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Rally has reached nearterm resistance, & Poor risk/reward near-term

February 14, 2017


2316-8, 2307-8, 2290-2      Support
2332-3, 2338-40                 Resistance



S&P Futures: (2-3 Days)   Flat, looking to sell at 2332-3 on Tuesday and go SHORT from a trading perspective for a move down to 2293-5 at a minimum but more likely 2281-3

SX5E- EuroSTOXX 50- Neutral-  Look to sell into 3330-5 for a stallout that could lead to sideways action and/or mild reversals of trend over the next couple weeks, and do not expect a move up above 3360 for now.   

HSCEI- Mildly bullish, but looking for short-term top by Wednesday/Thursday in HSCEI which should result in some consolidation to the recent rally.   

Longs/Shorts for a 3-5 day period:

Technical Shorts:  KORS, VFC, DV, SIG, KR, VZ, WMT, TAP


The breakout in S&P, and DJIA has coincided with a rapid breadth thrust that has helped many sectors accelerate in recent days, but appears to be nearing a short-term top that could be in place by today/Tomorrow of this week.  While the technical patterns are positive in indices (and will be tough to fight on an intermediate-term basis without a fair amount of technical damage) the near-term risk/reward isn't there for new longs and gains should be used to sell into by mid-week.

As mentioned in our recent Weekly Technical Perspective, the daily charts have begun to show a confluence of counter-trend sells based on Demark indicators that likely should be in place by today/Tomorrow in most US indices.   Momentum has gotten overbought and prices have pushed above the upper Bollinger band (2% Std Dev) on daily, monthly and in some cases a weekly basis also.  Meanwhile the Summation index shows readings nowhere near the prior highs from last Fall.  Implied volatility gauges such as the VIX meanwhile have ceased going lower in the short run, and even on Monday's surge, finished at higher levels than last Friday.  Thus, a huge ramp in Equities produced higher readings in the VIX, which often can signal near-term exhaustion is near for Equities.  Breadth for Monday came in around 3/2 positive, certainly not too encouraging, as most of yesterday's rallies were led by Financials, the only sector up over 1%. 

Yet , Financials certainly is a big part of the SPX and the combination of Financials, Healthcare and Technology all rising more than 0.50% certainly is constructive, as this amounts to more than 50% of the SPX composition.  Additionally, this Expiration week in February historically has been positive early in the week, while Expiration day itself is negative going back over the last 20 years along with the subsequent week.  Treasury yields, for now, continue to press higher and the rise in yield and the Yield curve is an important piece of the puzzle for the Financial sector.   The breakout in both the Russell 2k and XLF late last week did in fact follow-through yesterday, so both of these are certainly positive.  Yet, there remain sufficient issues with the near-term breadth, momentum and counter-trend sells to justify selling into this move mid-week, as seasonality trends for the month are far less robust than what this week shows.

Bottom line, it looks like a time to be very selective about what to buy and initiate as longs, and it's wise to be on the lookout for trend reversals this week, where prices push higher early on, yet fail and close down near the lows for the day or at a slight loss.  For Tuesday, it still looks likely that prices can push up slightly above 2330, but this should be used as a chance to sell into gains, as the risk/reward at these levels looks uncomfortably poor for short-term traders.

Additional thoughts and charts found below


Monday's rally lifted prices up to an area of attractive risk/reward resistance to consider lightening up in the short run, and the combination of overbought conditions, counter-trend sells, and heading into a period of sub-par seasonality in the weeks ahead makes this a difficult area to initiate new longs.  Look to sell into gains today into Wednesday, using 2332-3 as an initial spot to sell with stops at 2345 and targets down under 2300, with 2293-5 initially and then 2381-3 as being important.


The metals have certainly seen a surge of late and Copper, zinc, iron ore and Steel have continued to lift in recent days, despite precious metals falling off, given the combination of rising yields and the rising US Dollar.  For now the breakout in SLX is impressive from a technical standpoint, as the pattern showed a breakout of a Cup and handle pattern last Friday that accelerated yesterday as SLX moved up over $44.50.  Prices are overdone in the short run and will need to consolidate these gains, but targets lie up at $47.50 over the next couple weeks as a legitimate possibility for upside gains in SLX.  Above that, while not immediately expected, would lift prices up to near August 2014 highs just over $50.  Movement back under $42, while also not expected, would postpone any further advance for SLX. 



HSCEI extended its gains even further on Monday, hitting the highest levels since late 2015.  The Hang Seng China Enterprises index has near-term resistance at 10350, which is a 38.2% retracement of the entire decline from 2015, but upon some "backing and filling" further gains look likely and upside targets lie up at 10732 to 10850, which lies near the late 2015 highs.  FXI is an ETF which mimics this index closely a much more liquid alternative than when looking at the Shanghai Composite.




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