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Equity stallout could allow for near-term weakness, but buyable for rally back to highs

May 27, 2016


2076-7, 2065, 2040-2, 2022-5, 2012       Support
2097-9, 2105-7, 2125-7                           Resistance


Note:  Most of this analysis is very similar to Thursday due to limited change in prices, but I'll be sending out a video today (Friday) to make better sense of trend and thoughts going forward which might be a bit more visual and help to understand the recent price action, and how this recent surge fits into the bigger picture.

S&P Futures:  No real change.   Upside limited on a 24-72 hour basis- Trend quite extended & likely will consolidate a bit (3-5 days) before moving to new high territory.  Hold off on initiating new S&P longs, & consider taking profits for at least a 30-40% pullback of recent 4-5 day bounce.   Area to buy lies at 2067 down to 2041 maximum, before trend turns back higher. Use extreme selectivity on longs the rest of the week

EuroSTOXX 50- Choppy trend overall since March as part of an overall downtrend.  SX5E is nowhere near as bullish as S&P and now the bounce in the last couple days shows the same symmetry as the move up into March, which could cause some stalling out.  Resistance lies at 3100-3150, but should take some time before immediately moving above 3150.

Hang Seng China Enterprise index- Neutral to mildly bullish- HSCEI has begun a mild rally, but remains in much weaker shape than US indices or SX5E.  Given the extent of the selling since April, it will take some time for HSCEI to bottom in a way that can allow a sharp rally.  For now, momentum has shifted to a bit more positive.

Equities-  Attractive Technical Risk/reward Longs

Bullish, but extended- Buy Pullbacks-  BSFT, MDT, TAP, TWC, AVY, MO, CB, FISV, NOC, LLL, JEC, BGS, NSP, LMT, VMC, AMSC, FIS, MBT, AEM,TRXC, EBF, CHD, OC, PM, MCD, SONC, POOL

Attractive Technical Risk/reward Shorts: XRT, ANF, MOH, NVDA,FL,  FXI, SPLS,TAN, FOSL, AAP, VSLR, BBBY, PTEN, GT, GPS, HTZ, CF, SHLD, AWI, CIEN, SQ, ADS,MNK, RL,HOG

Bearish but extended- Sell Rallies-, CROX, EFOI, TSLA, LC, KONA, CSIQ, FSLR, FIT, MYL


This bears repeating, so nothing new with regards to S&P Trend-  Prices are now stretched to levels that make pullbacks likely in the short run, with areas near 2097-2100 likely constituting max upside over the next few days,  while pullbacks could carry down to 2050-60 or even 2041.  Therefore, an extremely poor risk/reward for new longs given the extent of the recent runup since 5/19.  Careful selectivity is necessary in longs and pullbacks would afford much better buying opportunities.  However, much of this cautiousness is short-term in nature only, as the weekly breadth and momentum remains quite positive with the A/D having moved back to new high territory, and we've rallied in an environment where sentiment is less than optimistic.  If the outflows over the last 10 of 14 weeks are any guide, similar to January/February,  many missed the rally in the last few days, and remain in underperformance mode as they contemplate whether to chase the rally, or hope the global uncertainty can subside.

Treasury yields remain the one factor that really have not joined the equity rally and should begin to turn up if Stocks are going to immediately move to new highs.  The backtracking in 2's and 10 yr yields seems to argue for a bit of strength in the Treasury market, which very well might coincide with a short-term pullback in stocks.  Movement in 10yr yields and 2yr yields back up through recent highs - 93 bps and 1.88% would argue for a possible immediate continuation in the rally.

3 Key reasons for optimism in the weeks and months ahead:

1) Sentiment remains subdued.. investors remain frustrated, having missed the second rally now, after the initial dip into Jan/Feb.  While indices are just a couple % away from all time highs.. Amazing to see such bitterness, anger and uncertainty on the market.  The election rallies and fights breaking out across the country seem to provide an accurate view as to the public mindset

2) Momentum and breadth remain supportive of an upside breakout.. In 2007, and 2000 we saw momentum negative divergence in 98-early 00, and in Summer of 07 prior to peak.. now we're seeing the opposite .. Advance declines moving back to new highs, ahead of price.

3) Sector rotation is important and indicative of strength.. Financials, Tech, healthcare,  energy all acting well, materials and industrials.. Defensive stocks have been lagging over the last five trading days, with Consumer Staples, Telecom, Utilities all performing worse than the broader market.  This rotation is thought to be constructive.

Charts and comments below

S&P hourly charts managed to follow-through dramatically on the breakout from Tuesday, gaining another 20 handles to make the total distance for S&P futures nearly 70 points from low to high in just the last four days.  For SPX cash, this level equates to around 50 points and more than 3%.  Hourly momentum is overbought, while daily momentum is nowhere near levels hit back in November.  Overall, it's likely technically that the market can move to new highs into the next month, but upside looks limited in the short run.  Buyers would benefit from pullbacks in the days ahead, but should use those to buy dips technically, as the medium-term trend remains constructive.


Treasury yields have coiled of late since March, making a series of lower highs and higher lows since March, and recently have failed to keep pace with the gains in Equities, as 10yr yields stalled right at the highs of the recent triangle pattern which lies between 1.88-1.90%.  Movement back over 1.90% is necessary to breakout of this pattern, while 1.70 guards the downside.  Overall a choppy near-term picture, which hasn't followed the gains in Equities or led to the upside to the degree which might be expected given the correlation present over the last 8-12 months.


Crude's rally briefly crossed $50 on Thursday, representing over a 50% rally off lows seen just four months ago but still while many are finding reasons to try to suggest prices have moved too far too quickly.  for now, trends remain positive and upside still looks likely to near $52, but until/unless uptrend lines are violated, its likely that prices can hold up a bit longer, particularly given the US Dollar index starting to show some evidence of pulling back again after its recent rally. 


CFTC data on Crude shows Speculative longs now reaching the highest levels since 2014, as Commercial shorts have also begun to levels which suggest Crude's rise might find resistance sooner than later.  While this data does suggest positioning that would warrant selling into Crude's move, for now, no technical evidence is present that would suggest an imminent reversal.  So recent data represents a warning sign at this point only.




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