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Near-term Bottoming Process at Hand, but Expect minor new lows

October 12, 2018
Mark Newton CMT, Newton Advisors, LLC- Contact:

SPX Cash index
SUPPORT-  2710, 2694, 2688, 2660
RESISTANCE- 2744, 2778-80, 2800-1, 2822


SPX - (3-5 Days)- Mildly Bearish- Sell rallies Friday/Monday, expecting a final pullback to break Thursday's lows which could get to 2723-6 or a max overthrow level near 2700.  While overnight futures are higher, we haven't seen sufficient Washout in volume yet to show the kind of capitulation necessary to put in a bottom.  Demark signals on VIX and on SPX are two days away, with upcoming sells and buys respectively.  While tough to stay short, I don't see this as being the area just yet to buy, so I will hold off and wait for 2723-6 on evidence S&P is making its TD BUY Setup (9 consecutive closes under the close from four days ago) . 

EuroSTOXX 50  - Mildly Bearish-  Pattern here broke down under prior lows at 3274 and closed at the lows, which is a bigger negative than expected heading into today.  One should hold off on buying dips until 3250 can be exceeded.  Movement down to 3100 possible 

HSCEI- Mildly bullish- Trying to rally after hitting prior lows and Close to support- Shorts aren't as great of a risk/reward here.  Rally to 10436 likely and over would provide a larger lift

Trading Longs: AMZN, CRM, SCVL, KL,HMY, ABX, AGI.CN, GOLD,  (SQ, FB, AAPL, all look to require 2-3 days and potentially one final washout, but are growing close-  These should be bought on weakness on Friday)  



Prices got down to near key levels of support -50% retrace on NASDAQ 100 and near key GANN support near 2723 on SPX, but yet failed to show all that much volume capitulation, which is nearly always necessary before thinking a low of any magnitude is in.  While "shock" and "disgruntlement" have been par for the course, it's tough to say we've seen real fear just yet.   Equity Put/call ratios are still under ideal levels and the TRIN barely registered a 1.4 on Wednesday and yesterday wasn't all that convincing.

To the bulls credit, markets are now oversold on daily charts, and we've begun to see intra-day positive divergence in momentum, the latter being more important near-term in potentially driving a bounce.  But with most of the rhetoric concentrating on "buying the 200-day"  or "buy because markets are oversold" it's likely to be too cute to step in and buy and think we've seen the bottom.   The real key will be a strong rally on good breadth and momentum, but also one where prices bottom out with sufficient Demark exhaustion and at least SOME evidence of capitulation.  At Thursday's close, we just don't seem to be there just yet.   Overall, the final stage of drawdowns tends to be vicious, volatility wise, with quite a few false shakeouts before markets bottom.  We seem to be near that time now.  Thus, for those that can "hold their nose" and buy, there should be some type of rally into the Mid-term Election.  However, on a 2-3 day basis, for my nickel, it still looks a bit premature, and I'd be willing to sell into post market strength heading into Friday. 



Long GDX with targets at 21
Long XLE with targets at 79
Long XOP targeting 45.50
Short KBE, adding under 46.77 with targets at 42.50 and stops at 48
Short XLI targeting 76.50 , adding under 78.13, with stops on a daily close over 81


Additional charts and thoughts below.


The NASDAQ got right down to its 50% ratio of the prior April to September rally,which took 171 days into the Fall Equinox, peaking where many markets often make turning points, and then falling off for 21 calendar days into yesterday.   Yesterday happened to be a key anniversary for the 2007 highs, and also the 2002 lows, just to name a couple.  A key timeframe for possible trend change.  Yet, Demark counts are early and we attempted to rally off the lows in NASDAQ which held up much better than S&P and then Thursday post close has been higher.  The gut is that minor rallies on Friday into next week are unlikely to get past 7250 before turning back lower and making a final push down, which will create the real momentum divergence that will be blatantly obvious to buy into.  For now, one should avoid putting too much stock in any rally from Thursday's lows having much momentum.  Demark counts are early and this should be revisited and likely make a lower low before any serious bottom is in place .  (This coincides with VIX making a similar but opposite signal on the upside - which shows the same count by the way)  (this adds to the conviction of this thinking) 


The Bloomberg Dollar index began to rollover in the last few days, and looks likely to continue in the days ahead.  This bodes well for the Metals trade to work in the seasonally bullish month of October.  Pullbacks to 1170-5 look likely and should coincide with commodities and Emerging markets bouncing. 


Gold miners made a huge breakout Thursday which accelerated throughout the day, closing up at the highs. This proved to be a breakout of a reverse Head and Shoulders pattern which was confirmed today.  While momentum got a bit stretched as of Thursday's close, pullbacks should be excellent buying opportunities.   GDX, shown above, the VanEck Vectors Gold Miners ETF, should push higher to test the resistance shown by this "WHITE" line undercutting all the previous lows from the last couple years, which should now be important resistance on a test in the weeks ahead.  This lies near 20.75-21 and would be the first meaningful area of resistance.  Pullbacks to 19.50 or below would make this attractive to buy dips and/or add to existing longs.