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US Dollar weakness looks to continue- Favor Energy, Materials- Newton's Notes- 081716

August 17, 2016


2171-2, 2157-8, 2139-41, 2125-6            Support
2183-5, 2190-1, 2200-2, 2108-10            Resistance



S&P Futures: (2-3 Days)  Bullish-  Tuesday's weakness closed exactly where prices finished seven trading days ago, on 8/5, with 2176.75 in the S&P futures, and 18 points higher than 7/14, or less than 1% above.  Still very little sign of technical damage despite some minor backing and filling in S&P and prices should move up to test and exceed 2200 in the near-term.  Under 2167 for ESU6, or 2172 on a close would suggest this rise is postponed.

SX5E-Bullish, with targets near 3100-3150 into late August-  Minor pullback Tuesday which helped prices consolidate recent breakout of its three-month range and brought prices back to the area of the breakout.  No counter-trend sells are present, which would take another 3-4 days of higher prices above Monday's highs.  For now, it's right to buy into this weakness, expecting a move to 3150.  Only bearish on move under 2890.

HSCEI- Stretched, but bullish-  Prices have reached initial targets and gave some minor signs of exhaustion by closing well down on the day from an extended position.  Yet a test of 10,000 looks likely before any real stalling out, so any additional weakness into Wednesday/Thursday would be used to buy, for now.

Longs/Shorts for a 3-5 day period:

Technical Longs: PX (<120), FLT, APD, CAT, A, UTX, FIS, DFS, SLB
Technical Shorts: FE, PPL, GOOGL (769 tgt), PM, MO, COH, STRA


Monday's minor pullback failed to do much technical damage, and by day's end, prices on most US Indices were exactly at levels hit roughly a week ago, with no discernible break of the recent trends which would warn of a greater correction.  Most of Europe and Asia followed suit with minor corrections, but here as well, prices remained bullish and failed to show much deterioration.  Additional gains look likely for the next 3-5 days in US Stocks, while Europe should also show signs of making a final push up into late August before any real stalling out occurs.

Technically speaking, the US Dollar decline on Tuesday seemed to be one of the more important technical developments worth watching, and far more decisive than anything seen in US or European equities.  The decline in USD vs Euro and Yen caused a pullback to the lowest levels since late June, which helped commodities show some strength and should be a further boon to Emerging markets.  Near-term, the Euro's advance above 1.125 should fuel gains up to near 1.1430 while Dollar/Yen could reach 98.75 and DXY itself might weaken to 94 before attempting to stabilize.  This decline should fuel commodities and commodity stocks further, while allowing Value to continue to outperform Growth.

Yet again on Tuesday, an early pullback attempt reversed course when New York Fed President Dudley suggested that a September hike might still be an open possibility.  Bond yields reversed back to positive while the US Dollar trimmed its losses and Gold gave up some of its early gains.  However, that seems to have proved temporary, as by end of day, the Dollar index was right back down towards the lows of the day while Gold managed to bounce back.  Overall, it's always difficult to make much out of what a Fed governor says in terms of how to view Rate hike possibilities vs simply examining Fed Fund futures.  The implied rate on Futures tends to be far more accurate than attempting to piece together many opinions from several different governors.  At the time of writing, September stood at 22% chance of having rates hiked, so over a 3/1 bet that Rates are held steady.   Given that globally, yields continue to drop and the US Dollar has now begun to turn down more sharply, it's a good bet that commodities should regain their recent strength, with precious metals moving back to new monthly highs. 

Some charts and additional comments below


NASDAQ's outperformance vs SPX might very well be coming to an end in the short run after a steep rise in the last couple months.  While this ratio has structurally improved, it looks close to triggering counter-trend sells within the next week which might limit the upside precisely at a time when many large cap Tech stocks look to be within striking distance of important highs (GOOGL, MSFT, FB)  In the short run, other sectors such as Energy and Materials might be better bets than Technology, and one could see XLK consolidating some of its recent gains, along with the ratio of NASDAQ to SPX stalling and beginning to retreat.



The decline in the US Dollar index mentioned in the writeup above can be seen in this daily chart of DXY since the beginning of the year.  Two things stand out specifically from a technical perspective.  First, July lows were breached as of Tuesday's pullback, which should allow for additional weakness down to near 94, and potentially to test June lows just above 93.  Second, the extent of the decline thus far has been far too technically damaging to label this anything other than a large corrective wave from May lows.  In other words, it's likely that DXY breaks back down to new monthly lows before thinking this stabilizes and turns meaningfully higher.  In the short run, additional selling pressure looks likely.



Gold has consolidated in a fashion that's turned many bearish in the last month, with hedge funds having trimmed their longs in four of the last five weeks.  This daily pattern looks very much like a symmetrical triangle, which should give way to a move above 1365 which should lead higher to 1485.   This level represents the 50% retracement of Gold's entire 2011 - 2015 decline, and would offer an attractive area to sell Gold in the event that prices rose back above 1365.  For now, given that speculators are reigning in their bullish bets while Gold's technical pattern remains intact, it's likely that Gold can breakout into September and continue this rally before any meaningful selloff occurs.




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