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What needs to happen to have more Concern of Larger Break

October 16, 2018
Mark Newton CMT, Newton Advisors, LLC- Contact: info@newtonadvisor.com

SPX Cash index
SUPPORT-  2710-2, 2692-5, 2685-8, 2665
RESISTANCE- 2776-8, 2798-2800, 2825


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

SPX - (3-5 Days)- Mildly Bearish-   Trend negative and expecting Triangle break to lead back to new lows.  Support 2712, then 2685-6.  Upside has resistance at 2778-9 which shouldn't be exceeded in this scenario. 

EuroSTOXX 50  - Mildly Bearish-  No Change-  Move down to 3100 is possible given last week's break of former monthly lows.  One should hold off on buying dips until 3250 can be exceeded.  Movement down to 3100 possible 

HSCEI- Mildly bullish-Shorts aren't as great of a risk/reward here.  Dips should be bought at 9970-10000.  Rally to 10436 likely and over would provide a larger lift


Trading Longs: HSY, EIX, PCG, PPL, LLL/HRS, CRM, NFLX, SCVL, KL,HMY, ABX, AGI.CN, GOLD, 

Trading Shorts:  KORS, PH, WYNN, SGMS, LVS, JEF, AMP, KMB,  DLTR, MNST, PH, OC, XBI, RHT, AMBA, MNK, DGX, M, JWN, WGO, ADNT, UPS, R, CAR, VMC


TECHNICAL THOUGHTS

A pullback to test last week's lows seems likely before any meaningful bounce can get underway.  Until markets show more evidence of fear and volume capitulation to the downside like what appeared at former lows in February and April, it's tough to have too much confidence in this being a serious trading low.   The Equity put/call is still quite low and TRIN readings were higher in early October than last week during the selloff.  Demark exhaustion signals are premature and it's thought that Monday's late break could serve as the catalyst that would lead lower to test and break last week's lows under 2712 by a small amount before any rebound.

Technology continued to lead to the downside yesterday while the flight to defensive seemed to be underway yet again with Staples and REIT strength, while Financials struggled.  The one positive has to do with market breadth which was much more subdued than what happened last week on the 8/1 A/D weakness last Wednesday.  However, until we see more structural progress, it should pay to stay defensive, and be hedged in the event prices turn down under 2745 which would allow for a challenge and break of 2712.  For now, it's right to hold off on being too aggressive in buying 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 Triangle pattern seemed to have been violated on the close of business Monday afternoon.  The odds are that this formation is a 4th wave triangle pattern in an existing Elliott 5-wave decline and should result in one final pullback to hit new lows in the next couple days to weeks before this pullback is complete.  Getting under 2745 on at least consecutive hourly closes should cause an acceleration back down to 2712 and under that level would result in a brief move under 2700.   On the flipside, movement back over 2779 is needed to postpone this decline, but it's thought that the bearish pattern for now takes precedence, and that a triangle formation following the lengthy pullback should be resolved by a final decline back to new lows before any meaningful bounce arises. 

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SPX monthly chart spells out in clear detail what this recent drawdown looks like in the context of the larger rally from 2016 most recently and going back, since 2009.  As monthly charts show, when prices violate the multi-year uptrends along with undercutting the 10-month moving average, and that moving average also violates the trend, prices tend to trend down sharply.  If one were to exit stocks when index prices close under the 10 month as of end of month, and only reenter when prices move back above, entire bear markets such as 2000-3 and 2007-9 could be avoided.  For now, prices are indeed under the 10 month for the first time since 2016, but the uptrend remains intact and the 10 month itself has not rolled over.  These will be things to make note of in the weeks/months ahead to get a good grip as to whether the intermediate-term trend is turning.  One intermediate-term negative involves the negative divergence cropping up on monthly charts when looking at RSI having peaked at lower levels than what occurred back in January.  This same divergence happened in 2007 and  also in 2000, though the lead time in 2000 was nearly two years.  However, this should be watched carefully if stock indices show any further weakness in the latter part of October or November, as this could drive the intermediate-term trend to negative.  
 

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WYNN Resorts Ltd is shown on a weekly basis as an example of what many of the Casino stocks have experienced in recent months.  This selling doesn't appear over, and stocks like WYNN, along with LVS, MGM, PENN, SGMS all look like attractive technical shorts in the near-term, though with plans on covering in the next few weeks on any further weakness.  In WYNN's case, the break of this long-term uptrend from 2015 has caused a huge decline that has given back more than 50% of the entire rally in recent years.  The most likely area of possible initial support lies at 109-110, near the 61.8% Fibonacci retracement area of this prior advance.  Yesterday's close back at new weekly lows seems to suggest this move should come about sooner than later, despite momentum being oversold.