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FOMC Dot shift coincides with US Dollar breakout, stalling in SPX rally

December 15, 2016


2245-6, 2240, 2232-4, 2220   Support
2272-5, 2286-8                       Resistance


S&P Futures: (2-3 Days)  Bearish for a move down to 2232, with gains back over 2271 needed to think the worst is over and a rally to 2300 could happen into end of year.  For now, Wednesday's decline looked important and could lead to a bit more weakness into end of week or early next before rallies take hold.

SX5E- EuroSTOXX 50-  Bearish- Pullback to 3100-50 likely in the next few days before rallies take hold.  Counter-trend sells are present which are also seen in SPX right now which could be confirmed and allow for minor backing and filling before a year-end rally.  For now, doubtful we see anything below 3050, with above 3250 being a stop for shorts.

HSCEI-   Pullback likely to stabilize near former lows from November with only a break below 9269 leading to material weakness in the weeks and/or months ahead.  For now the next few days should bring about a test but stabilization and support, not breakdowns.

Longs/Shorts for a 3-5 day period:

Technical Longs:  UUP, EUO, QQQ, GILD, HUM, AMGN, AAPL
Technical Shorts:  ANF, AWI, VFC, KODK, DDD, FOSL, NTES, TRIP, TUP


Some definite evidence of stalling out occurred in global equities yesterday, and while overall weakness proved mild, closing at/near prior day's lows is more suggestive that additional pullbacks might play out this week as opposed to a move straight back up to highs.   The trend has showed a few signs of slowing after such a sharp advance from early December and this often results in a waning in momentum that can allow at least a 2-3 day pullback to unfold before this advance can continue.  For now, most of the weakness has occurred in Defensive, yield sensitive sectors and this could continue further given the further strengthening in rates until there is some evidence of a backing off.

It should be emphasized that any weakness in the days ahead should still represent an attractive buying opportunity into year-end as opposed to the start of a more meaningful top for equities.  Despite the level of overbought conditions present, coupled with bullish sentiment, there hasn't been sufficient confluence of counter-trend sellsper Demark's weekly charts on indices, nor sectors that would justify any sort of meaningful intermediate-term top.  Many of these do appear close to forming, and are present on a daily and/or monthly basis or close, but will still require additional upside to generate the type of widespread confluence that justifies "going the other way" in expecting a larger top (purely from a counter-trend perspective)

Wednesday proved to be quite volatile for both fixed income and currencies more so than equities, with meaningful breakouts in the 2-year yield and ongoing dramatic flattening out in the yield curve, with the US Dollar index breaking out to new highs yet again, reaching the highest levels on a weekly closing basis since 2003.  This served as an initial strengthening point for Financials while being strongly detrimental for Yield sensitive sectors like Utilities, Telecomm, and Real Estate, all which lost more than 1% in trading Wednesday.  Precious metals meanwhile were hit hard, along with stocks correlating with Gold, silver, as the GDX dropped to new monthly lows on Wednesday.  Regardless if the Dot plot stays true for 2017 given the potential mixup in the governing committee, the strong rally in the US Dollar index and Treasury yields tends to be a poor environment for precious metals, and this looks likely to continue.



SPX has gotten well extended, with prices stretched above the upper end of its 2% Bollinger Band range on weekly charts.  This week's early weakness threatens to give back a bit more into end of week before prices stabilize, but should prove to be a buying opportunity into end of year.  Targets lie near 2243, roughly 10 points below, down to 2232, the 50% of SPX's rally from early December.  This would constitute an attractive area to buy dips for a push back to new highs.  For now, Wednesday's reversal looks to be the start of at least a minor backing and filling for SPX.  The longer that prices remain at current levels without moving to new highs, the greater the likelihood of at least a 2-3% pullback before a push back to new highs.   Last week's lows of 2200, however, should not be breached in this scenario before a move back to new high territory.  



US Dollar index has managed to exceed the last four week's highs Wednesday, and while prices backed off a bit late in the day, this looks to be the start of a sharp acceleration which should help prices extend in the weeks ahead.  EUR/USD moving down to test critical support near 1.05 should prove temporary before a break that allows the Euro to pullback to parity with the Dollar, which has become much more likely technically with this week's move.  While stretched based on Wednesday's move, ETFs like UUP and EUO both look like attractive longs to consider in the weeks ahead to play a rising US Dollar, along with shorting EEM, for the Emerging markets and Gold, which could underperform given this move.



Emerging Markets ETF (EEM) has shown some evidence of reversing course after the near 3% pullback Wednesday given the rising US Dollar and additional weakness looks likely in the short run which should test and break recent lows made in mid-November near $34.  The base from 2012 broke down last year, and while prices rose to retest this area of the breakdown, the failed into November lows before the one month bounce attempt.  Wednesday's decline severed the one-month trend and makes a test and break of November lows much more likely. 



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