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Near-term overbought while Daily/weekly momentum negative makes for a poor Risk/reward- Yet still likely a bit early to sell

October 17, 2018
Mark Newton CMT, Newton Advisors, LLC- Contact: info@newtonadvisor.com

SPX Cash index
SUPPORT-  2775-7, 2764-6, 2710-2, 2692-5
RESISTANCE- 2815-8, 2825-7, 2830-2, 2941-2


LINK TO TECHNICAL WEBINAR from 10/11: https://youtu.be/_NY6cKzBZSo

SPX - (3-5 Days)- Mildly Bullish up to 2825-42 looking to sell into strength Wednesday, thinking upside should be limited after 100 points in 3 days.  Risk/reward poor for new longs- but still a bit early to fade- max upside to 2841-2, while downside could lead market back to new lows for one final pullback.  Short-term overbought now while daily, weekly momentum negative. 

EuroSTOXX 50  - Bearish-  Gains should find strong resistance near former lows at 3276 and likely to stall and pullback to 3100 before any low of magnitude is in.  Above 3300 on a close, However, would stop out shorts and suggest a bit more upside.

HSCEI- Mildly bullish-Above 10436 on a close switches to bullish- Shorts aren't as great of a risk/reward here.  Dips should be bought at 9970-10000. 


Trading Longs: CASY, PFE, HEAR, FB, CRM, HSY, EIX, PCG, PPL, NFLX, SCVL, KL,HMY, ABX, AGI.CN, GOLD, 

Trading Shorts:  RHT, AMBA, KMB, JEF,PNC, KEY, AMP, KORS, PH, WYNN, SGMS, LVS, MNK, M, JWN, R, VMC


TECHNICAL THOUGHTS

Our breakdown of the Triangle yesterday proved to be false indeed, and we saw both bullish and bearish triangle violations fail before pushing back up above 2879.  This served as the technical catalyst for some real acceleration, which started off lackluster, with 3/2 breadth, then slowly but surely gained speed and broad-based participation.  By end of session, we'd seen a 5/1+ Advance/Decline that was largely Tech, Healthcare and Discretionary led, while all sectors outside of Energy closed up more than 1%.

Looking back, the positive divergences in momentum were clear, and positive as volume and breadth waned from last Wednesday's big selloff.  So things got better and better on Thursday and Friday, despite a lack of progress.  This started to help market internals, suggesting a bounce was in the making and right around the corner, despite a lack of price breakout.   Indices as of the end of last week had reached oversold levels not seen this year.  The real source of confusion lie with the structure of S&P Futures which seemed to resemble a fourth wave move and required another move to new lows.  There was never any real fear a the lows, with regards to High Equity put/call nor high TRIN readings which had occurred at nearly every other low this past year.  Demark signals were also premature.  Yet, once prices got over 2779, it caused some short-covering and some real buying in sectors like Healthcare and Discretionary.  

Going forward, XLI, XLF, XOP, XLB, XLP and VNQ have all gotten near-term overbought while structurally still negative.  All would benefit from a pullback on lesser volume and breadth which would serve as a much better buy signal than reaching for prices here.  The next 2-3 days will shed some light as to whether this stall out and retracement gets underway into early next week before a bigger low.  However, make no mistake, the price action and volume/breadth today was a big positive and had been sorely lacking.  The bullish seasonality ahead of mid-term elections seems to be underway.  So now it lies on trying to find a better suited risk/reward area to buy dips.  

  
 

ACTION PLAN-  

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.

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The S&P experienced two false breakouts before getting above 2779 which put I motion a quick move above 2800 which gained in participation as the day wore on.  Overall, short-term overbought on hourly while daily and weekly momentum remain negative makes this tough to buy into, thinking any sort of meaningful upside happens after 100 points in 3 days.  Yet, no discernible evidence of peaking out is yet apparent on hourly or two-hour charts.  Demark shows 3-5 hours of possible upside per intra-day charts, and trendline resistance lies directly above with Gann Square of Nine charts showing 2841 being perfect to sell into based on last Wednesday's low close.  Overall, the breadth of yesterday's move at 5/1+ bullish is a good sign for the next few weeks most likely.  Yet the next 3-5 days could experience some resistance and pullback given the extent of the last few days gains. 
 

gains.gif

Industrials have shown some evidence of turning up after a steep one month correction. This equal-weighted Industrials ETF vs SPX bottomed out a few days ago and now is showing evidence of turning up sharply.   While XLI remains under pressure given GE and GWW woes, the broader industrials space has made an attractive period of stabilization and should start to show more strength in the weeks ahead.  While a 3-5 day correction can't be ruled out, this should be a chance to buy dips and accumulate Industrials.  Relative charts show the beginning of a healthy bounce, making dips buyable into next week. 
 

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Financials are in dire need to turn up if we're to have any real conviction in this rally lasting.  The daily chart of XLF to SPX still shows this group trending down, although potentially within 3-5 days of bottoming relatively that could allow for a decent bounce.  Near-term, this is downtrend is a headwind to the Bulls case, and pullbacks back to lows and seeing this group start to stabilize with some relative strength out of the Regional Banks would be a source of encouragement.  The red trendline above needs to be surpassed.  Until that happens and we see BOTH TD Combo and TD Sequential counter-trend buys emerge on XLF/SPX, it remains premature for this group, and further near-term underperformance is expected.