely from a trend following point of view.
Comments and charts below
S&P futures chart shows the extent of the recent rise following the nearly 10% lift just since the Election into December 13. This consolidation proved brief before yet another liftoff which has helped S&P gain over 5% just in in the first seven weeks of the year. Counter-trend sells are present but not confirmed on daily charts, while momentum indicators like RSI, MACD have begun to diverge on intra-day timeframes along with showing minor divergence on daily charts, as RSI is not following price back to new highs. A 50% price retracement of the first leg up from the Election would target 2375 which should be a maximum amount which S&P would reach over 2360 into early March before falling. For now, those with a trading bias can short with stops at 2360 and look to reinitiate hedges up at 2375, as this trend has gotten a bit too parabolic in the near-term.
3 key points to make on the NASDAQ- First, prices are extending outside Bollinger Bands on Daily, weekly and monthly charts now. Second, counter-trend sells are apparent on multiple timeframes as well which suggest an upcoming change of trend should be imminent. Third, momentum has reached overbought territory again per RSI, but as can be seen, is at far lower levels than was reached back in 2014/5 when the Russell 2000 peaked. This is not considered a healthy advance when momentum thrusts higher again after consolidation, though at much lower levels while price is surging. Often the combination of these factors indicate that upside should prove limited.
This is a snapshot of the breadth of momentum as shown by the Summation index, which sums up the values of McClellan's Summation index. Often when this starts to diverge substantially it can bring about peaks in stocks, and recent trading deserves to be scrutinized in that regard. Values currently are far below where they were last Summer, and/or Spring, while momentum indicators such as RSI have begun to diverge negatively given the recent push up in the last two weeks which wasn't followed by momentum. While many would prefer to wait for actual price deterioration to short, when overlaying Demark indicators on this Summation index, we've just completed TD Sequential sells, which might bring about near-term peaks in price as this turns down simultaneously.
Ten-year yields and Equities have largely moved in tandem in recent months outside of the last few weeks, where we've seen yields pullback after making lower highs, while Equities continue higher, uninterrupted. While this can certainly persist in the short run, the correlation between the two has consistently been strong and positive and suggests that Equities might be close to turning down to join the move in Treasury yields. The last few days of Treasury gains while Equities have gained also has been unusual of late, as seen by the mid-December peak, late Dec low, late January low, while yields peaked out last week and turned back lower in the near-term. Stocks, however, have pushed higher, while not only Treasury yields have not followed, but neither has most of the world either for that matter, as most Global stocks peaked out in 2015.
PUT/CALL (Equities) This sentiment gauge tends to be fairly accurate at extremes, as the Put/call on equities has shown just in the last six months, by moving from extreme pessimism ahead of the Election (which turned out to be the lows) to extreme optimism into mid-December, with more than 2 calls being bought for every Put (this in turn, led to sideways action for the balance of the year). The recent pullback in Put/call failed to get below mid-December levels, but fell to multi-week lows (and the lowest level of the year) which potentially says something about how optimistic or complacent investors have become of late in the last couple weeks with lots of rhetoric which "COULD" have caused volatility, but didn't.
5 SHORTS TO CONSIDER FROM A TECHNICAL PERSPECTIVE:
United Parcel Services (UPS- $106.90) UPS near-term trend remains bearish following its gap down three weeks ago to the lowest levels since last July, the biggest plunge in two years on six times average volume. Technically speaking, this decline served to violate the uptrend from last January's lows, correcting 50% of that prior advance in the process. Its subsequent bounce attempt doesn't look to be getting much traction, and last week's pullback towards lows of the week suggests some additional selling to come before this has officially bottomed out. Weakness down to at least test prior early February lows at $103.23 looks likely, and additional corrective activity could take the stock down to just below $100 at Fibonacci targets at $99.96. At present, the weekly chart is not oversold and technical structure remains negative, so it remains difficult to buy dips until this can begin to show more signs of stabilization. Technical shorts over the next 3-5 weeks look more appealing than longs, and the near-term trend remains bearish.
Trip Advisor (TRIP- $47.06) TRIP remains a underperformer, and the stock has trended downward since peaking out nearly three years ago at $111.24. Its ongoing pattern of lower highs and lower lows doesn't look complete, and last week's move back to new multi-week lows should serve as a technical catalyst for this to challenge and break December lows on its way to $41. While former monthly lows could serve as temporary support, any violation of this level would have little overall support until down near late 2012 lows, and this looks certainly possible from a technical perspective. Overall this looks like an attractive risk/reward technical short for the weeks ahead and one should avoid buying dips until this selloff has completely run its course. For now, no evidence of counter-trend exhaustion is present, nor any attempt at bottoming out, which remains premature.
Bed, Bath, & Beyond (BBBY- $41.14) BBBY remains a better short than long after having broken down from a multi-year Head and shoulders pattern in late 2015. Despite the market's 10%+ rip following the Election and a good bounce from the Retailing sector, BBBY has participated in none of this strength. Its shares lie near recent lows of the past year, and remains an ongoing underperformer which still looks to have downside in the weeks/months to come. Its pullback throughout much of 2015 into early last year took BBBY down to the 61.8% retracement of its advance since 2009, but its recovery efforts thus far have proven futile. The recent bounce from early February hasn't helped the stock show any real technical strength, and should prove to be a selling opportunity for a move back lower to challenge and break recent lows near $39 to test last October's lows. Support lies near $38.60 and under this could allow for a selloff down to near $30-$31 which constitutes a better suited area for trading buys than attempting to jump onboard the recent minor bounce.
Fossil (FOSL- $20.73) the recent pullback down to new multi-month lows on about 15 average volume took FOSL down to the lowest levels since 2009. Its bounce from last Wednesday's lows has helped the stock regain about 10% off these lows, but it remains quite bearish Technically and this recent bounce should be one to sell into for a possible decline down to test 2009 lows just north of $11 up to $12.70 which looks to be a good level of intermediate-term support. Momentum remains near oversold levels but not as extreme as last year given the attempted consolidation down near recent lows. Yet, this can't officially be called positive divergence given little to no real advance by this stock in recent months. Overall, recent strength should be used to sell into for FOSL as additional downside looks likely.
Tractor Supply- (TSCO- $72.18) TSCO has corrected now more in price and time than any of the pullbacks since its 2008 lows. The technical damage which has unfolded since its April 2016 peak has violated the long-term uptrend as of last September, and momentum remains negatively sloped while not too oversold. The attempted bounce since last Fall looks to have run its course with the monthly reversal seen in January, and this month's drawdown to multi-week lows looks to have more ahead given the ongoing negative structure and short-term momentum having turned back lower. Near-term resistance lies near $74-$74.50 while support is found at $70, and then $67.80. Weekly closes under $67.80 argue for a potential full retrace of prior lows made last October. For now, this is one to definitely avoid in the short run unless TSCO can get back over $75. Short-term gains in the next week should be used to lighten up and/or short for technical reasons.
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