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No real signs of Capitulation to call a Low- Stay defensive into weekend

October 11, 2018
Mark Newton CMT, Newton Advisors, LLC- Contact: info@newtonadvisor.com

SPX Cash index
SUPPORT-  2769, 2743, 2717
RESISTANCE- 2822,2860-2


LINK TO TECHNICAL WEBINAR from last Thursday 10/4: https://www.youtube.com/watch?v=NQtSxfx4P1o&t=1s

 

SPX - (3-5 Days)- Bearish- While tempting to try to take quick profits after such a plunge, the time counts simply don't line up just yet with price and will take a few more days most likely before any meaningful support is in place.  Overnight futures show prices down near 2760, or near the 50% retracement of the move up from early April. 

EuroSTOXX 50  Neutral-  Not as negative here with prices down near two former lows-  3250-60 importnat and feel that max downside on this first go-around lies near 3100.  On a break of 3250, its right to hold off on buying, but for now, watching and awaiting buy entries

HSCEI-  Close to support-  Pullbacks have hit 9972, the 61.8% Retrace, and should be close to trying to bottom- For now, no need to try to pick lows, as the downtrend in Asia is pretty severe overnight and need some stabilization before trying dips, but shorts aren't as great of a risk/reward here.


Trading Longs: PEG, CMS, XLE, XLU, EXC, NEP

Trading Shorts:  ALK, AAL, DAL, JBLU, LUV, OC, XBI, RHT, AMBA, MNK, DGX, WYNN, LVS, MHK, M, JWN, LB, WGO, ADNT, UPS, R, CAR, VMC


TECHNICAL THOUGHTS

Prices plunged after breaching support of 2874 yesterday, getting briefly below 2800 in a move that many haven't witnessed in years.  Breadth and volume expanded on the move, yet it appears to have taken many off guard and happened so quickly that many didn't hae time to react.   Fear looks premature on this move, and is an essential ingredient to putting in a meaningful low.   Several gauges are useful when trying to identify lows during spike declines.  One of course is VIX backwardation which we've clearly begun to see in the last day.  However, others like TRIN readings above 2 (ARMS INDEX) with an outsized amount of volume to the downside vs upside remain premature.  Additionally, Demark indicators are still early in signaling any type of downside exhaustion.  Moreover, sentiment polls were largely pretty bullish heading into the last week, and will take time before turning immediately bearish.   Finally, we'll need to see some evidence of positive momentum divergence with prices pushing to new lows, while momentum holds up.  This normally occurs on a sharp bounce attempt which fails and then moves back to new lows.  At present, while prices might have reached near-term oversold levels on hourly and two-hour charts, daily charts aren't yet oversold, and the Percentage of stocks trading above their 10-day moving averages haven't gotten down under 10% yet which might bring about a low.

Overall, breadth yesterday came in a very heavy 8-1 negative while volume was even heavier.  However, despite very poor breadth, TRIN was still relatively mild and did not register any real capitulation.  VIX spiked higher, yet also looks early to think it's peaking.  Half of all the 11 sectors were down 3% or more, and ideally we'll see prices close meaningfully up from lows (Hammer formation, using candlestick lingo) before thinking even a trading bounce is upon us.  Financials ended up breaking prior range lows which is a concern, and Technology was very hard hit.  These two sectors make up nearly 40% of the Market, so essential to see some evidence of stabilization here.  The one potentially promising sign deals with Technology ETF's getting down to two-year trendline support which began in 2016, and so one can make the case that the Tech decline (in the very short-term) is getting overdone and could find some support. 

 

ACTION PLAN-  

Long XLU, with upside target at 47
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.

a.gif

The weekly SPX chart puts yesterday's selling into perspective as trends from the Spring were violated, putting prices now right above the 2-year area of weekly trendline support.  This seems important in coming together to cause some stabilization in the next 2-3 days to SPX and the key for Bulls is the ability to rally up sharply without pulling back to get down under recent lows.  Thus, the longer-term trend remains bullish.  The flip-side to this, however, is that momentum has begun to turn down sharply on weekly charts, at a lower level then where momentum hit back in late January.  This so-called "negative momentum divergence has the potential to be a problem going forward and could mean that lackluster bounces should be sold.  For now we'll take the combination of near-term oversold conditions, weekly trendline support and await (what should be ) the return of fear into late week/early next to try to buy dips on this decline.  
 

b.gif

Financials have undercut lows near 27.50 via the ETF and are now trading at the lowest levels since July.  This looks to be a damaging break in this group as there were minor signs of rebounds last week which made many quite optimistic that the banks could start to follow yields.  Overall, Breaking 27 would cause further selling pressure down to 26.50.  For real optimism, we'll need to see evidence of not just absolute strength (movement back over 27.50 and really over 28.40.. but of relative strength with XLF/SPX starting to trade better and break its downtrend.  At present, this has not happened and still early in many respects. 

c.gif

Weekly charts of XLK give some minor reason for "hope" as the decline has now taken XLK all the way back to test its two-year area of trendline support near $69.  This has been tested now nearly 5 times in the last couple years and should result in at least some type of stabilization in this sector.  However, it's important to note that weekly MACD has turned sharply lower and is doing so at lower levels than what happened earlier this year.  Thus, evidence of negative momentum divergence is present, and it will be important for any stabilization in the next 3-5 days to turn back up sharply.  Any failure of this which then turns back down to break 69 would be far more negative for the intermediate-term picture.   Also, moving up far slower than the pullback would be a further concern for longer-term momentum.  For now, this looks to be an important area and we'll see if XLK can hold in the days ahead.