January 4, 2017
S&P MARCH FUTURES (SPh7)
2239-40, 2228-30, 2210-2 Support
2269-70, 2279, 2286-8, 2295-2300 Resistance
S&P Futures: (2-3 Days) Mixed picture until 2269 is exceeded for S&P- For now, momentum still negative given late December selling, while early year rally hasn't gained enough to turn trend bullish- Under 2239 is a negative and leads to 2228 and lower to 2223.
SX5E- EuroSTOXX 50- Bullish- Signs of upside exhaustion, but pullbacks still likely to prove minor and lead a bit higher into 3360.
HSCEI- Bullish to 9624, but would look to sell into gains as the move which started in early December to the downside still looks to be in place and could result in a washout down under 9100 again. For now, the near-term 2-3 pattern is bullish.
Longs/Shorts for a 3-5 day period:
Technical Longs: LVLT, EUFN, CS, DB, URI, RTN, XPH, OIH
Technical Shorts: K, CMG, M, DRI, KR, SYY, EEM, XRT, GPN, YHOO
Equities certainly proved to be far more volatile than expected to the downside during the last week of December. The normal Santa Claus rally certainly did not materialize as expected, and equities lost 1.5% in a period which typically returns 1.5% to the upside. While yesterday's surge gives rise to hope that this was just a low volume snapback, patterns remain under pressure and additional rallies are necessary to restore the bullish near-term momentum and lift prices back to highs. For now, selectivity is necessary for longs while watching the downside in the event that 2239 is taken out. Meanwhile as explained above, movement back over 2269 is needed to help the rally extend.
The short-term picture has a combination of bearish technical structure since mid-December, with uptrend from November lows broken along with the triangle in the last couple weeks, while the 3 day chart has taken on a possible Bullish formation with a potential reverse Head and Shoulders pattern which would be confirmed with a move over 2269. For now, we'll need to see a bit more proof before thinking that the late December weakness was just a minor drawdown.
Meaningful developments Tuesday concentrated on the Healthcare rally, which made above-average progress in relative terms with decent price action in many of the Pharma and Medical device names, along with selective Biotech winners, while Crude oil completely reversed its early gains, which had previously moved up to closing levels which were the highest since August before reversing course. Energy, however, despite the crude reversal, showed above-average strength. Gold managed to make ground higher despite the US Dollar rally and still looks to have some upside in the near-term. However, gains to 1185-1200 should be used to pare down longs, and consider going the other way. Natural gas was another commodity that should be mentioned given the huge snapback it showed Tuesday after its move above prior monthly highs turned out to be very much a false breakout.
Outside of energy stocks gaining ground with weak Crude prices, another relative oddity concerned the degree to which Financials gained ground despite the yield curve flattening out even more between 5s/30s and 10s/30s with the long end of the curve rallying throughout the session into end of day. European Financials gained more ground than US Financials though in what looked to be the start of European Bank outperformance over US in the short run following the steep runup we've seen in US Financials throughout November and early December. Charts and analysis below.
S&P futures failed early in the session, but made lows nearly at exact symmetrical levels as prior drawdowns from 12/29 before rallying back to near highs. This appears like a potential reverse Head pattern, but still requires a move back over 2269 to alleviate the bearishness caused by the breakdown of this pennant formation that had been in place throughout most of December. Breadth finished a relatively strong 3/1 bullish. For now, the chart is still more bearish than bullish, but if this recent three day pattern can drive prices higher on heavier volume and better breadth, one should trust this more so than thinking the Bearish pattern wins out.. at least for now. Additional proof for now, is needed though.. and the near-term pattern is mixed.
The STOXX Europe 600 Banks index made a very sharp bullish move back to new monthly highs on Tuesday (SX7P- Bloomberg) and additional gains look likely in European Financials as well as outperforming most US Financials, most of which are already quite stretched. One should look at EUFN as a vehicle which might give some exposure to this group over the next 3-5 trading days.
Healthcare's outperformance today came largely in the hands of the Pharmaceutical stocks, as DRG made a very sharp move back over prior highs to the highest levels since November. This helps to break the downtrend in place since last July and argues for higher prices in the short run. One should look to overweight Healthcare given the mean reversion tendencies which occur during this time of year given that Healthcare was 2016's only Down sector performance wise, along with minor signs of technical progress, as seen in the DRG. XLV meanwhile requires a move back over 70.25 to expect further upside. ETFs like XPH (which I own) give bullish exposure to the Pharmaceutical sector.
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