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Newton's Notes- Weekly Technical Perspective- 9 Stocks to consider after BREXIT decision

"Just at a time when it seems CRAZY to even think about being in stocks.. You know what?  Everyone feels the same".

June 27, 2016

S&P SEPT FUTURES (SPU6)
Contact: info@newtonadvisor.com

2003, 1992-4, 1971, 1953             Support
2040-2, 2071-2, 2083-5, 2100       Resistance

 

 

Equity Put/call has spiked to the highest levels since January

 

 

Key Takeaways

BREXIT decision has caused sufficient uncertainty and signs of fear to think trading lows should be right around the corner.  I don't think its smart betting on a larger decline here and feel that markets should be within 1 -2 weeks max of very good trading lows that carry stocks higher into late August.  However, there could be some early week minor followthrough given last Friday's decline, so wise to buy dips at 2000-3, and/or 1992-4 and looking for stabilization vs attempting to bottom-tick.  But I do favor minor net long positioning for a 4-6 week basis and would use pullbacks over the next week to add.


FACTS:
Friday's 87 pt S&P futures decline as the 2nd largest on record, trailing only 4/14/00's 89 point move

The DJIA's 610 point loss was also the eighth largest decline ever

VIX jumped 49% last Friday, the 5th largest ever one-day move in the CBOE Volatility index

Monday and Thursday of this week could prove negative, as days following a 3% drop on Friday typically also close down (6 of 7) over last 15 years with average drop of 2.3%.   In addition, Friday's that close lower than 1.5%, nearly always bring about NEGATIVE Monday's to the tune of 86 out of 90 in the last 15 years. (Ryan Detrick)  Thursday, based on Stock Traders Almanac end of Quarter seasonal selling could also prove to be bearish- See below

Last week represented the third straight "down" week for SPX the longest streak since October 2014.

Sentiment is yet again reaching levels of fear - 

1) Equity Put/call ratio has jumped above 1, reaching the highest levels since January. 
2) The MONTHLY TOTAL PUT/CALL ratio with one trading week left is set to finish at the  highestMONTHLY levels since 2011.      
3) On a daily chart, there is negative divergence on the Daily Put/Call Composite as a 1.24 reading has come in LESS than the daily reading seen on 6/16 of 1.40.            
4) AAII sentiment from last week BEFORE the BREXIT decision showed an inverted Spread with Bears leading bulls by 12 percentage points.
5) TRIN readings from last Friday show an ARMS index reading of 2.28, the highest since February, as extreme amount of volume flowed into Declining vs Advancing stocks, typically capitulatory
6) VIX backwardation has occurred again, which started out as a flattening out in the vol structure a couple weeks ago, but as of last Friday showed an extreme close in Spot VIX vs the Futures 1, 2, 3 months out which have inverted.


The recent bond surge has caught most off guard, and equities have followed bond yields.  Now sentiment is starting to increasingly think yields stay "lower for longer" while the idea of a July or September hike has been completely taken off the table, for no other reason outside of the BREXIT uncertainty and GLOBAL yields plummeting,  and not really reflective of US economic growth- Bond yields should be closer to lows, if not in the next few days, than by early July, and we're getting close to a time when its wise to bet against Treasuries, not ON them.

Seasonality ended up proving correct again for the week following June expiration, which makes it 23 of the last 26 years DOWN in the week immediately following Triple/Quad witching.  However, during Election years, June tends to be the best month of the year for S&P, and 4th best for NASDAQ and DJIA going back over the last 40 years, following a poor May.   End of month seasonality on the final day of the month typically is sub-par (DJIA down last 17 of 24) and S&P (Down last 6 of 10) , but otherwise, this week should be better than last week. 

Currencies remain on the focus list given the surge in the US Dollar vs Euro, Yen and most importantly for some, Pound Sterling which produced its largest one-day move vs the USD.  Signs of a surging USD should ultimately prove to be bearish for commodities and precious metals aren't likely to thrive if interest rates and US Dollar start to rise in unison during a time of bullish sentiment towards Gold.


Short-term Thoughts (3-5 days) : Bearish for Monday, but feel that dips should be bought at 2000-3, or 1992-4 in S&P futures and that pullbacks prove mild this week and produce meaningful lows by early July which should carry stocks higher.  This week we have both Monday downside followthrough possibility along with End-of-June seasonality on the last day of the month (Thursday), which are both bearish.  Yet, signs of fear are arising again while breadth remains solid.

Intermediate-term Thoughts (2-3 months): Bullish- (No change) -A move back to new high territory is expected before indices turn down to begin any larger correction.  The BREXIT decision caused meaningful declines in most of the world, yet US indices failed to show much, if any structural deterioration, and the pickup in Bearish sentiment as seen by VIX move, Equity put/call spike to pessimistic levels while TRIN spiked over 2% and indices remain within 3.7% of all-time highs looks to be an important factor arguing that further selloffs could prove muted for the time being.  From a fundamental and macro standpoint, factors like ongoing revenue concerns, FOMC uncertainty, China & Emerging market growth, along with Election year angst have all served to fuel bearish sentiment steadily for months.  Now the BREXIT decision and plummeting interest rates have all but guaranteed that the FED will be on hold, despite any meaningful downshift in US Economic growth.  The Advance/decline recently moved to new all-time highs and breadth and momentum remain on solid footing, all which suggest any decline in the near-term should be used to buy selectively, and with the start of positive sector rotation towards Technology Healthcare with any sign in yields holding and turning up being a real positive for Financials.

 

 


"Newton's Nine" -  Nine stocks to consider buying after BREXIT decision that look appealing from a Technical Risk/reward perspective
 

 

Universal Display (OLED- $65.39)  Excellent technical structure with a giant five-year base which was exceeded on heavy volume in late May and now has pulled back post BREXIT decision to offer more attractive opportunities to buy dips.  The technical "rounding bottom" pattern from 2011-2016 following its initial run-up from 2009 makes this quite favorable to buy breakouts, and upside targets lie near $75, then $80 on an intermediate-term basis.  Momentum is positively sloped , and the area from 62-65 is considered a sweet spot to buy dips in the days ahead.  Stops on longs lie near $59, with upside could take OLED well up to $80.  Overall, a good technical formation that supports dip-buying.

 

 

Lam Research (LRCX- $82.28) A breakout to new all-time highs happened last week which was temporarily retraced following the BREXIT decision, but this stock continues to show very good signs of technical structure, similar to the Semi space as a whole.  LRCXs former highs in early 2015 followed a lengthy base and its pullback late last week makes this even more of an attractive risk/reward as this pattern likely should lead the stock higher up to $90 and then to $100 in the weeks, months ahead.    While movement under $81.20 would prove to be a temporary setback for longs on a weekly close, it's unlikely to begin a lengthy correction given that this technical structure has remained intact for over a year and just recently has given way to strength.

 

 

Intuit (INTU- $105.33) INTU's breakout to new highs failed to follow-through as a result of the post-BREXIT selloff, but has not declined sufficiently to think this can't happen upon a stabilization in the market in the weeks ahead.   Movement back to highs should allow for upside follow-through up to $115 and then $120.  For now, the fact that last week's breakout failed doesn't take away from the broader pattern, and doesn't suggest that an initial failure won't eventually lead this back higher , and the pattern remains quite bullish technically with multiple stabs at this level in the last few weeks that eventually should prevail.  Longs look right here, looking to add on any weekly close over 109 with initial targets, as suggested above, near $115.

 

 

Hasbro (HAS- $82.37) HAS' lengthy base following its breakout has pulled back to fill this open gap near $82.30, and presents an attractive opportunity to buy dips of a breakout stock which most feel has failed in recent days given the downside move.  Technically momentum remains in good shape, and structurally this just gapped up to new highs in April and has consolidated for two months, helping to alleviate the overbought conditions. Consecutive daily closes back above $87 would be a reason to add to longs, expecting that $90 would be seen in short order and then $100 being an intermediate-term target.

 

 

Agilent (A-$44.12) A's lengthy base from early 2014 was exceeded back in May, and this subsequent pullback helps to relieve overbought conditions and makes this attractive to buy dips in the days ahead.  The area at $42.50-$44 is a sweet-spot to add to existing longs, with upside targets found near $50 in the months ahead.  This coming week should produce evidence of Agilent stabilizing right near the highs of this base, and allow for a good risk/reward technical long

 

 

Medtronic (MDT- $83.26) MDT lies just above a very attractive area to consider buying dips for intermediate-term purposes after the breakout of its one-year base which began in early 2015.  MDT remains one of the more attractive stocks from a pure structural perspective within the Healthcare sector, with an ongoing uptrend, lengthy base breakout, and lack of meaningful overbought conditions. Last Friday's pullback could lead to a bit more near-term weakness, but not likely to get back under this area of the base breakout, so MDT is attractive on intermediate-term basis with any further pullback on Monday/Tuesday leading this to be attractive to buy for trading.

 

 

 

American Tower (AMT- $108.27) AMT's move back to new high territory in the last month is a bullish long-term development given that AMT had formed a bullish base in the last year and just managed to push back up above $105.  The longer-term structure showed a positive trend of higher highs and higher lows before the recent range, and this breakout of late shows real resilience in the face of a weak market that should allow AMT to push even higher once this recent turbulence has run its course.  Last week's pullback should face no further declines than down to $102-$105 before turning back higher, and structurally remains in very good shape after its push back to all-time highs.

 

 

Waters Inc (WAT- $135.53)  WAT is another example of a structurally sound stock that's just in the process of trying to push back to new high territory following nearly a year of base-building.  Its move in mid-June proved brief thus far in its attempts to break $137, but the subsequent weakness has failed to take away much of the positive effects of this pattern, and it remains within striking distance of new highs.  Any weekly close back above $139.12 would help to jumpstart the move back higher which should help WAT get to $142, and then $150.  Under $132 meanwhile would postpone the rally and allow for some additional consolidation to play out between $128-$132.

 

 

Texas Instruments (TXN- $60.54) TXN has been one of the strongest performers within the Philadelphia Semiconductors index in the last 12 months, with returns of +12.13% in the last 12 months vs a -5.74% for the SOX.  Its push back up above $60 in the last month was constructive in helping TXN surpass both highs from last year, made in March and October, and should help this push up to near $75 in the weeks and months ahead.  The pullback in the last couple days has taken TXN right back down to its uptrend line which should offer good support on this recent weakness to buy.

 

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: HAS, INTU, AMT, and LRCX.  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.

 

Dips should be used to buy ahead of BREXIT vote

June 20, 2016

S&P SEPT FUTURES (SPU6)
Contact: info@newtonadvisor.com

2050-1, 2040-1, 2022-4                              Support
2071-2, 2083-5, 2100, 2112-3, 2130-2       Resistance

 

 

 

Key Takeaways

1) Mild stabilization doesn't equate to LOWS in equities-S&P trend has begun to try to stabilize a bit, though remains down from 6/8 and insufficient proof of a low is in just yet to justify a bullish stance.  Above 2085 would suggest the lows for this move are likely in place and give confidence for a move back up to new highs.  For now, given that indices closed down on the week and Treasury yields still look to have additional downside, it's important to wait for more proof before trying to buy SPX at 2071.  The near-term trend suggests one final pullback under last week's lows could materialize early in the week ahead of the BREXIT vote, and this might be better to buy, before assuming prices can simply lift up to highs in absence of any news/vote.

2)  Bond surge still looks to have more to go- Friday's bounce in yields should prove short-lived, and give way to additional pullbacks over the next few weeks into early July before a meaningful low in Bond yields is in place.   The move has gotten stretched ahead of the BREXIT vote, and appears to be solely on the basis of Global yields selling off, more so than any judgement as to lack of US economic growth.

3) Seasonality suggests next week could prove negative, based on historical trends.   Stock Trader's Almanac data states that the period after the Triple(Quad) Witching expiration in June has been "DOWN" the last 22 of 25 years. Also, since 1991, of 31 down Triple Witching Weeks, 22 following weeks were also down.  Last week in the S&P was lower by 1.2%, so given the negative momentum and lack of sufficient bullish price action thus far, this week could very well also be lower.  Getting past the BREXIT vote should eliminate some uncertainty, and allow for stocks to rise.

4) Volatility has begun to rise in a strange manner with a flattening of the VIX term structure very early on in this recent decline from early June.  The Total Put/call ratio hit the highest levels since January last week, while the 5-day moving average was up over 1, near early May highs.  Credit Suisse's Fear Barometer hit the highest levels ever last week, which is based on Out of the Money options, and 5 different volatility ETN's which are based on the CBOE VIX traded high enough volume to make up over 4% of total volume.   Much of this could represent hedging given little underlying selling in the indices, but for now, an interesting phenomenon, and something to keep watch of.

5) Currencies will be front and center this week with both the Pound Sterling and EUR/USD lying near key levels ahead of the BREXIT vote.  Any breakdown in either Sterling or Euro vs USD that causes a move in the US Dollar index back over 96 is thought to be quite bearish for Commodities, and could accelerate the Earnings shortfall in future quarters.  1.11 is a key level for EUR/USD and a breakdown of this would suggest a move down to Par vs the US Dollar.

6)  Sector-wise, Telecom and Utilities managed to beat out all other eight sectors, as the yield decline caused a rush towards high yielding stocks while Financials lagged, as might be expected.  Furthermore, the three worst sectors last week (Healthcare, Technology, and Financials) were also the three weakest for the year as a whole after the first five months of the year.  In one interesting shift, Consumer Discretionary managed to outperform Consumer Staples despite a "down" week for the market. 

7) Divergences remain abundant with the SPX trading well above where EuroSTOXX 50 and most of Asia has trended in the last month, and SPX also has held up better than what the traditional relationship of how stocks and bond yields, USDJPY have shown.  For now, this doesn't suggest that SPX needs to necessarily pullback and join the others, but it is a concern given how tight the correlation has been with SPX to others, and important for SPX to remain above May lows.



S&P 500

Short-term Thoughts (3-5 days) : Bearish for a move back down to new weekly lows- Above 2085 would turn the trend bullish.   If a surge back above 2085 happens at this point, given of the recent bearishness, it would be right to trust this move and think that a move to new highs is possible.  For now, Most of the structure, while indicating some minor consolidation in place, can still allow for a bit more weakness before any bigger low in place, and very difficult to see a real rally given the amount of seriousness that the market and financial media have made this upcoming BREXIT vote.  Given that the market still largely expects a "STAY" vote, according to polls and UK betting sites, where real money is placed on the outcome, getting past next week should be a real positive, helping to clear up some uncertainty.  A "Leave' vote, would likely result in a huge decline in GBP and Euro vs the USD which would have bearish implications for Gold.  With regards to equities, dips should be used to buy


Intermediate-term Thoughts (2-3 months): Bullish-  (No change) - A move back to new high territory is expected before indices turn down to begin any larger correction.  The uptick in bearish sentiment given that indices are within 3.7% of all-time highs looks to be an important factor arguing that further selloffs could prove muted for the time being.  From a fundamental and macro standpoint, factors like ongoing revenue concerns, FOMC uncertainty, China & Emerging market growth, along with Election year angst have all served to fuel bearish sentiment steadily.  Meanwhile technically, despite the short term churning, there remains precious little to be all that concerned about given the medium-term picture.  The A/D-Advance/Decline for the NYSEhas recently moved back to new all-time high territory while weekly momentum remains bullish.   The 5-day Put/call ratio meanwhile has hit the highest levels since mid-February while AAII polls show a greater number of Bears than Bulls for the second straight week.  In addition, the total Put/call ratio has hit the highest level in over three months.  Sector-wise, the start of Technology outperformance in the last week could be telling, as the NASDAQ has begun to act a bit better after a lackluster few months.  While this six-month period remains seasonally weak and daily and monthly MACD are negative, gains should be able to hold indices up into late August before any pullback into the end of Q3. 


Technical review and What to expect

Combination of the poor seasonal cycle in place for 2Q post expiration with ongoing negative short-term momentum and insufficient proof of a low in place, the odds still favor that a bit more weakness is possible this week ahead of the BREXIT vote.  Given that this year as a whole has proven very choppy, with constant outflows out of Equities over a majority of the last 25 weeks, it's difficult to see how markets would suddenly gain conviction with the urge to position ahead of this week's upcoming vote.  Better to stay selective on what to buy, and await some evidence that stocks have begun to trend back higher, (which would take a move back over 2085 (2078 for Sept S&P Futures)  Dips back down in S&P Futures to 2030-40 though should be good to buy into this week, and expect some push back higher.

Bond yields remain the source of much anxiety with yields plummeting around the globe, and it's thought that some evidence of stabilization is required to have some confidence that stocks can begin to turn back towards highs, as it's been difficult in the past for stocks and bonds to trend sharply in unison over the last few years, and both tend to trade opposite in low yield environments.  When scanning Demark indicators for confluence as to signals across German Bund yields, UK Gilts, JGB's and US TY yields along with TLT, TBT signals, it looks premature on a weekly chart to make the case that yields have bottomed just yet, despite last Friday's sharp yield bounce.  Most argue for another 2-3 weeks of yield decline which might mean stocks might fail to accelerate as sharply higher until yields can truly stabilize.

The US Dollar will also be quite important to watch this week, as a sharp rise or pullback post BREXIT vote would have huge implications for Growth vs Value, Emerging Markets, commodities, and whether the Energy, Materials and Industrials sectors can continue some of the recent gains.  Some charts of the major indices along with commodities, currencies and Fixed income charts are below.
 

 


Charts & Writeups- SPX, TNX, DXY, NKY, Ratio charts, & overlays, with a few key sector stocks
 

 

SPX- 120 min chart-  Insufficient proof of a low in just yet, but should be close within the next couple weeks, with BREXIT this coming week potentially serving as a catalyst.  Look to buy dips in the week ahead on any retest of lows, with the area at 2030-40 being important as support, while movement back over 2082 should be bullish. Technically it's likely that this entire consolidation should give way to a move back to new high territory into July, so it's wise not to get too cute in trying to time the exact low, but its likely we could "back and fill" a bit early in the week before a late week rally.  Looking back. this three-month chart of SPX shows the brief move above April highs that ended up failing right away, giving way to a 60% pullback of the progress since mid-May.  In the last few days, we've seen a few attempts at bouncing which thus far have failed, but we've now seen two of the last three days close well up off the lows.  Overall, the choppiness of this pattern suggests buying dips for a move back to highs, as the degree of pessimism of late and extreme volatility surge should limit damage under May lows.

 

 

10-Year Treasury yields, Daily-  Bottom line-  Friday's bounce in yields was encouraging, but there remains few signs that this is anything more than a bounce at this point, and yields still look vulnerable to a possible move down under 1.40 before any real low is in place.  Yield charts of German Bund yields and JGB's look similar, along with UK Gilts after a global bond surge that's brought about an understandable amount of concern.  Looking at this daily chart, the breakdown in Yields got almost down to February lows before bouncing, but given a two-month consolidation that broke down, it's probably unlikely given no meaningful economic reports due right away that Bonds show any type of serious selloff which would take yields right up over 1.70.  However, this is what to look for in the weeks ahead.  For now, another 2-3 weeks of Yield weakness look possible.

 

 

OVERLAY with SPX, TNX, USDJPY-  SPX when shown on a chart with US 10yr Bond yields and USDJPY, shows the extent of the divergence that's been present since Equities took off in mid-February, while bond yields showed no similar move off the lows.  While the 12-month chart had shown a fairly tight correlation in the past, it's diverged of late, and only in the last week have equities begun to selloff once Bond yields showed a more meaningful breakdown.  There's no saying that Equities have to be the asset class that follows yields all the way down, and if anything in the next week, some stabilization in the US Dollar vs Yen and in Bond yields should give way to a bounce in these latter two in July which would be conducive to Equities bouncing back to highs.

 

 

SPX, and STOXX 600 index, and Bloomberg World index-  Just as SPX has diverged from Treasury yields of late, the real divergence has occurred with SPX vs global stock markets as a whole, as both Europe and Asia have been far weaker, and this remains something to pay close attention to in the months ahead.  Until we see evidence of mean reversion, there's no saying that US Equities should join the weakness in the other indices, but May lows will represent a key area of support that has to hold.  This can't be undercut without expecting a bigger pullback for SPX, which for now, seems unlikely.

 

 

US Dollar index-  This daily chart of the US Dollar index shows the attempted rally holding right where it needed to at 96 before failing and then retesting just in the last two weeks. Unless May lows are violated, there's no saying that the US Dollar has to move lower, and if anything, this recent stabilization and improvement in momentum since April has to be watched carefully in the weeks ahead. Movement back over 96 should cause a meltdown in commodities, with Gold falling back down under 1200.  For now, the BREXIT meeting this coming week should likely answer some hard questions about this recent churning.

 

 

NKY-  NIKKEI 225 index-  This breakdown of four-month trendline support for Japanese stocks this past week coincided with a meltdown in the US Dollar vs Yen, which got down to near 103.70 before rallying briefly.  For now, this pattern remains bearish, and suggestive of further technical selling, as rally attempts into early 2016 failed right near former lows from late 2015 and now have given way again to the downside.  Movement down to 14544, or even 13000  looks definitely possible before any meaningful rally, and Japanese stocks right now are weaker than either European, or US stocks, with prices well off all-time highs which were made in 2015.

 

 

EUR/USD-  Ahead of this week's BREXIT vote, the Euro has sold off down to key make-or-break support vs the US Dollar, which will have important implications in the weeks ahead.  Violations of 1.11 in EUR/USD would likely coincide with a sharp intermediate-term decline in EUR/USD which could end up testing last November's lows and lower.  Sharp pullbacks in the Euro likely also would coincide with commodity weakness as the US Dollar index as a whole would exceed 96 and begin a sharp move back up towards former highs.  While many are concentrating solely on Pound Sterling and its relationship to the US Dollar, the Euro seems to be equally important to watch for evidence of breakdowns or snapback rallies in the weeks ahead.

 

 

Gold, when looked at utilizing the BEWI index, to strip out the effects of the US Dollar, looks a bit more bullish than when scrutinizing the Daily chart of Gold in USD terms.  This base over the last few months is having its highs tested, and the upcoming BREXIT vote likely will have serious implications for either helping gold breakout, or fade and pullback to the lows and lower in the months ahead.  For now this pattern is more bullish than bearish, but prices will need to get up above recent highs to have a shot at real upside acceleration.

 

 

Consumer Discretionary vs Consumer Staples (as shown on this ratio chart of the S&P 500 Consumer Discretrionary index, vs S&P 500 Consumer Staples index)  remains bearish after this long-term uptrend broke early this year.  The rally attempt looks to have failed while Discretionary pulled back hard relatively speaking in the last month.  Overall, this pattern since 2013 has shown evidence of peaking out, but the top last year definitely gives some larger hints about the broader deterioration that's been seen in US stocks, as well as addressing the defensiveness of the market as a whole.

 

 

Financials have neared an area where they could stabilize after a sharp drawdown from recent highs.  However, this four-year weekly chart still shows a very weak picture for the sector.   The early year weakness violated a multi-year base in Financials vs SPX and now the recent bounce failed to get back above where it needed to, thus far.  Until Treasury yields can stabilize and start to rally off recent lows, it's unlikely this group will be able to make much progress, as recent relative strength has definitely been positively correlated with rates moving higher.  For now, it's a work in progress, but looks to be closer to trading lows after its sharp decline.

 

 

UTILITIES vs SPX- Weekly- Utilities have improved, relatively speaking after the breakout early this year caused this group to outperform all other nine sectors in the month of January.  That could have been a forewarning of what to come, as the year thus far has still seen the Utes outperform all other sectors, which has occurred both for defensive reasons, and given the yield decline.  For now, this seven-year downtrend was exceeded and relatively speaking, the group is headed back rapidly towards prior highs early in the year.  While this might not be broken just yet (as doing so would suggest a much larger Equity decline most likely) the group remains quite bullish, and relatively has just begun to show meaningful strength relative to the SPX after nearly seven years of underperformance.   Technical targets for XLU, as suggested a few weeks ago in the Weekly Technical Perspective, lie near $54.



 

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:  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.

 

Financials breakdown serving as temporary headwind for Equity rally

June 13, 2016

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

2080-3, 2075-6, 2039-40, 2022-4        Support
2105-6, 2111-2, 2123-5, 2135              Resistance

Key Takeaways

1) S&P trend failed to maintain its gains by end of week, as the move to nine-month highs reversed to close down back into the previous consolidation range.  Technically I don't view this as all that big of a negative since SPX failed to even breach the prior week's lows.  While some partial follow-through might happen Monday and/or into Tuesday, the positives of momentum and breadth should help equities trade higher in the weeks ahead.

2) US Dollar index rallied on both Thursday and Friday of last week resulting in a stalling out in Commodities just as indices had reached levels hit last June/July (CCI index)  WTI Crude oil fell down to test an area near its two-month trendline, and some minor signs of exhaustion happened within the Grains complex.  

3) US 10 and 30-yr Treasury yields broke lows of their consolidation mirroring movement seen in Japan, Germany and the UK where rates have fallen to near 0 and in some cases Negative territory.   While some daily counter-trend signals are in place now which could limit declines in yield much more in the near-term, TNX will require a move back above 1.70% to get back into its prior range before thinking that this decline is complete. 

4)  Sector-wise, Financials weakened substantially in the last couple weeks on yields pulling back and still look to weaken more in the short-run this week.  Much of this sectors ability to rally will depend on long rates likely turning back higher, which for now, still looks premature.  Utilities have managed to prosper under this yield decline, and remain the best performing sector YTD along with over the last 12 months.   While Tech and Healthcare have both shown above-average strength in the last month, last week's pullback favored the defensive sectors which all turned in better than average relative strength.

5)  Similar to SPX, Junk bond ETF JNK moved to the highest levels of the year last week, before pulling back into Friday's close, and its strength is one of the main reasons to continue favoring equities as this typically tends to turn down ahead of the equity market.  Technically, this still looks apt to rise to above $36 to potentially $36.50 which would be an important area to consider fading this move.  For now, no evidence of JNK having made a meaningful downturn.



S&P 500

Short-term Thoughts (3-5 days) : Bullish-  S&P can't be avoided or faded based on one day's decline, and breadth and momentum are strong enough to still favor indices pushing higher.  However, Treasury yields and USDJPY are key areas which likely need to stabilize and in turn can help Financials also turn higher, which would be important given their representation within SPX.  For now, technically it looks likely that other groups can take Financials place. This week, it should be wise to use any minor drawdowns to buy, expecting an upcoming move back to new high territory.

Intermediate-term Thoughts (2-3 months): Bullish-  (No change) - A move back to new high territory is expected before indices turn down to begin any larger correction.  The uptick in bearish sentiment given that indices are within 3.7% of all-time highs looks to be an important factor arguing that further selloffs could prove muted for the time being.  From a fundamental and macro standpoint, factors like ongoing revenue concerns, FOMC uncertainty, China & Emerging market growth, along with Election year angst have all served to fuel bearish sentiment steadily.  Meanwhile technically, despite the short term churning, there remains precious little to be all that concerned about given the medium-term picture.  The A/D-Advance/Decline for the NYSEhas recently moved back to new all-time high territory while weekly momentum remains bullish.   The 5-day Put/call ratio meanwhile has hit the highest levels since mid-February while AAII polls show a greater number of Bears than Bulls for the second straight week.  In addition, the total Put/call ratio has hit the highest level in over three months.  Sector-wise, the start of Technology outperformance in the last week could be telling, as the NASDAQ has begun to act a bit better after a lackluster few months.  While this six-month period remains seasonally weak and daily and monthly MACD are negative, gains should be able to hold indices up into late August before any pullback into the end of Q3. 


Technical review and What to expect

US Equities fell the most in three weeks last Friday, erasing the breakout attempt on a weekly close, which was set to finish at the highest levels since last July for SPX.   While many attributed the selloff to BREXIT concerns, or anemic global growth, the rapid acceleration in Treasuries looked to be a real concern, as Japanese, UK and German Bund yields fell to record lows.  US 10-year Treasury yields meanwhile fell to the lowest levels since 2013 on a closing basis, with most recognizing the Fed's dilemma of trying to hike rates in the US while global sovereign yields are plummeting. 

Overall though, trends remain positive, and it's still tough to make much of any real selling in US Equities, with indices still just fractionally below all-time high territory while breadth and momentum remain in good shape.   Technically speaking, the combination of 1) Decent breadth (with the Advance/Decline having moved back to new all-time high territory and sector of the year)  along with 2) Bullish sector rotation (Tech, Healthcare strength over last month)  and arguably 3) Negative sentiment ,remain key positives to support indices moving back to new high territory into July. 4) Small-caps seem to have returned with a vengeance, and very good outperformance in the last few weeks, while the Mid-Cap index is now pressing up near former highs. 5) High Yield strength-  This was thought originally to be a concern when Junk bonds began to turn lower last year while Equities eventually followed.  Since February though, JNK has rallied to the highest levels of the year and still hasn't shown any sign of peaking.   A sixth reason would involve momentum and structure still very supportive of rallies, as daily and weekly MACD are positive while pattern-wise ( the rally from February moved up far too high to be a counter-trend bear rally. )  Negatives involve 1) the divergence among indices right now (the NY Composite and Russell 2000 managed to move above April highs while the NDX has not)  while 2) Seasonality- indices remain in a tough period from a seasonal perspective (Week after June Triple-Witching has seen DJIA lower the last 22 of 25 years (Starts on June 20 through June 24) 3) Financial underperformance with yields accelerating lower which has coincided with lagging in the Financial space (2nd largest SPX sector, so lagging here is thought to be a definite headwind for SPX gains.  4) Bond yields moving down at an alarming rate, as 10yr yield hit the lowest levels since 2013 while many in Europe and Asia are hitting record lows and going negative.  5) Earnings growth and Economic strength- Both seem to be lagging a bit and these along with Election uncertainty is a big drag on conviction(Negative, though does play a part of a positive factor from a contrarian view.

This week's Weekly will concentrate specifically on the Financial sector, an area that many believe truly HAS to work if equities are going to move back to new highs.  Last week's -1.55% made Financials the worst performing sector of the major 10 for the week and it lags all other sectors in month-to-date performance and for the year, with returns of -3.21%, the only negative sector for 2016, outside of Healthcare, which is just down a fractional 0.75%. 

Technically speaking this sector remains short-term negative after the break of two-month trendline support for XLF while relatively speaking, Financials stalled out at a key area of resistance vs the SPX into late May and turned back lower.  The intermediate-term trend has been neutral for the last few years before January's break of support and this group still doesn't look likely to show a major rally anytime soon, until/unless Treasury yields can stabilize and turn back higher quickly.  Technically it is possible that other sectors can step in and lead the market higher despite Financials underperformance, but there remains a definite headwind when this group is trading in bearish fashion like it's done since late May. 

Charts and comments below.

 


Charts & Writeups- Financials Sector- Absolute, Relative charts of Financials, along with key sector stocks
 

 

Financials SPDR ETF-  XLF- Financials have broken down in the last couple weeks given the acceleration lower in yields, and last Friday cracked the two-month uptrend from April lows.  Additional weakness looks likely over the next couple days, with targets near May lows just under $22.80 before any real stabilization.  As the daily chart shows above, the larger trend has been negative since the middle part of 2015 with a series of lower highs, most recently in late May, which peaked right near important resistance at $24.  This area will need to be surpassed on an absolute basis to argue for meaningful strength out of this sector, and for now, the trend is mildly bearish near-term.
 

 

Financials, Relatively speaking v SPX-   This chart of Guggenheim's Equal-weight Financials ETF vs SPX shows the breakdown in this sector which occurred into January of this year while the snapback failed to move high enough to allow for meaningful improvement.  For now, this bounce from January/February lows looks to have peaked at the exact area it needed to hold to maintain a bearish stance on the sector. Moving back up into this range would make the sector more attractive, but likely depends on long rates moving higher.
 

 

Equal-weighted Financials RGF vs the XLF-   Ratio chart of Equal-weighted Financials to the popular S&P SPDR ETF XLF shows how the broader Financial sector has made headway of late vs the XLF which is dominated by JPM, WFC, and BRK/B.  This ratio has now reached the highest levels since 2012, showing a far different picture on an equal-weighted basis than what might be just seen when looking at the large-cap dominated ETF. 

 

 

US 10-Year Treasury Note Yield- Yields have broken down under this descending triangle formation in place since March, with the 10-year yield having closed on Friday at the lowest levels since 2013   Yields have largely diverged from stocks in the last couple months and have traded range-bound until the breakdown late last week.  The area near 1.70% will continue to be important for yields and counter-trend signals are now in place that could allow for a bounce in the next 2-3 days to unfold.  Until 1.70% is exceeded again, the near-term trend for TNX is bearish and Financials should underperform with targets near 1.60%.

 

 

Treasury yields vs SPX- Overlay- The ratio chart between TNX and SPX is shown above, with equities largely diverging from yields for the first time since mid-2015.  For now, there's no saying that equities need to immediately pullback and join yields at low levels, and we should be close to a time when yields can bottom and turn back higher which would give equities a bit of a boost.

 

 

KRE- Regional Banking ETF -  Unlike the XLF, Regional Banking ETF KRE has held its trend from early this year, trending higher with no meaningful breaks.  Similar to the Financial space as a whole, however, KRE has shown largely very little evidence of any real strength over the last couple years and remains trending sideways since the latter part of 2013.  Until/unless $39 is broken on a daily or more importantly weekly close, it should pay to stay bullish expecting another push higher as part of this trend.   

 

 

KBE vs KRE - The Banking ETF KBE which includes both Commercial and Regional banks, has been trending lower vs KRE since 2013, showing the degree to which stocks like BAC, C have been a weight on this sector, and why Regionals generally have outperformed the broader space.  Just in the last week we've seen a breakdown of last year's lows, bringing this ratio down to the lowest since 2012.   While we could stabilize down near 2012 lows, we'd need to see some evidence of this turning up to think that KBE would begin to outperform KRE, which could take the form of KRE breaking $39.  For now, KRE is preferred within Financials.

 

 

Visa (V- $80.18)  Visa remains one of the stronger stocks within the entire Financials space technically.   Its consistent outperformance only temporarily suffered some weakness into early this year structurally, but the subsequent rebound has helped V recapture its former high from late 2015 and after a brief consolidation,  prices lie within striking distance again of all-time high territory.  Movement back over $82 should allow for a quick move up to near $90.  The uptrend from early this year intersects near $78 and should be an attractive area to buy Visa on any further weakness.

 

 

JP Morgan (JPM- $63.84) Similar to XLF, JPM has had a pattern of several lower highs, with the most recent happening into late May.  The uptrend from February remains intact, however, and should provide strong support on further weakness, right near $62.50.  Given that XLF has broken down, while JPM remains above, this remains in better technical position to consider buying dips than XLF, and key levels lie near 62.50 on the downside and then recent May highs near $67 for resistance.  Above May highs allowsfor additional follow-through which should test all-time highs just over $70.  Bottom line, weakness over the next 2-3 days should find firm support just above $62 and is likely buyable, technically for a move back to highs.

 

 

Goldman Sachs (GS- $149.89) Bearish, and the move down to new multi-day lows last Friday likely allows for additional weakness down to near $140 in the days ahead.  Last year's breakdown, shown on daily charts, was important given the length of time without any material weakness and now bounces in the last month look to have failed at levels below 2015 lows.  This keeps this downtrend intact.  Thus far, the pattern from 2015 has taken the form of three waves down, so a move back to new lows under $140 would represent the first impulsive "FIVE WAVES DOWN" for at least the last eight years. 

 

 

Bank of America (BAC- $13.83) BAC remains very similar to the broader Financial sector pattern, with a lengthy period of consolidation which gave way to a breakdown early this year.  The subsequent rally looks to have held where it needed to, and is truly a strong area of resistance for BAC and for the Financial sector as a whole.   In the case of BAC, this lies just above $15 and important to get above to allow for this stock to begin trending higher, with the most important level found just over $18 for intermediate-term purposes. For now, the intermediate-term picture will remain negative until BAC can reclaim this area of its prior breakdown.




 

 

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:  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.

Utilities breakout to new highs should carry group higher near-term

June 6, 2016

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

2080-3, 2075-6, 2039-40, 2022-4        Support
2105-6, 2111-2, 2123-5, 2135              Resistance

Key Takeaways

1) S&P trend has consolidated a bit over the last six days, but holding within striking distance of all-time high territory is certainly more positive than negative.  An upcoming move back to new high territory seems likely into early July.  For now, 2105 is important in S&P Futures, 2111 in SPX cash and getting above these would allow the S&P to mirror what happened in the NASDAQ Composite and Russell 2000 last week. 

2) US Dollar index gave up 50% of its entire snapback rally in May with just one day's decline last week, but is unlikely to move all the way back down to May highs, and this pullback should likely stabilize in the next week before turning back higher. 

3) Treasury yields turned down sharply from resistance last week, which had looked to be setting up for a move to the upside, but now have reached the bottom of this recent multi-month channel for 10-year yields.  German bund yields and Treasury yields likely need to stabilize and start to turn higher before Equities can embark on any sort of breakout, given historical tendencies

4)  Sector-wise, last week mirrored what had been seen on a Year-to-Date basis with strength in Utilities, Telecom and Staples while Technology, and Financials both weakened.  Healthcare was a bright spot and continues to look like an attractive sector technically which could experience mean reversion in the next couple months. (Higher after underperforming in the first five months of trading)

5) Lots of breakouts in the last week with the Russell 2000, Healthcare, and Utilities all moving back to at least new monthly highs, with Utilities hitting new all-time highs again.  The Advance/Decline for NYSE "All-stocks" exceeded April highs, putting this within reach of all-time high territory.




S&P 500

Short-term Thoughts (3-5 days) : Trend bullish but this recent consolidation over the last six days will need to exceed 2105 SPM6, 2111-SPX to begin to join the recent strength seen in NASDAQ Composite, Russell 2k, and for now, prices have been near-term range-bound while breadth expands.  One worry is the extent to which Treasuries have rallied hard in the last week along with the Yen vs the US Dollar, and both have been bearish in the past for US Stocks, so it's important this week that we see stabilization and rallies in both before thinking that Equities and Treasuries can diverge too much more.   This week, it should be wise to use any minor drawdowns to buy, expecting an upcoming move back to new high territory.


Intermediate-term Thoughts (2-3 months): Bullish-  (No change) - A move back to new high territory is expected before indices turn down to begin any larger correction.  The uptick in bearish sentiment given that indices are within 3.7% of all-time highs looks to be an important factor arguing that further selloffs could prove muted for the time being.  From a fundamental and macro standpoint, factors like ongoing revenue concerns, FOMC uncertainty, China & Emerging market growth, along with Election year angst have all served to fuel bearish sentiment steadily.  Meanwhile technically, despite the short term churning, there remains precious little to be all that concerned about given the medium-term picture.  The A/D-Advance/Decline for the NYSEhas recently moved back to new all-time high territory while weekly momentum remains bullish.   The 5-day Put/call ratio meanwhile has hit the highest levels since mid-February while AAII polls show a greater number of Bears than Bulls for the second straight week.  In addition, the total Put/call ratio has hit the highest level in over three months.  Sector-wise, the start of Technology outperformance in the last week could be telling, as the NASDAQ has begun to act a bit better after a lackluster few months.  While this six-month period remains seasonally weak and daily and monthly MACD are negative, gains should be able to hold indices up into late August before any pullback into the end of Q3. 


Technical review and What to expect

US Equities continue to dodge every punch that's being thrown these days.  Last week equities weathered nearly the worst economic data miss possible as Payrolls came in at the lowest levels since 2010.  While bond yields and the US Dollar plummeted, US Equities shrugged and churned back higher to finish the holiday shortened week at a mildly positive +0.43%.  By end of week, despite some early attempts at pulling back, trends overall still show very little evidence of any Technical damage.  Looking back, we've now experienced yet another dismal earnings season, while economic data remains poor enough that the Fed has seemingly boxed itself into a corner with regards to trying to hike based on market resiliency vs strength in the economy.  Most market participants drew down risk into January and February along with into early May and have subsequently missed most of the recovery and have lagged the market badly this year.  All of this together paints a rather grim picture for sentiment, which in turn, has fueled a wall of worry for stocks yet again with prices within striking distance of highs.

Overall, it's rare to see stocks and bonds move in unison, at least over the last couple years.  As bond yields plummet, like what happened last week, sectors like Financials experience understandable underperformance, which should present a huge headwind for stocks given their composition of SPX at 16.32%, or the second largest sector.  This year's +2.7% returns for S&P thus far have been experienced through a huge period of Defensive positioning for Equities, as Staples, Telecom and Utilities are in the top five (out of 10) sectors for outperformance this year.  While a push back up to new high territory should cause the laggards to begin showing better performance, (and we've seen some evidence of that in the last couple weeks of technology and Healthcare showing good relative strength) it still remains difficult to find fault with and Sell the Defensive sectors

One of those groups, the best performing sector of the year, the Utilities, is the key group of focus this week for this week's Weekly Technical Perspective.  Utilities remain this year's best performing sector, outperforming all other nine S&P major sectors and are leading the Second best sector YTD-Telecom by more than 300 bps with a nearly 500 basis point lead over Energy.   Their January outperformance was a notable "tell" that normally tends to highlight sectors which can show further leadership throughout the year and this year has been no exception.  In performance through 6/3/16, Utilities have risen by 14.95% have consistently been in the upper quartile over the last 1 and 3 month period, while showing the best performance last week, higher by 2.73% while the S&P managed to just barely get to positive territory.  

This outperformance in Utilities should continue, at least over the next 2-3 months given the technical breakout of XLU back above former highs.  Momentum has not yet gotten overbought, and both weekly and monthly counter-trend signals are premature to suggest some kind of reversal.  Weekly patterns show the formation since January 2015 as being a giant Cup and Handle formation, with last Friday's rise above March 2016 highs likely leading to a sharp acceleration which could carry XLU up to $54 before any meaningful weakness.  Finally, the group remains one which most people would rather avoid at this stage, citing valuation concerns, and/or thoughts of future underperformance given the beginning of interest rate normalization along with the start of a potential secular bear market in long-term Treasuries.  For now, the technical pickup in momentum this week on the breakout above March highs makes Utilities worth overweighting, where 5-10% gains are possible in the next couple months, and fading here looks premature. 

Charts and comments below.

 


Charts & Writeups- Utilities Sector- Absolute, Relative charts of Utilities & best ones to own on after this breakout
 

 

Utilities SPDR ETF-  XLU-   Bullish, and this past week's move back over March highs represents what's though to be a breakout of a Cup and Handle pattern in the XLU which should help to fuel this sector in the short run, after the consolidation throughout most of last year and from February-May of this year.  XLU should move back higher to $54 as no counter-trend sells are present using Demark indicators on a weekly, nor monthly basis and XLU remains structurally attractive.

 

 

Utilities, XLU, Monthly- this longer-term channel shows prices likely to test the upper end before any trend failure, as momentum remains positive and counter-trend signs of exhaustion remain premature.  Rallies up to $54-54.45 look likely

 

 

Utilities vs SPX- Weekly Ratio chart since 2007-  This breakout of the long-term trend lower from 2007 was fairly pronounced in January and has since consolidated a bit, but has not really given up this breakout, and should still be thought to be positive for Utilities in driving this sector higher for outperformance in the months ahead.  While markets might need to show more evidence of trend damage before Utilities can offer true trending behavior, last week's gains in Utilities back to new highs should let this sector trend higher still on both an absolute and a relative basis.
 

 

European Utilities are certainly not performing as well as US and should be avoided near-term.  This ratio of European Utes vs the XLU has plummeted to new yearly lows after the early year breakdown, and still looks as if one final push back down to new lows can happen.   Ratio above highlights the SX6P or STOXX600 Utilitiesindex vs. the XLU.

 

 

CMS Energy- (CMS-$42.82) The stock of this largely Michigan-based Utility has just broken back out to new highs following the move last Friday in XLU and should be favored for further outperformance.  Upside targets lie near $45 and only a move back down under $40 would postpone this advance.  Within the XLU, CMS Energy has been an outperformer for the last month along with on YTD terms, and technically still looks like one of the better to own to take advantage of this recent Utility strength.

 

 

WEC Energy Corp- (WEC- $61.52) Another mid-west Utility, WEC, has moved back up above former Spring highs along with former highs from early 2015, making this a stronger technical name, and should be able to push up to the mid-to-high $60's on the strength of this recent advance. Its parabolic typeadvance from last year has caused weekly momentum to push up to near overbought levels and the stock remains over 20% above its long-term uptrend line from 09 lows, it's premature to sell or avoid WEC here.  Additional gains are likely to near $65 which would be the first real area to consider resistance on this move, and for now, its right to own WEC and use any dips to buy, technically.

 

 

NiSource (NI-$24.46) NI has been a consistent outperformer within the Utilities space on nearly every timeframe in the last 12 months and its breakout back to new all-time highs should help this trend continue a bit longer.  The act of forming a base from April and now exceeding the highs late last week is a real positive technically, and should allow this stock to rise up to near $26 with a max of near 27.50 before any stalling out.  Until there is some evidence of price showing more signs of stalling out, and weakening relatively speaking, NI will continue to be one of the top Utilities in the space.

 

 

NRG Energy (NRG- 17.39)  NRG has the dubious distinction of being the worst performing stock of the major Utilities over the last 12 months, while the best performing stock over the last week, month and three-month timeframes.  Its performance in the last rolling 30 days alone showed a Positive 23.95%. Technically, this is one example of some of the poor performers over the last 12 months attempting to regain their former momentum, and in this case, NRG has just exceeded prior lows that were violated from back in 2012 and 2008-9.  While the stock has gotten near-term overbought, the act of closing back over $17.75 would drive this to the low $20's without much trouble. For now, given the move back to new highs in XLU, it's doubtful that NRG's outperformance comes to a dead halt right near $17.40, so this should be favored for a move into the low $20's before any real stalling.

 

 

P G & E (PCG- $61.55) PCG is being revisited given its move back to new all-time high territory, and the cup-like nature of its pattern makes this likely to continue showing above-average performance in the near-term, with technical targets up near $65.  The act of forming a small base like PCG did from March after having peaked out in the past makes this a Cup and Handle candidate which has just exceeded the right-hand side of this base

 

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:  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.

Trend bullish, but SPX faces resistance entering June

May 31, 2016

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

2039-40, 2029-30, 2022-4, 2007-9        Support
2105-6, 2112-4, 2025-6                             Resistance

 

Key Takeaways:

1) S&P trend changed to bullish on last week's move above trendline resistance at 2065 which carried prices quickly up to test mid-April highs. However, upside now looks limited given overbought conditions combined with short-term cycles and former highs being technically important.

2) US Dollar index poised for its biggest monthly rise since September 2014 with returns through 5/30/16 of 3.6%.  Precious metals have been hard hit in the last two weeks given this rally.

3) Emerging markets, conversely, have been hard hit in May, with MSCI Emerging mkts index falling nearly 4%, the most since January, while Brazil's Bovespa dropped nearly 9% on the month. 

4) Treasury yields seem to be readying for an upside breakout, which could allow the long end to join the recent gains in 2 year yields.  Given the Fed's determination at readying the market for a rate increase, the bond market seems to be paying attention on the front end, while 10 and 30-year yields, similar to stocks are up near key short-term resistance.

5)  Technology, Financials and Healthcare dominated performance for May, with the SPX's 1.4% gains for the month with one day remaining being led by the three sectors that account for 50% of capitalization

6) Sentiment has begun to show some evidence of following the most recent rally, as Equity put/call data dove from readings shown earlier in the week.  By end of week, the Equity Put/call had fallen to levels not seen since last August.

7) Breadth continues to be supportive of a move back to new high territory, while climbing back to April highs might allowfor a bit of resistance to take hold as the indices enter June.  However, the beginning of the month tends to be far better seasonally speaking than back end-end of quarter, which often shows end-of-quarter positioning.


S&P 500

Short-term Thoughts (3-5 days) : Trend bullish but has reached former April highs which looks to be a logical place to pick a spot to fight this trend, for those who intend to do so.   A stalling out is possible between 6/1-6/4 based on the combination of short-term cycles, former highs acting as resistance, along with overbought conditions in the near-term.   However, this rally looks to move back to new high territory in the weeks ahead, so its smart not to get too aggressive in hedging, or trying to short into this move, as the pullback could prove minor before moving back to new high territory. 


Intermediate-term Thoughts (2-3 months): Bullish-    A move back to new high territory is expected before indices turn down to begin any larger correction.  The uptick in bearish sentiment given that indices are within 3.7% of all-time highs looks to be an important factor arguing that further selloffs could prove muted for the time being.  From a fundamental and macro standpoint, factors like ongoing revenue concerns, FOMC uncertainty, China & Emerging market growth, along with Election year angst have all served to fuel bearish sentiment steadily.  Meanwhile technically, despite the short term churning, there remains precious little to be all that concerned about given the medium-term picture.  The A/D-Advance/Decline for the NYSEhas recently moved back to new all-time high territory while weekly momentum remains bullish.   The 5-day Put/call ratio meanwhile has hit the highest levels since mid-February while AAII polls show a greater number of Bears than Bulls for the second straight week.  In addition, the total Put/call ratio has hit the highest level in over three months.  Sector-wise, the start of Technology outperformance in the last week could be telling, as the NASDAQ has begun to act a bit better after a lackluster few months.  While this six-month period remains seasonally weak and daily and monthly MACD are negative, gains should be able to hold indices up into late August before any pullback into the end of Q3. 


Technical review and What to expect

The last week brought forth some fairly significant technical developments, as the S&P managed to breakout of the minor downtrend from mid-April and accelerate all the way up to test these levels by end of week.  As of 5/30, the electronic session in Monday's holiday session saw S&P futures close within a point of all-time high territory, 2101 vs last May 21-2103, while still under the intra-day 2105 which was recorded both last May and this past April.(and still 1.4% below SPX cash peak closing prices just above 2130) While near-term momentum has gotten stretched on this recent 3% spike in prices in the last 10 days, the weekly structure suggests this was quite the bullish move, not only canceling out the thoughts of a possible Head and Shoulders pattern at play, but also improvingthe technical structure on an immediate move back up to levels that were hit around the middle part of April.  The trend is bullish short-term, and closing in quickly on key overhead levels, which should be a source of resistance entering the month of June.  However, if all-time highs are exceeded in the SPX, NASDAQ and DJIA, this should provide the impetus for a quick move to SPX 2250 into the summer, allowing price to join the recent breadth improvement and move back to all-time highs seen by the Advance/Decline for all securities.

For now, bonds haven't really shown signs of selling off too substantially on the long end just yet, which would be thought to be the case if the FOMC suspects the US economy is strong enough to hike in June or July.  2 Year yield attempted to breakout, while 10 and 30 remain more subdued, but do lie near key areas where breakouts might happen in the next couple weeks and have to be watched carefully here in this regard.  Meanwhile the US Dollar index should be closing in on its first major area of resistance near 96, which might cause a temporary stalling out in the US Dollar and allow for short-term bounces in both the Euro and Gold.  

Overall I suspect this week could provide a short-term stalling out in stocks, but am skeptical that equities show any sort of meaningful selloff other than a 2-3% drawdown at a maximum before moving back to new high territory.  And despite any near-term slowdown, it remains right to be long in selective stocks within Technology, Financials and Healthcare, as these sectors provide about 50% of the total SPX composition and should outperform in the next couple months.

This week's Weekly Technical Perspective covers 10 stocks within the major 10 sectors that are all poised for potential further gains in the weeks ahead.  Each of these has bullish technical structure and has recently moved to new 52-week highs, or is on the verge. Charts and comments below.

 


Charts & Writeups- 10 Bullish stocks to consider technically among 10 different S&P Sectors
 

Technology-  Intuit (INTU-$107.89)-   INTU looks technically attractive, and its ability to have rebounded back to test the highs of its ascending triangle formation from last May should result in an upcoming breakout to new high territory.   Given the stock has moved in a linear uptrend since the latter part of 2008, this triangle formation since 2015 represents a change in structure.  However, ascending triangle patterns of this sort tend to be bullish continuation patterns, and should lead to an upcoming breakout given historical precedent in how these patterns are typically resolved.  Movement back up above $109 should lead straight to $120 and any pullback in the days and weeks ahead to near $105-$106.50 should constitute a technical buying opportunity.


 

Financials- PrivateBancorp (PVTB- $44.54) PVTB's strength in climbing back above $44 puts this stock in a strong technical position as it's setting up for an upcoming test of last year's highs near $45.79, made in November.  However, the larger pattern remains quite constructive, and little resistance lies between current levels and the area near $50 which has hit initially back in 2008.

 

Energy - Concho Resources inc (CXO- $122.19) CXO's rally back above $110 serves as a breakout of the two-year downtrend in place for this stock, and allowed for acceleration up to over $120 in a short period of time.  Given that Crude's rally is ongoing and to this point has shown little signs of peaking out, the Energy sector remains one to favor technically.  CXO's outperformance this year speaks for itself after having risen 31+% this year through 5/27/16, but given this move back over the descending trendline, it looks to have further to go, technically speaking.  Initial targets lie near last May's highs at $134, with movement over allowing for a move back up over $140.

 

Industrials -  Acuity Brands (AYI- $256.21)  AYI is bullish technically and the breakout into mid-April looks to have consolidated sufficiently and now could give way to a move back to new high territory in the weeks ahead. While the selloff into February of this year caused some minor trend damage, this was recuperated nearly right away and the larger trend for AYI remains in parabolic mode since early 2009 with an accelerating trend of higher highs and higher lows at an increasing rate.  Key for short-term traders will be a move back over $259 which should drive this up to $280 which is an attractive area to sell for trading purposes.  For intermediate-term investors, a move back down under $239 is necessary to think this rally might be postponed.

 

Healthcare -  WebMD Health (WBMD- $65.32)  The recent breakout of the enormous nine-year double bottom pattern has meaningful bullish intermediate-term implications for WBMD and should help the pattern continue to stretch higher, despite a near 75% gain in prices just since last September alone.  Monthly RSI has hit 75, which might seem troublesome for the months ahead, but the move over two prior highs from 2011 and 2007 should help WBMD hit $70 before any stalling with a good likelihood of $80 potentially being reached as an intermediate-term technical target.  In the short run, any pullback to the low $60s all the way down to $58 would be an excellent area to consider buying dips.  But the intermediate-term progress in exceeding two prior highs made more than five years ago is considered a reason for optimism overall with WBMD.

 

Materials- Vulcan Materials (VMC-$118.12)-  VMC remains in acceleration mode as it completes the right side of its giant "Rounding Bottom" pattern with upside targets at $128, or nearly 8% above.  Given that this level held the initial time back in 2007, it should serve as a magnet for prices but also likely cause a real stalling out in the shares on the first retest.  Overall, pullbacks to $110-$115 would likely constitute an attractive opportunity to buy dips with upside targets near these former highs in 2007.  For now, VMC remains one of the more attractive within the space, and has shown very little signs of any weakness, with even its February 2016 pullback proving minimal and leading to move back to monthly highs within the next few weeks.

 

Telecom -  Verizon (VZ- $50.62)  VZ's pattern improved substantially given the rally back to test 2013 highs early this year.  The subsequent pullback failed to do much technical damage and has now provided an opportunity to buy dips with key upside resistance near $55.  Overall, this pattern in VZ between 1999 and 2013 resembles a giant base for this stock with subsequent three years representing a higher base which should give way to an eventual rally back to test 1999 highs.   Verizon also has taken some positive steps of late relative to AT&T, and could be in the process of bottoming out in relative terms and starting to relatively outperform.  Overall, given the amount of strength early this year followed by the recent consolidation, VZ remains attractive to own, with movement back over $55 leading to the real acceleration that will allow this to eventually retest $63.

 

Consumer Staples - Molson Coors Brewing (TAP-$100.20)  TAP's move back to new monthly highs in exceeding former levels set back last November/December when equities peaked last year should set the stage for additional strength up to near $110 before any meaningful peak.   The initial advance late last year managed to exceed nearly six months of sideways consolidation and TAP has continued to show very good signs of technical structure, with an ongoing pattern of higher highs and higher lows which makes this stock one of the better within its peer group to own. 

 

Consumer Discretionary - Hasbro (HAS-$87.28)  HAS looks attractive technically given the stock's ability to rise back over highs set this past Fall and now the recent stalling out is showing signs of being resolved by movement back to highs given last Friday's advance.   Upside targets lie near $90 and then $100, which should be meaningful to HAS given its prior rise.  Momentum-wise, the stock's pullback last Fall helped to alleviate some overbought conditions, and its recent move back to new highs looks to have been consolidated in good fashion which should allow for rallies back above $90.  Overall, HAS is attractive, and long positions are warranted at current levels, looking to buy dips.

 

Utilities -  P G $ E (PCG- $59.12) PCG is attractive within the Utilities space given that the stock has not yet moved back to new highs, and rests near former highs from last Spring, which provided resistance on the initial test earller this year.  Getting back above $60 looks likely in the weeks ahead and should provide a springboard for PCG to rise to at least $70 on an intermediate-term basis.  Giventhat stock completely retraced the weakness into last Fall, a move back up above $60 on a weekly basis should result in real upside acceleration.

 

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:  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.

Technology Progress could lead the way- Sector rotation important

May 23, 2016

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

2039-40, 2029-30, 2022-4, 2007-9        Support
2064-6, 2070-1, 2080-2, 2105-6            Resistance

 

 

Key Takeaways:

1) S&P trend still bearish from mid-April- Insufficient progress to declare selloff complete- HOWEVER, high bearish sentiment readings, time cycles suggest lows should be in place within 1-2 weeks- >2065 Key
2) Defensive groups like Utilities, Staples, Telecomm all beginning to underperform in the near-term, which looks like a key "TELL" that equity rally is right around the corner
3) Technology has shown some of the best performance in the last week while the worst laggard over the last month- Its sharp gains this week likely signal a turn back to Tech outperformance
4) Sentiment continues to be slanted more toward bearish than given the AAII survey along with the Put/call data which recently moved to the highest levels since September
5) USD rally still showing no signs of turning lower, despite sharp 3 week rally within 4month downtrend
6) Commodities showing evidence of short-term peaks at hand given Dollar rally
7) Treasury selloff looks to have reached key YIELD resistance, and yields should back off this week, favoring TLT, TYD, TMF,while German Bunds could rally as yields test 10bps or slightly lower before any real bottom in yields
8)  Emerging mkts still look to have one final pullback this week before bottoming- Close to support, but selloff thus far incomplete.



S&P 500

Short-term Thoughts (3-5 days) : Mildly Bearish- The technical structure remains negative from mid-April, but should be within 1-2 weeks max of bottoming out and turning back higher to challenge all-time highs.  The late week rally appearing very much like the prior rally attempts that happened within this downtrend from early May, from 5/6-5/10 and then 5/13-5/17.  Key downtrend resistance lies near 2065 for ESM6, (S&P June Mini's contract) and still very tough to make anything of this move over the last few weeks other than a choppy downtrend, which still lies within striking distance of all-time high territory.  As of last Friday, 5/20, prices were within 2 ticks of closing prices from March 29, nearly two month ago, showing the degree to which prices largely have gone nowhere.  After one full year, SPX is only down 3.68% from last May's all-time high close.

Over the next two weeks, pullbacks should prove limited, and rallies should be right around the corner.  The combination of bearish sentiment with High TRIN readings, ongoing bullish weekly momentum and breadth with Ichimoku cloud support just below argues that recent weakness "shouldn't" be the start of a bigger pullback, and should provide a floor to indices just as prices pass the 1-year anniversary of all-time highs.  Look to use any further weakness to buy dips and consider covering shorts or hedges with a move back above 2065 on a close likely signaling that this one month mild selloff is complete.

Intermediate-term Thoughts (2-3 months): Bullish-    A move back to new high territory is expected before indices turn down to begin any larger correction.  The uptick in bearish sentiment given that indices are within 3.7% of all-time highs looks to be an important factor arguing that further selloffs could prove muted for the time being.  From a fundamental and macro standpoint, factors like ongoing revenue concerns, FOMC uncertainty, China & Emerging market growth, along with Election year angst have all served to fuel bearish sentiment steadily.  Meanwhile technically, despite the short term churning, there remains precious little to be all that concerned about given the medium-term picture.  The A/D-Advance/Decline for the NYSEhas recently moved back to new all-time high territory while weekly momentum remains bullish.   The 5-day Put/call ratio meanwhile has hit the highest levels since mid-February while AAII polls show a greater number of Bears than Bulls for the second straight week.  In addition, the total Put/call ratio has hit the highest level in over three months.  Sector-wise, the start of Technology outperformance in the last week could be telling, as the NASDAQ has begun to act a bit better after a lackluster few months.  While this six-month period remains seasonally weak and daily and monthly MACD are negative, gains should be able to hold indices up into late August before any pullback into the end of Q3. 

This week's report focuses on Technology outperformance after sharp gains in the month of May and in the last week but following a huge 30-day period of underperformance.  To put this in perspective, given that only seven more days remain in the month of May, the S&P Information Technology index had to have experienced a very weak final week of April given that the group went from worst to first so quickly. (Worst on 30-day basis, -4.12% for the S&P Information technology index through 5/20/16, but best in May, the ONLY group showing positive performance out of the 10 major S&P GICS Level 1 sectors re: Bloomberg)
 
NVDA, EA, AMAT and FIS have been the best performing stocks in May, with gains spanning from 10-24% with NVDA far and away leading the pack.  Meanwhile, on a 30-day rolling period, we see that FSLR, STX, XRX, SWKS, and AAPL were all lower by greater than 10%.  Quite the dispersion, making selectivity in this group a must. 

Technically speaking, Semiconductor stocks remain the best part of Technology, and charts of Semis vs Hardware (shown below) and Semis vs Software have both begun to turn higher sharply(Semis vs Hardware managed to hit new multi-year highs, breaking out of a giant basing pattern formed in the beginning of the prior Decade. 

Additionally as charts show below, the NASDAQ has bottomed out vs the S&P right near an area of former relative lows, while the Tech sector has risen above a key downtrend vs the entire market, which supports the notion of further Tech outperformance in the months ahead.  While prices on many stocks which caused some of this relative strength have gotten stretched of late, (NVDA as a prime example) the group seems primed to rebound from its miserable stretch of losses in the prior 30-days.  Given that Technology constitutes nearly 20% of the SPX, its largest sector by percentage, gains in Tech should be important in causing a tailwind for gains in equities in the months ahead.
 

 


Charts & Writeups- Technology charts of interest- NDX, SOX, MSH v SPX, SOX v Hardware, & AAPL,GOOGL, AMAT, & NVDA technicals
 

NASDAQ 100 index-  Technically speaking, both the NASDAQ composite and 100 index have held up fairly well in the month of May, with the NASDAQ comp down only -0.12% for the month, far better than the DJIA's -1.53% through 5/20, along with measurably better than Europe, with the EuroSTOXX50 -2.18% thus far, with seven trading days remaining.   Daily charts show this downtrend from mid-April after the break of the uptrend line now giving way to a range-bound pattern in the NDX,with lows occurring right near 4280 and highs happening at 4407.   The borders of this one-month range will be key as to the future path of prices and its best to follow price in whatever direction it goes.  Technically, the breakout in Technology suggests more of a bullish lean for the next 2-3 months, in expectingan upcoming breakout.  For now, this range is worth watching carefully.

 

NASDAQ vs SPX- The bottoming in the last few weeks of NASDAQ vs SPX is meaningful, given that this trended down from mid-April as part of a larger pullback from late last year.  Additional gains and outperformance look likely from the NASDAQ vs SPX, which could be important given that this bottomed along with the stock market last back in mid-February.

 

The Philadelphia Semiconductor index, or the SOX, has rebounded to an area of importance, following its breakdown in the end of April.  Prices as of last Friday, 5/20, have reclaimed former lows from March/April and are arguably moving back into this former range which had trended sideways for a full month before giving way.  Semis had already broken out in relative terms vs other parts of Technology, but would be apt to show gains in absolute terms if the SOX can reclaim the area at late April highs, just above 680.

 

 

Morgan Stanley Technology index vs SPX-  MSH/SPX-   Don't look now, but TECH has broken out of a downtrend from last year.  The ratio of MSH/SPX has rebounded sufficiently to exceed its relative downtrend from November highs in just the last couple weeks.  This is a bullish development technically and should result in technology showing better relative strength in the months ahead given how quickly this has snapped back.

 

Semiconductor stocks, relatively speaking, (SOX vs S5TECH) have begun to sharply turn higher vs Hardware, as seen in this 5 year weekly chart of the SOX vs S&P Tech Hardware index.  Given that this relative chart moved up over prior highs to multi-year highs in relative terms, this suggests a meaningful breakout in relative outperformance in the Semi sector vs Hardware, making Semiconductor stocks "THE GROUP" to own within Technology for weeks and months to come. 

 

Apple (AAPL- $95.22)  AAPL's recent ability to rebound follows a severe period of underperformance that's not unlike what the stock went through from highs back in 2012, when it peaked out and fell more than 45% from its peaks, though managed to maintain its intermediate-term uptrend.  A similar fate has occurred since last May in AAPL when the stock become quite overbought vs its long-term trend and gave back over 30% from peak to trough before the rally over the last week.  A few things are worth mentioning.  First, AAPL's selloff this time around hasn't done any more technical damage than what happened the last go-around, after the stock became extremely stretched vs its intermediate-term trendline.  The weakness in the last 12 months has strong support in the mid $80's given this long-term trend and is considered a much better risk/reward given its selloff down to important long-term support.  If this is broken, it would be correct to have more bearish intermediate-term prospects, but at present, the stock remains in a short-term downtrend which looks to be trying to stabilize near former lows as part of an ongoing uptrend.

 

Google (GOOGL- $721.71) GOOGL's technical picture remains bullish but stretched on a weekly basis after the sharp breakout from last July, which carried the stock higher by over 30% in the month of July alone.   The entire last year has been spent in consolidation mode after this breakout, with the stock treading water between 810 on the upside and 680 on the downside just in the last seven months alone.   The stock is down nearly 9% over the last month, but given the steep ascent of this chart since last Summer, it could afford to pullback to the mid-$600s and still be attractive to buy, from a purely technical perspective.   For now the near-term picture is range-bound, and tough to rule out a test of 680-690.  Meanwhile moving back over 743 would help to lift this up to 800 and improve the picture dramatically.  Technically, GOOGL is a short-term hold as part of a long-term bullish pattern.

 

Google vs Apple-   The ratio between GOOGL and AAPL has gradually been bottoming out in the past couple years, favoring Google on a long-term basis, technically.  However, GOOGL's outperformance of late seems to have reached key upside resistance which should cause some stalling out in this ratio, just as its neared 2014 highs.   So from a short-term basis, there lies reasons to consider AAPL more technically attractive after its recent woes, as it tries to bounce, while GOOGL remains range-bound.   In the bigger picture, the ability of GOOGL to get back over 2014 highs relative to AAPL would result in GOOGL being the favorite, and suggest a serious amount of outperformance.

 

NVIDIA- (NVDA- $44.33)  Short-term NVDA is extremely Stretched and has reached technical targets which should result in a stalling out and pullback for trading purposes.  However, the stock is long-term attractive given the rounding bottom structure and move over 2007 highs, so any pullback back down to 40, or the high $30's should represent a great buying opportunity.  NVDA is the Technology sector's top performing stock of the year,(from within the S&P 500 Information Technology index)  up 34.50%. However, 21% of this return happened in the last month, making this very overbought and susceptible to some huge backing and filling in the weeks ahead.  Weekly RSI has not reached former levels hit in 2015 while the stock presently is near 30% higher.  Overall, a good intermediate-term stock to own given the bullish momentum and ability to rise back to new all-time high territory.  However, near-term, its doubtful this will be able to extend gains over $46 and it looks right to take near-term profits with the idea of buying dips.

 

Applied Materials (AMAT- $22.66) The ability to quickly recapture the damage that was done in 2015 keeps this stock in a base-building effort that began back in the early part of the last decade   The gap last week has made AMAT a bit short-term overbought.  after the runup from late 2015.  However the longer-term pattern shows fairly constructive technical structure, and it wouldn't take much to suggest AMAT could experience a large advance which should be very likely if AMAT gets back over $25.  Overall, pullbacks should be contained near $20 with upside to near $26-$27 and then the high $20's.

 

Citrix Systems (CTXS- $83.21)-  Near-term structure has turned choppy after a strong rally back up to challenge former highs from 2011-2012.  The larger pattern has been quite constructive in forming an initial high turning 2011, but CTXS needs to show evidence of getting back above these former highs which would improve the intermediate-term gains.  For now, this is one of the few in Technology that exhibits a 5-year base on top of its longer-term uptrend and any movement back up above $90 would likely elicit a giant rally back to test and exceed former highs.

 

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: GLD, IAU, SLV.  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.

Equities near support as 1-year Anniversary of All-time highs approaches

May 16, 2016

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

2035-7, 2026-28, 2007-9                           Support
2056-8, 2068-70, 2089-90, 2105-6            Resistance

 

In This Issue

Ongoing Equities pullback likely to hit support by end of week and turn higher

Treasury yields could lead the way, while US Dollar hits strong resistance

 

Key Takeaways:

1) S&P trend bearish, but near support- High TRIN readings, bearish sentiment mean downside limited
2) US Dollar index nearing Important resistance, likely to peak out by Monday, Tuesday of this week
3) Commodity rally should continue a bit longer, with Precious, Base Metals, Ags, Energy participating
4) Value stocks should outperform growth over the next 3-5 weeks as Dollar pullback will hurt Growth
5) Consumer Discretionary still likely to lag Consumer Staples a bit longer; Favor XLP over XLY
6) TLT, TYD, TMF should be favored given Treasuries trending higher this week, along with RX (Bunds)
7)  Emerging mkts close too support after giving up nearly 40% of Jan-April rally-Buy EEM ~31.50
8) Crude oil should continue its rally up to near 48-50 before any resistance, with maximum near 52
9) Defensive sectors like Utilities, Staples favored this week, but should be sold into strength ~3-4 days
10) Gold looks attractive near-term on absolute and relative basis vs US Stocks but Copper also looks to be near support after decline and should turn up this week

Given these takeaways, key longs and/or spreads to consider for this upcoming week are : SVX vs SGX,  XLP vs XLY, IAU, GLD, SLV, USO, DBA, EUR/USD, RUSL, FAZ, EDZ (1-2 days)   Shorts via ETF:  XRT, FXI, TAN, TYO, TMV, RUSS, FAS, USD/RUB, EDC (1-2 days)


S&P 500

Short-term Thoughts: Mildly Bearish- The technical structure this week remains negative, but closing in on both time and price based support which should provide a bottom to this decline and allow for a counter-trend rally to unfold. For now, prices are right down near early May lows, which might be initially important. But a pullback down to 2030, or even 2007-9 can't be ruled out before lows are at hand, as there remains insufficient grounds for a technically bullish opinion based on lack of structural improvement in the short run.  However, the combination of bearish sentiment with High TRIN readings, ongoing bullish weekly momentum and breadth with Ichimoku cloud support just below argues that recent weakness "shouldn't" be the start of a bigger pullback, and should provide a floor to indices just as prices near the anniversary of last year's all-time high territory directly following the birthday of the NYSE.  Look to use any further weakness to buy dips and consider covering shorts or hedges thinking that a rally back to highs is right around the corner. 

Intermediate-term Thoughts (2-3 months): Bullish-    A move back to new high territory is expected before indices turn down to begin any larger correction.  The extent of the bearishness looks to be a big deal, given factors like Revenue concerns, FOMC uncertainty, China & Emerging market growth, along with Election year discord among voters.  Certainly there's a lot to be concerned about; Yet, indices lie only 3% from all-time high territory and the Advance/Decline has recently moved back to new all-time high territory while weekly momentum remains bullish.   The 5-day Put/call ratio meanwhile has hit the highest levels since mid-February while AAII polls show a greater number of Bears than Bulls for the second straight week.  The start of Technology outperformance in the last week could be telling, as the NASDAQ has begun to act a bit better after a lackluster few months.  While this six-month period remains seasonally weak and daily and monthly MACD are negative, gains should be able to hold indices up into late August before any pullback into the end of Q3. 

Looking back at last week, overall,  a very tough week to make money as SPX fell to its third straight weekly loss with groups like Consumer Discretionary Financials and Industrials each losing more than 1% while Utilities continued its dominance, the sole positive sector on the week of the major S&P GICS Level 1 groups.  The rally in the US Dollar continued while Treasuries also rallied with Yields breaking down on the long side of the curve as the 2/10s curve flattened to the lowest levels since 2008.  Emerging markets fell precipitously while commodities weakened a bit, albeit not too dramatically.

Many seem resigned to the fact that the Spring "top" is in with equities likely showing little to no appeal after the sharp rally to test last November's peaks.  Bearishness from gauges like the Equity Put/call and AAII would seem to indicate a far higher level of disgruntlement than might be warranted with prices just 3% away from all-time highs. Momentum has given clues as to how the trends seem to be going against each other, with bearish daily and monthly momentum, as part of a bullish weekly pattern with Advance/Decline having recently moved back to new all-time highs.  While the pattern since this time last year certainly has proven to be a lot more choppy than many expected, for both bull and bear campsalike, there remain precious few who are betting on upside breakouts between now and late August. 

The one short-term factor that suggests waiting for stabilization before getting too aggressive in buying, however, concerns the degree to which Treasury yields are now breaking down, with yield curves flattening out dramatically.  While assets like WTI Crude seem to have lost their positive correlation with Equities of late, both USDJPY and TNX still remain in bearish trends, and will need to show a bit more stabilization to argue that these can rise.   Therefore, despite near-term oversold conditions, or signs of fear, or capitulation with TRIN readings in excess of 2.50 (the highest levels since February) it's best to let this selloff play out a bit more in the near-term until ample signs are present which suggest buying into this downtrend might be a bit better risk/reward.  Short-term cycles which successfully pinpointed both mid-February troughs along with early May bottoms during the 5/4-5/6 area nowproject to 5/19-22 for a low, which would mean selloffs early this week likely find some type of floor and reverse course.  For now, the near-term trend is bearish, and outside of commodities and Treasuries, it seems wise to be selective until additional evidence is there for Equity longs.
 

 


Charts & Writeups-  Equities, Sectors, absolute, relative, and Commodity, currency thoughts
 

SPX index- Daily- As this daily chart shows above, S&P's decline might look menacing to some as a potential Head and Shoulders pattern in the making, but prices now lie right above strong Ichimoku cloud support which should hold on any additional weakness this coming week.  Momentum is negatively sloped as per MACD , but weekly MACD remains positive and prices lie only roughly 3% from all-time highs. The combination of heightened concerns at a time when prices lie near support and evidence of former laggards like Technology improving would seem to be a good case for buying dips this coming week.

 

Bloomberg World Index- Similar to SPX, the near-term trend for the broader world index such as Bloomberg's (BWORLD) index has been trending lower over the last three weeks, yet the broader pattern has improved since early March with the breakout of the one-year downtrend from early 2015.  Near-term, a bit more weakness looks possible this coming week, but should find strong support near 180 and provide an opportunity to buy dips for a lift back to highs into the Summer.

 

30-Year Treasury yields- Both 10 and 30-year Treasury yields have been testing key support from February in the last week, which now looks to be broken as of last Friday's close down at 2.553 for TYX.  Additional weakness looks likely to 2.50 to test former swing lows, which if breached, would allow for a much more severe Treasury rally on the long end into early June.  For now, given that equities have largely followed the movement in Treasury yields in recent months, it pays to wait until some evidence of turning happens with regards to yields before getting too aggressive in buying dips.

 

German Bund yields remain within striking distance of former April lows, and could very well get below 10 bps in the days and/or weeks ahead before a larger bottom occurs for yields.  Counter-trend signals remain early to signal any type of bottom in Bund yields using either daily or weekly data, and last Friday's decline looks to have stripped most of Thursday's rally attempt away.  For now, a bit more weakness looks possible in the short run.

 

Yield curves continue to flatten, and as this chart of the 2s/10s curve shows, this flattening has reached the lowest level on a weekly close, since 2008.  For now, an extremely challenging environment for Banks when yield curves have flattened dramatically since early 2014.

 

Agricultural Commodities look poised to play "Catchup" with the movement seen in Energy and Metals recently if the rally in the the Powershares DB Agriculture Fund is any judge.  This ETF has risen to the highest levels since last October, largely on the strength of Soybeans.  This cup and handle breakout should be a positive for the entire Ag space, so rallies in Corn and Wheat could be expected also in the near-term, and help to lift DBA up to 22.50, potentially $23.50 right near last July's highs. Given that the US Dollar looks close to turning back lower early this week, this should prove to be a boost for Ags once USD begins its fall and help the Ag commodities to push higher.

 

Consumer Discretionary vs Consumer Staples-  A graph shown earlier in the week showed how Staples were beginning to play catch-up with the Discretionary stocks, and much of this was due to Discretionary dropping off just as stocks like Gap Inc. Staples, Nordstrom, Macy's and Michael Kors, which have all fallen more than 20% in the last month.  After a lengthy six year rally by Discretionary over Staples, the start of Discretionary falling off seems to suggest a structural change in the market which is becoming evident just as the former uptrend changed to sideways last year.  In the short run, additional retail weakness looks likely, which could serve as a continued drag on the Discretionary sector.

 

NYSE Cumulative Advance/Decline line moving back to new highs was considered quite positive technically, and despite some churning in the last month as prices have begun to consolidate after testing November 2015 highs, a move back to new high territory is likely given the breadth improvement which is more probable than a move down under 1950-SPX.  As opposed to 2007, when breadth fell back in the early Summer and failed to follow price to highs that October, breadth has taken the lead this time, whether when looking at the NYSE "All Stocks" or "All Securities" Advance/Decline line, both of which have moved up above November highs while SPX has not.  This seems to suggest that price should follow breadth, which has happened consistently in the past, not vice versa.

 

McClellan Summation index confirms the weekly breadth improvement which was seen in March-April of this year when this cumulative summation of breadth moved to the highest levels since 2010.  While prices in some sectors have gotten ahead of themselves and have consolidated this move in recent weeks, this seems to be yet another intermediate-term breadth gauge that's giving out far more reasons for optimism than what might be seen in common sentiment polls.

 

TRIN readings for last Friday registered above a 2.5 reading, showing a huge spike in volume into declining vs Advancing stocks which can often signal that stock market declines are nearing capitulatory lows as "the Bears" start to climb aboard, at precisely the wrong time.  This reading was the highest since early February which was triggered within a few days of the lows which happened three months ago.  Given that prices have fallen for the last three weeks,, we seem to be closer to lows, than to a time of downside acceleration, despite how ugly the near-term charts might appear.

 

Equity put/call readings have signaled that investors are not all that optimistic, despite prices being just 3% of All-time high territory.  The 5-day moving average of the Put/call on Equities recently registered a reading near 0.90, or nearly equivalent amount of Puts being bought as calls, something which often signals a low is near.  Given that this ratio is the highest seen since mid-February, equities look to be closer to lows than highs in the bigger scheme of things.

 

The ratio of Gold to SPX has begun to carve out a bullish base after the initial breakout in Gold into early March.  This suggests that Gold in the weeks ahead likely could be a better bet than US Equities, and could outperform.  For now, it's right to have a precious metals allocation technically, and both Gold and Silver look attractive from a risk/reward standpoint, while copper also looks to be close to forming a low.


 

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: GLD, IAU, SLV.  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.

Aerospace/Defense breaking out among Industrials

May 9, 2016

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

2037-8, 2026-28, 2007-9              Support
2068-70, 2089-90, 2105-6            Resistance

 

In This Issue

S&P gains last Friday still haven't done enough to think immediate gains happen

Industrials under review, and specifically, Aerospace & Defense

 

Summary: Short-term weakness still looks to be at hand, despite last Friday's bounce attempt, as downtrends from mid-April remain intact and insufficient strength has been seen to call a bottom of any sort. 

Europe did successfully attempt to stabilize late last week, but the price action in both the SPX along with the World index is certainly inconclusive of any low.  In the bigger picture, there is a good likelihood that weakness proves minimal in the weeks ahead, however, given that pullbacks have taken prices right above several different kinds of technical support while bearish sentiment is on the rise.  For now, selectivity remains key in stocks and important areas to look for support lie near 2026-8 initially in S&P futures followed by 2007-8 which looks to be much stronger.  Overall, with technical support less than 1% away, one should take a look at using any pullback to cover shorts, while considering the Metals stocks, technology, buying into Consumer Discretionary and Healthcare after recent weakness.  The Aerospace & Defense sector has some allure within the Industrials space (which will be showcased below) as its move back to new highs makes this one of the stronger areas within Industrials.

In the short run, the near-term technical picture remains pointed lower, with bearish daily momentum pointing down,with breadth averages not having rebounded sufficiently to have conviction.  For those that utilize counter-trend indicators for buying into downtrends, those also remain inconclusive at this time and not complete, which eyeing NASDAQ, SPX, or Treasury yields (which have trended very closely to stocks in recent months.   However, with Ichimoku cloud support directly below, and positive intermediate-term momentum, the bigger picture still looks fine for Equities.  As reiterated above, Minor drawdowns should be used to buy in the next 1-2 weeks with S&P futures likely finding support near 2026-30 as maximum area of downside before a move back to test and exceed November 2015 highs on the way to new high territory.

Overall this part of the year typically isn't for the faint of heart now that stocks have entered May.  We've entered that part of the year where indices have traditionally been seasonally weak, particularly in Election years.  According to Stock traders Almanac, Presidential election year Mays rank poorly #11 of 12 for the DJIA and S&P and #9 for the NASDAQ.   The "worst six-month period" has indeed begun, and as history has shown, a $10,000 investment held only from May-October would have lost money since 1950, VERSUS the six "BEST" months of the year- November - April having grown to $838,486 in the period from 1950-2014.  Astounding indeed.  Given that technical indicators such as MACD turned down on daily charts, this period is upon us yet again.  Sector-wise, Banking Materials stocks and Gold and Silver traditionally decline during May.  The Financials certainly have followed suit there but Materials stocks have largely shrugged off this seasonally weak period thus far as Gold and Silver's rise have shown little signs of reversing course. 

Industrials has interest at this stage of the rally given that it's had some impressive outperformance in recent months, but yet has stalled out recently given signs of XLI nearing former peaks along with many stock in this sector. While Capital goods and Aerospace and Defense remain on solid ground, other sectors like Machinery have largely rallied on Dollar weakness but could be prone to give up that outperformance if the Dollar turns back higher, which looks likely.  The Aerospace & Defense part of the group still has a lot of allure within the space, with many stocks having recently broken out to new 52-week high territory.




Top 7 Ways to Play Industrials, Techically speaking
1) BUY XLI, which still looks to make headway vs SPX after recent weakness
2) Buy Aerospace & Defense- Breaking out to new high territory- Favor RTN, GD, LLL, & LMT.
3) Buy XLI vs Europe's SXOP 600, the Construction and Materials index
4) Buy Rail stocks vs the Airlines
5) Sell(Short) Machinery stocks
6) Sell (Short ) Transport stocks more than 2-3 months in duration
7) Buy XLI vs China-  Favor XLI over FXI

 


Charts & Writeups-  Industrials Sector, Absolute, relative, XLI v SXOP, Rail vs Air, XLI vs FXI, Aerospace & Defense, others
 

SPX index- Weekly- Following a sharp nearly 200 point rally in S&P from mid-February into mid-March, SPX has traded largely range-bound over the last seven weeks, at an area right near former highs from November.  Sentiment has turned bearish in the last couple weeks given the stallout, as seasonality concerns combined with lackluster earnings and ongoing concern of China and/or the course for US Fed policy have kept people largely on the sidelines in the last couple months.  As of last Friday, the AAII sentiment showed 30% Bears vs 22% Bulls, with SPX just 3.3% off all-time high territory from this time last year.  So we've experienced nearly a full year of dramatic selloff and recovery with prices nearly at prior levels from last May.  Overall, the near-term pattern remains negative over the last couple weeks, but selloffs should prove minimal before rising prices carry SPX back to new highs into June/July based on the current structure.  In this scenario, SPX has no business being under 2000 and any additional pullback this week should be used to buy down at 2030 area down to 2010 for upcoming gains back to new highs.
 

Industrials- XLI shows the sharp outperformance in February in relative terms (See graph below price of XLI vs market) followed by a period of Catchup for the other sectors, as Industrials slowed.  The act of getting back above former highs from last November/December is definitely a positive technically, yet the area at former Spring highs remains a strong area of resistance.  Technically speaking the recent pullback into the 50-day moving average could provide good support for the group, given that it also lines up with former highs from November 2015 along with having provided good support and resistance for XLI going back since mid-2015.

 

Industrials in relative terms to SPX when looking on an Equal-weight basis (to strip out the effects of GE) stalled out in recent weeks right near highs made back in 2014.  Recent churning hasn't done much to suggest much of a top at work, but just a slowing in performance given the presence of former highs.  Arrows shown point to counter-trend sells and buys in relative terms right near highs and lows respectively.  For now, additional churning can happen, but movement up to new highs looks to be in the cards which will allow for a bit more outperformance out of this sector into the summer months before any real top.

 

Industrials in equal-weighted terms, broke down relative to the market much earlier than most indices did in January of this year, having made its decline in late 2015.   While the sector peaked out right when Small-caps did in mid-2014, it was the breakdown below prior lows from 2015 that caused the real downside acceleration.  At present, Industrials seems to still be in the midst of a bounce from oversold levels, but its equal-weight chart is far more negative than what might be seen from looking at XLI charts with price within a whisker of all-time highs. The equal-weight picture has seen far more deterioration..

 

US Industrials vs STOXX 600 Construction & Materials index-   XLI is bullish vs European construction and materials stocks, as prices have just risen to the highest levels since early last year.  This technical rise back above March-April highs suggests further upward acceleration, and should continue to favor US Industrials vs European stocks of similar nature.

 

RAIL vs AIR- While the intermediate-term trend remains negative, this chart of Rail stocks vs the Airlines has shown real progress in recent weeks that makes additional gains likely in relative terms, favoring the Rail sector-  XAL has dropped down from highs near $97 to under $86 in the span of just a couple weeks which has helped this relative chart break out of a mild downtrend created from early 2015.  In the weeks ahead, additional strength still looks likely in the Rails, and if getting above the longer-term trend from 2012, this would offer a larger move for the group, suggesting overweights in Rails vs shorting/underweights in the Airlines.

 

Machinery vs Industrials-  Machinery stocks look to be at key resistance from longer-term trends from 2014, and recent stalling out suggests a possible move back down to lows.  The group has experienced strength right at a time of the falling US Dollar, which plays into the theme of multi-nationals like Caterpillar (CAT) bouncing.  Now that the Dollar has been widely shorted and shown some evidence of turning back higher, (which might take a few more weeks), the Machinery stocks could very well begin to underperform again, as seen by this ongoing downtrend remaining very much in place.

 

S&P Aerospace and Defense index has just moved back to new high territory after exceeding highs which were important in late 2015 along with winter 2015 highs.  This breakout which happened initially in late April and was consolidated, looks positive for continued outperformance in Aerospace and Defense in the short run.

 

Aerospace & Defense vs SPX has just made new relative highs in the last week, besting prior levels seen back in early 2015 along with 2014.  This should allow for a period of outperformance that's likely worth chasing technically with those with timeframes of 3-5 weeks or longer given that relative charts have just advanced to new all-time highs.  While stretched on monthly charts, it's worth still favoring this sector for outperformance until some evidence of trend deterioration occurs.

 

Transports vs XLI-  New relative lows look possible for the Transports vs the Industrials sector give this group undercutting April lows which puts it within striking distance of levels seen back early this year.  Overall, Transports showed evidence of peaking back in 2014, back when Small-caps topped out, yet most broader indices continued higher.  This retest of former lows is due to trigger counter-trend buy signals in the next few weeks, but for now, additional move back to new lows should occur.

 

Ratios of XLI to FXI suggest Industrials should outperform China in the short run, as seen by XLI moving back to new highs vs the Ishares China Large-Cap ETF.   Overall, a very steep advance since mid-2015 and one which looks likely to continue given this move back to new high territory.


 

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:  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.

Semi Drop should offer buying opportunity within Technology

May 2, 2016

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

2058-60, 2048-9, 2026-30              Support
2071-4, 2089-90, 2105-6, 2123-5   Resistance

 

In This Issue

S&P trend turns negative for Short-term, but selling should prove short-lived 1-2% losses

Sector Focus on Technology & Semiconductors given last week's pullback

US Dollar nearing August 2015 lows should provide some stabilization

Summary: Near-term weakness looks possible this week given signs of the S&P breaking down under minor trendline support and joining the NASDAQ, which has already dropped more than 5% from mid-April highs.  Factors such as minor negative divergence, Technology underperformance, global equity market unease, Election year seasonality, and short-term trend deterioration all argue that a 1-2% pullback can happen into early May.  However, the intermediate-term rally still looks very much intact, and factors like bullish weekly momentum and breadth (Advance/Decline having recently moved back to new high territory) lackluster sentiment, and Treasury yields holding up are all positive factors which should be given more precedence at this time.  Minor drawdowns should be used to buy in the next 1-2 weeks with S&P futures likely finding support near 2026-30 as maximum area of downside before a move back to test and exceed November 2015 highs on the way to new high territory.

Looking back, the month of April was remarkable in that equities had rallied nearly 14% up to near prior late 2015 peaks without as much as any real weakness, or given the outflows, any real participation from the investing public.  Last week showed the first evidence of S&P moving below a prior week's lows while the US Dollar continued its downward descent, nearing the lowest levels since last August.  Commodities, meanwhile, turned in their best month since 2010 as Metals and Energy showed above-average strength.  Sector-wise, Energy and Materials both benefited from this move in the month of April, turning in the top performance for major S&P sectors, with Energy being sufficient to knock Utilities out of its 1st place ranking for the year.  Financials and Healthcare also made comebacks to the tune of 3.67% and 2.57% respectively.

Now we enter the challenging month of May, which ranks poorly in Election years, #11 of 12 for both DJIA and S&P and 9th out of 12 for the NASDAQ.  This month does bring about the start of the "Worst six month of the year" period according to Stock Traders Almanac, and studies from Bespoke show that May-October tends to be particularly worse if the first four months of the year have been relatively flat (Plus or minus 2%) which has happened 16 times since 1928 and averages -0.21%.  While if the market is higher by more than 2% over the first four months, the subsequent six month stretch is +2.99%, while if worst then 2% down over the first four months, the average gain was 1.11%.  So seasonally speaking, definitely reasons to heed the phrase "Sell in May and go Away"  However, the sentiment already seems remarkably bearish, with AAII polls this past week showing a greater level of percentage "Bears" than "Bulls"

This week we concentrate on the Semiconductor sub-sector within Technology, April's worst performing sector, but with some interesting progress having been made from the Semis relatively speaking to Hardware given Apple's woes.  Additionally, Semis are showing signs of bottoming out vs the Software group.   The NASDAQ meanwhile has dropped down under February lows vs the S&P, which suggests its important to be selective here following NDX having given up 5% from mid-April.  Overall, last Friday's drop was bearish for the SOX, but pullbacks should prove limited and provide some attractive buying opportunities in May for the Semi space, which looks likely to outperform vs both Hardware and Software (Based on the S&P groups S5TECH index, and S5SFTW index)
 

 
Charts & Writeups-  SOX index, Semis vs Hardware, Semis vs Software, NASDAQ vs SPX,  AVGO, NVDA, NXPI, IDCC, & TXN
 

Philadelphia Semiconductor Index (SOX-$645.33) SOX's break of former lows going back since mid-March looks more bearish than bullish technically, a clear break of a level that had held numerous times in the last two months before giving way last Friday.  While additional near-term weakness looks likely to areas near 632-4 or 618, any drawdown should be used to buy dips given the improving relative picture(Seen in charts below).  Momentum at present is not yet oversold, and levels that bulls should concentrate on for any rebound are 665, and then 685.  A break of the former would put the SOX back up into its former range, while getting back over 685 would result in upside acceleration given that March/April highs were a test of November/December 2015 levels.
 

Semis vs Hardware-  When looking at the relative relationship between the SOX index and Technology's Tech Hardware index, or S5TECH, we see a clear breakout of a pattern that had been steadily improving since last Summer.  The move to new monthly highs managed to eclipse the early February peak, and while overbought at current levels, any pullback in the days or week(s) ahead would be a buying opportunity to favor the Semi space over Hardware.  Apple's representation within Hardware certainly was a factor in the month of April, but other stocks weakness such as Seagate Technology, Western Digital, or NetApp, were equally as damning for Hardware.  These last three all underperformed Apple during the month of April, showing that it was a widespread issue for Hardware weakness, not necessarily limited to Apple's woes.

 

Semis vs Hardware-  Weekly-  The weekly chart going back since 2007 presents a far more bullish picture for Semis in relative terms to Hardware, with the breakout of a base that extends back over nearly a 10-year span.   The pattern might be termed a reverse Head and shoulders formation by some, whereas by others it merely resembles a long-term bullish base breakout.  Regardless of the terminology, the act of having bottomed out in 2012 and moved sideways in symmetrical fashion before rising to new yearly highs last week is certainly a bullish factor to consider sticking with the Semi space within Technology, despite the absolute weakness last Friday.
 

Semis vs. Software- Semis also look promising when viewing the group vs the Software space, which dramatically outperformed Semiconductor stocks over the last year, with a sharp rally and outperformance (shown here as Semi underperformance)  However, this group (SOX) recently triggered counter-trend TD Sequential buys right near 2012 lows vs the Software space, based on S5SFTW index, and the one-year underperformance in Semis makes this area look attractive to the likes of ORCL, YHOO, WU, EA, MSFT and others.
 

MSH vs SPX-  When viewing Technology as a whole, this group's underperformance largely began at the beginning of the year , but remains a long-term outperformer vs SPX, and recent weakness should translate into a buying opportunity given the long-term uptrend from 2002.  Near-term woes in Semiconductor stocks shouldn't be given as much merit given how they've outperformed hardware, and in general this space remains one to consider owning and buying on dips. 

NASDAQ vs SPX- One thing to keep aware of, that will make owning the right stock increasingly important, is the degree that the NASDAQ has been breaking down relatively to SPX.  Technology woes certainly contributed to this last month, but as the chart shows, NASDAQ has violated a three-year uptrend vs SPX and now the bounce looks to have failed in attempts to regain this uptrend line.  Movement back down under February lows suggests a bit more weakness before this can bottom out unless we were to see a sudden large snapback over the next few trading days.  Counter-trend TD Buy setups per Demark indicators are now in place in the NDX after its recent drawdown, but this deterioration in the relative line remains a negative when viewing NDX/SPX.

 

Broadcom (AVGO- $145.75) AVGO remains one of the better stocks to own within the Semi space and pullbacks down under $140 should be considered a good technical risk/reward to buy dips with thoughts of continued strength in the months to come.  Last week's pullback makes buying dips here still look a bit premature, as the breakout attempt is now falling back into the prior base given the selling from last Thursday and Friday.  However, anywhere from $130-$135 should be an excellent area to consider buying dips given the ongoing positive structure and momentum in this name.

 

NVIDIA (NVDA- $35.53) NVDA looks to be peaking in the short-run, and could allow for movement back down to the low $30's which would create a great risk/reward opportunity to buy this stock, technically speaking.  The broader trend remains quite bullish with the stock having advanced in parabolic fashion in the last year, to levels right below prior peaks from 2007.  While overbought and showing some evidence of minor negative divergence, NVDA remains the best performing stock in the Philadelphia Semiconductor index by a long shot, with gains of over 60% in the rolling 12-month period.  This huge upward surge in momentum will be difficult to completely erase, so near-term weakness should still create excellent opportunities to buy dips with thoughts of NVDA getting back to near $40 in the months ahead.

 

NXP Semiconductors (NXPI- $85.28) NXPI's stalling out over the last couple weeks doesn't take away from its overall bullishness in getting back over the one-year trendline extending down from last Summer highs.  Nearterm weakness down under $80 is a possibility, yet the degree to which NXPI has outperformed over the last 3, 6 month periods should make this one to continue owning, technically speaking.  Movement back higher to $100 looks to be a possibility, with any dips in this group in the week ahead providing a good opportunity to buy dips.

 

Interdigital (IDCC- $56.98) IDCC is bullish on an intermediate-term basis, and movement back over $60 would help this stock to accelerate in climbing back to retest former highs from 2011.  IDCC has outperformed all other Semi stocks within the SOX on a three-month basis, with returns of 26.51% through 4/29/16, and the bullish pattern on weekly chart should allow for continued dominance in the space, with positive momentum and a series of higher lows since 2012.  Near-term, the stock has gotten stretched just shy of $60, but pullbacks to the low $50's would represent a good area to buy dips.

 

Texas Intruments (TXN- 57.04) TXN's slowdown over the last year can't be ruled the start of a larger decline given the extent to which prices remain near last year's highs.  The churning near these tops is considered quite bullish technically, and should allow for an upcoming push back above $60 which would allow TXN to begin to outperform once again.  In the short run, an engulfing pattern last Friday makes this temporarily vulnerable to pullbacks to the low-to-mid-$50's, but its technical structure argues for buying dips, given how resilient the stock has traded over the years.   Weakness should prove minor and a chance for adding to existing technical longs for a chance of accelerating back over $60 in the weeks ahead.

 

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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Seventh Inning Stretch- Energy looks to have more upside into May/June

April 25, 2016

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

2075-7, 2058-60, 2048-9       Support
2105-6, 2123-5, 2130-3   Resistance

In This Issue

S&P trend positive, but beginning to churn near highs, & short-term top possible

Sector Focus on Energy- Breaking out to new highs relative to SPX, this looks quite positive into mid-May

Sentiment remains subdued and should ultimately fuel the SPX higher given lack of optimism

Summary: Trends remain positive for Equities but showing increasing signs of stalling out in the short run, which could produce a short-term top in US Equity indices as early as this week.  Momentum and breadth have begun to fade while prices are up against prominent highs formed last November for SPX while a number of sectors are facing the same issues, with XLI, XLY, XLV nearing important prior highs, while XLF is also up against resistance in the short run after a nice bump in recent weeks.  Treasuries have shown evidence of turning lower, as 10yr yields now approach 1.90% while the US Dollar has stabilized and pushed back higher in a manner that's allowed the commodity space to stall out a bit in recent days.  Overall, the trend remains bullish, and given that sentiment remains somewhat subdued while breadth has been quite strong in the past few months, technically it's right to think that any pullback should prove short-lived and give way to a rise back to new highs in the indices in the upcoming 1-2 months. For now, most benchmark indices have their work cut out for them at this juncture, which looks important and could provide some difficulty for those expecting immediate acceleration without any real catalyst.

Equities have now risen over 14.3% in the last 10 weeks from the mid-Feb lows.  Yet outflows continue to outpace inflows substantially in US Equities which have now occurred during 13 out of the last 16 weeks.  This past week saw $4.5b outflow from equity funds through 4/21.  Bullish sentiment certainly hasn't risen as dramatically as would be expected, when looking at Equity Put/call ratios, High short interest, and Subdued levels of Bulls over Bear per sentiment polls such as Investors intelligence and AAII.  The recent Barron's Big Money poll showed that American's Money managers thought that equities couldn't rise 10% in the next 12months by more than a 2/1ratio (68 vs 32%)  The same group expected stocks to fall by more than 10% during the next year by nearly the equivalent ratio, on the bearish side- 66% vs 34%.   Additionally, the latest reading from AAII shows Bulls with less than a 10% point lead over Bears, with 33.41 vs 23.92, certainly not too enthusiastic.  Whether poor earnings or Fed indecision or the rush towards Global NIRP is to blame, the result is the same:  Many have not nearly participated in this rally as would have been expected these last few weeks (discounting the first few off the lows, which are always difficult to time properly) .  Now investors are faced with the task of hoping that indices stall out and pullback again, which would afford some a good buying opportunity, yet very few seem to use pullbacks to buy, but rather, become defensive.  If stocks experience any type of weakness, and investors had thought a correction was coming, that simply serves to fuel bearishness even more.   It takes a combination of good earnings, Monetary clarity, and an uninterrupted uptrend to embolden the investing public to the extent where this finally shows up in the polls. For now, sentiment still doesn't really reflect the 14%+ rally we've experienced.

Bottom line, technically, the Positives seem to be as follows:  1) Positive weekly momentum based on an upward sloping and diverging MACD 2) Solid uninterrupted Uptrend from mid-February, 3) a bounce that has carried far too high and long to be considered a Bear market rally, 4) Widespread participation, with sectors like Financials, Industrials, Healthcare leading, while the Defensives have begun to underperform meaningfully, 5) Less than optimistic Sentiment 6) Lack of selling in the High Yield JNK etf, which typically tends to show weakness ahead of declines in Equities 7) Rallies in Treasury yields and WTI Crude, both which look to move higher and have correlated quite well with US Stocks 8) Demark "Sells" still premature in indices like the NASDAQ, which would be thought to trigger TD Sequential and/or TD Combo "13 Sells" first, and turn down9) Very bullish intermediate-term momentum, where the percentage of stocks trading above their 50, 200 day MA have rallied back substantially, while the Cumulative Advance/Decline has moved back to new All-time highs.  Trying to fade this gauge when it hits new highs is typically an exercise in futility.   However, the Bear arguments are also compelling, and are as follows:  1) Waning short-term momentum after overbought conditions arose where the recent push back to new highs was not followed by momentum 2) Poor seasonality during mid-April to June for most Election years, the worst time seasonally speaking to be invested given history going back since 1950 3) Prices now sit within striking distance of former November 2015 highs while a plethora of Sector indices are showing the same signal:  XLI, XLY, XLV, XLF all at or near former highs 4) Sectors like Technology have been underperforming substantially, with many growth names falling out of favor.  5) Monthly momentum as shown by MACD remains negative and even on a push to new highs, this would fail to move to new highs.  6) Indices are approaching a time where a number of short-term key cycles project a "turn".  based on time ratios from former highs and lows over the last 12 months, in particular, being 90 days from our recent prominent low in mid-January seems important.  Overall, most of the negatives are near-term in nature, while the positives are intermediate-term in nature.  Thus, selloffs likely prove short-lived before a move back to new high territory.

This week we concentrate on Energy, which remarkably has snapped back to become this year's Top performing S&P sector in YTD terms with 11.49% through 4/22/16 vs 2.33% for SPX.  Given that oil was plummeting throughout the month of January, its sudden reversal, and 65% climb in less than three months' time has helped this sector substantially.  While seasonality tends to show Crude often peaking in mid-May during months when it bottoms in January/February timeframe, (like what happened in 3 of the last 5 years, and 26 out of the last 32 years, for an 81% Win rate) the Doha meeting in June could prove to be an additional factor this year which could cause some volatility into and post the Late Spring period before Summer.  

Technically speaking, crude remains structurally bullish at current levels given its ability to have broken out of downtrend line resistance from 2014 while not yet overbought on a weekly basis.  COT data shows a long bias for Net Speculators, though sentiment wise, most view the ongoing supply issue as being a serious threat, rightly so, for an intermediate-term rally to continue and sentiment seems more bearish than bullish.  Relatively speaking, OIH has just broken out vs SPX in the last week while Exploration and Production has been far and away the best performing part of Energy, while the Refiners have lagged.  In the weeks ahead, leading up to a possible May/June peak, it still looks right to favor the E&P along with Service & Equipment parts of Energy.  While potentially late in the game, many Energy stocks still look to have the potential to return 5-10% in the next 4-6 weeks, making this a sector to stick with, given that many others are already stretched up near prior highs.  Long ideas and targets, along with six writeups, are found below.
 

Energy- Top technical longs to consider

WMB- $19.54- Tgt- $25.50
SWN- 12.27   Tgt- 16.50-17
DO-   23.90- Tgt- 28.15, 31
ESV- 11.90    Tgt- 16.50-17.50
CXO- 114.26Tgt- 130
HP-    64.08- Tgt- 69.50-70
MRO- 14.34- Tgt- 19-20
CHK- 6.55Tgt- 8.75-9.00
COP- 47.62Tgt- 52-53
CVX- 102.01-  Tgt- 109-110
SLB- 79.93- Tgt 84
PXD- 153.15- Tgt 173-175
PSX- 87.98-  Tgt- 93.45-94

Charts & Writeups-  WTI Crude, OIH vs SPX, XLE vs XLU, Crude vs Gold, XOP vs OIH, Drillers vs Exploration & Production, Refining Rel. to Energy, SWN, WMB, DO, CHK, ESV, and SLB

 

WTI Crude- Jun '16 contract-  Crude remains bullish following its breakout over March highs to the highest level since last December.  Its move to exceed a two-year area of trendline resistance has helped momentum to push higher, while prices remain resilient even in the wake of ongoing huge supply issues and a lack of production Freeze announcement during the recent Doha meeting.  Technically, momentum is not yet overbought and prices could push up to 48, then 50-52 ahead of June before a peak in price for 2016.  For now, WTI remains constructive to own long and it looks likely to continue higher in the days and weeks ahead into mid-May and potentially mid-June.
 

OIH vs SPX-  When looking at relative charts of the Market Vectors Oil Service ETF vs the SPX, one of the key reasons for still wanting to own Energy after the move its had has to do with the ability to break out above prior highs from March, something that structurally should lead Energy higher relatively speaking into mid-May. For now, this would have to reverse violently to prove this to be a false breakout, but given the positive yet not overbought momentum, along with ongoing skepticism regarding Oil's rise, this sector still looks to have a ways to go before any sort of stallout.

Energy vs Utilities-  XLE vs XLU (Relative basis)  Given oil's precipitous decline into late January, along with a low interest rate environment, it's understandable that the Utilities sector has outperformed Energy, which is shown on this chart as a long downtrend in XLE vs XLU which got underway in mid-2014.  However, this could be changing given the start of yields to turn higher, while most of the Defensive sectors are beginning to give way recently, lagging performance of the broader market.  As energy attempts to push even higher, this relationship is now challenging this downtrend for the third time since 2014 and needs to be watched carefully for signs of breaking out.  Such a development would make it right to overweight Energy vs the Utilities for the first time in over two years.  Stay tuned.

 

Crude oil vs Gold-  When trying to decide on whether to own Crude vs Gold, we've seen some recent evidence of this ratio bottoming out over a month ago, arguing for Crude longs within the commodity complex over Gold.  While just a minor bounce has occurred thus far, this looks likely to continue and a further rally into May looks probable.  Thus, Crude at present, is the one to own for the next 4-6 weeks vs Gold, technically speaking.

 

XOP vs OIH-  (Relative relationship between the SPDR S&P Oil and Gas Exploration and Production ETF, vs the Market Vectors Oil Service ETF) As might be expected during a time of steep gains in Oil, the high beta E&P's have been outperforming the Equipment and Services sector which looks to continue for at least another 3-4 weeks according to this weekly chart.  Technicals show the breakout of the ratio of XOP to OIH and subsequent follow-through that has recently picked up steam into late April.  While this ratio does have overhead resistance directly above, it still looks like XOP is the one to own within Energy vs OIH for outperformance into May. 

Drillers vs E&P-  When plotting the Oil and Gas Drilling sector vs the Oil and Gas Exploration and Production sector, as per their respective S&P groups-  (S5OILD, vs S5OILP- Bloomberg) we see that this ratio has faced a steep decline through the month of March, which only recently has shown some evidence of bottoming out.  For now, it looks like the Drillers are beginning to bottom out as a group and within the next 2-3 weeks should be favored for an oversold bounce vs the E&Ps

Refiners vs Energy-  When looking at the S&P Refining sector vs the broader Energy space, there looks to be definite evidence of a topping pattern in place for the first time since the breakout happened in mid-2014.  Relative charts show the possible presence of a Head and Shoulders pattern which is just attempting to break down given a test of the "Neckline" of this formation.  Momentum has steadily lost strength in the last year, as might be expected, and now only after a mild bounce into early this year, this ratio is turning down again in attempts to break the lows.  Overall, Refiners have lost sufficient strength to make this group unattractive technically as a group.  Movement in this ratio down further would allow this sub-sector to continue to underperform in the next couple months and should be watched carefully.

Southwestern Energy- ($12.60) This stock has recently broken out to the highest level since late 2015 which could partly be blamed on Short-covering (23.14% Short as a percentage of float) with over 89 million short shares.  Technically the stock has just reached overbought territory after a lengthy decline and bottoming out over the last six months, but the path of least resistance remains to the upside.  Given the sharp move in momentum along with short covering at a time when the energy complex is making a breakout to the SPX, this could help to further fuel the shares in the near-term and upside targets lie near 16.50-$17 in this stock before any sort of stalling outFor now, any pullback in the upcoming week would be used to buy, technically speaking, thinking that additional upside is likely.

Williams Cos, Inc. (WMB- $19.54) Following an over 80% loss in value since mid-2015, WMB has finally begun to stabilize and show evidence of turning higher.  While the stock is likely to face considerable overhead supply on its rise, additional strength looks likely to the mid-$20's technically with targets at 25.50 before any peak.  Its structure in the near-term shows the formation of a reverse Head and Shoulders pattern with this rising right to the top near $20.  Momentum continues to lift and technically its right to expect a move over $20, which should fuel the stock higher after a substantial decline in the last year.  While intermediate-term factors remain a concern for this stock, in the near-term additional gains look probable.

Diamond Offshore Inc. (DO- $23.90) DO is another example of an energy stock with substantial short interest that could experience significant short-covering as its shares begin to improve technically.   DO currently has over 1/4 of its entire float Short, or 25.70%, more than 16 million shares while the stock has begun to look much more attractive for nearly the first time in over three years.  DO has broken out of its downtrend form 2013 and now beginning to make higher lows, something this stock has failed to do for some time.  Strength looks likely up to $28.15 with the potential for a move to $31 in extreme cases.  Most of the gains should occur between now and June, and on any rally, it would likely be wise to take profits on any type of move exceeding 10% in the weeks ahead heading into mid-to-late May.

Chesapeake Energy (CHK- $6.55) Given a bankruptcy not happening until May 2017 at the earliest, the near-term risks of CHK very well might be overstated and its stock has begun to show real technical strength that could allow for further gains in the next 1-2 months, which might offer aggressive traders a chance to participate.  Technically the move above $5.80 from March allowed CHK to breakout of the entire downtrend from 2014, while sporting a very high Short interest % of float of 24.81%, or more than 148 million shares.  While it's difficult to weigh in on the long-term prospects for CHK, in the near-term this looks attractive and given the recent breakout in Energy, could show further signs of short-covering gains up to 9.50-10 before stalling out.  For now, CHK is attractive to own and buy dips given the recent stabilization and now gains in this stock, which look to continue technically over the next 4-6 weeks.

Ensco PLC- Cl A (ESV- $11.90) ESV has just completed a very attractive short-term technical base since March which now looks to be giving way to upside gains and could allow this stock to advance up to $14 and then $16.50-$17.50 before stalling out. Similar to other stocks shown above, the stock has recently broken out of an intermediate-term trend which was formed last May near $28.40 and has begun to show some strengthening in momentum which looks to continue. The stock lost more than 70% of its value into February of this year but has since rebounded sufficiently to breakout above recent April peaks in a manner which should let its recent strength continue.  Near-term upside targets lie near $14, and then likely a max near $16.50-$17, right near last November peaks before this stalls.  For now, this looks attractive to buy at current levels, with only a pullback down under $9.45 cancelling out the benefits of this recent momentum.