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NASDAQ looks likely to weaken relative to SPX, & Semis could underperform

August 25, 2016


2175-6, 2165-6, 2160, 2139-41      Support
2190-1, 2200-2, 2208-10              Resistance


S&P Futures: (2-3 Days)  Neutral with a possibility of near-term weakness down to 2165.  Wednesday's close down beneath the lows of the recent pennant could bring about additional 1-2 day decline to challenge 8/18 lows, but still not too much weakness thus far to justify a larger correction-  NASDAQ Comp has shown evidence that it could start to underperform, so this is primarily the impetus for thinking stocks might stall out and/or encounter near-term weakness. But still very much range-bound overall and the S&P should outperform vs the NASDAQ.

SX5E-Bullish, with targets near 3100-3150 into late August-  European Bank rally on Wednesday helped European stocks continue higher to multi-day highs.  Rallies up to 3100 look likely.   Only bearish on move under 2890.

HSCEI- Wednesday's decline below Monday's lows postpones the advance and suggests that HSCEI could experience another few days of weakness before turning back up- Area at 9340-50 should be support to buy, while any close back up OVER 9640 would mean the move back to 10,000 is back underway.

Longs/Shorts for a 3-5 day period:

Technical Longs: LEN, PHM, PX, EA, FLR, YUM, TLT


Wednesday's selling was the first bearish sign in the last couple weeks that S&P undercut the lows of the most recent pennant which had been formed since early August.  This could bring about a test of mid-August lows and is viewed as a short-term negative.   Breadth finished at a bit over 2/1 in "Down" vs "Up" stocks, while volume picked up to the highest levels of the week thus far.  While not much can be counted on in extending prior to Jackson Hole with no meaningful information as to the broader picture or the FOMC's timetable for possible hikes (which certainly would be downplayed on a selloff Thursday/Friday given past tendencies to overemphasize their "Dow Dependence" vs "Data Dependence")  there were several cycles which pointed to August 26 as having importance in possibly causing a change in trend from a cyclical perspective that can't be counted out thus far as occurring early.

A few things are concerning in the very near-term, which were largely absent last week: 
1) The NASDAQ Composite has shown a few signs that suggest this should now be topping relative to the S&P, and typically a concern and a leader in market movement, when the NASDAQ turns up or down prior to the SPX.   Wednesday's reversal occurred amidst a flurry of TD 13 signals from TD Sequential and TD Combo indicators on relative charts of NASDAQ Composite vs SPX, and the underperformance in Semiconductors and SOX index drop to new multi-day lows could have a near-term detrimental effect on Semi stocks and the Tech sector in general.

2) The Metals/Mining trade seems to have lost a lot of momentum in a very short period of time, as GDX broke down out of its trend channel while Gold showed signs of violating support.  Part of this is due to the attempted bounce in the US Dollar with little or no reason outside of wanting to "flatten out" ahead of Yellen's speech in Jackson Hole.   While this move might prove short-lived given the Dollar's ongoing downtrend and inconclusive proof of any rally, it's notable that this sector has moved so quickly to the downside in the last few days after a lengthy period of prior outperformance.

3) Healthcare has also quickly reversed on the controversy regarding the recent "Epi-pen" price hike that was accentuated by Hillary Clinton Wednesday afternoon.  Prior to the sector's about-face, Biotech's XBI etf had reached the highest level on a closing basis since January.  However, by days' end, XBI was right back at new weekly lows after a severe reversal with ENDP, MYL, MNK, VRTX all shedding more than 4% on the session after formerly being up more than 2%.

The positives have to do with Europe turning up sharply to multi-day highs on the SX5E, SXXP with European Banking stocks showing evidence on a one-day basis of making a breakout of the downtrend from last year.  This is certainly a positive, but if the FOMC downplays the economic strength or stocks experience any kind of weakness into Jackson Hole, the uncertainty might be emphasized more than "leaving a window open" for Hikes.   The breakout early in the week of Consumer Durables is also a positive that should be highlighted as a bullish factor, despite Wednesday's decline.

Some charts and additional comments below


NASDAQ's close at the lowest levels since 8/10 look to be helping this ratio of NASDAQ Composite to SPX to turn lower at a time when two separate counter-trend sell signals are suggesting possible exhaustion for the NASDAQ vs SPX.  Given that this turned higher and produced "buys" right at the lows in February and showed two prior indications of exhaustion both right within 2 days of prior peaks in April and also in early June, it's worth paying attention to.  In the days ahead, NASDAQ Composite should underperform the SPX, and technically it looks right to expect a relative correction in this ratio.  Thus the NASDAQ should be the index to avoid between the two between now and early September.



The reversal in Semiconductors Wednesday also presents a near-term bearish development for the group after its huge run-up since February and more recently since June.  The combination in this chart, similar to the NASDAQ/SPX, of a move to new multi-day low while counter-trend signals are abundant make Semis vulnerable to showing near-term weakness, and could underperform both Software and Hardware in the short run after a massive period of outperformance most of the year.  While additional selling might be required for some to avoid this group from a trend following perspective, there's sufficient evidence now from a counter-trend perspective to consider taking profits and avoiding in the near-term.  Trading sells for the SOX would be confirmed on a Thursday 8/25 close beneath 797.05, or Friday 8/26 close under 797.28.


A positive development surrounds the minor breakout of the STOXX Europe 600 Banks index Wednesday on its close above both early August highs along with the intermediate-term downtrend from last year made during mid-July.  Gains up to near 150-5 look possible for European banks in te short-run, but could prove short-lived heading into the month of September if Global bond yields remain subdued and move lower.




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