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Break of 4-day uptrend should set stage for Retest of lows

October 19, 2018
Mark Newton CMT, Newton Advisors, LLC- Contact: info@newtonadvisor.com

SPX Cash index
SUPPORT-  2749-51, 2710-2, 2692-5
RESISTANCE- 2781-4, 2815-8, 2825-7, 2830-2


LINK TO TECHNICAL WEBINAR from yesterday: https://www.youtube.com/watch?v=BJeYb8vRVAI&t=46s

SPX - (3-5 Days)- Bearish given the break of 2783 a- Sell early rallies back to 2779-83 and until/unless 2783 is recouped on at least consecutive hourly closes, its right to expect a broader retest might be underway.  

EuroSTOXX 50  - Bearish- NO change and still better to sell/short Europe than US in the short-run.  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-Despite US and European stocks selling off, we're still not seeing severe selling here, and its right to think markets can stabilize in the coming 3-5 trading days.   Bullish unless 9975 broken-  Shorts aren't as great of a risk/reward here.  Dips should be bought at 9970-10000. 


Trading Longs: GDX, WMT, CASY, MRK,  PFE, HEAR, HSY, EIX, PCG, PPL,  KL,HMY, ABX, AGI.CN, GOLD, MOS

Trading Shorts:  GCI, VGK, FEZ, RHT, AMBA, KMB, JEF,AMP, KORS, PH, WYNN, SGMS, LVS, MNK, M, JWN, R, VMC


TECHNICAL THOUGHTS

Overall, yesterday's pullback likely starts the process of bringing fear back into the market at a time when such a sentiment shift is necessary to help prices rise during this normally bullish seasonal time.  While last week's selloff came as a shock and was immediately bought up, this latest roundtrip is being looked upon more seriously by many given the Italian budget defiance while US has pulled out of the Saudi meeting.  Yet volume and breadth is less severe on this latest pullback than what happened last week, and this roundtrip likely should lead to buying opportunities for stocks into next week.   For now, yesterday's trend violation makes this look premature and the near-term trend has turned back lower to match what the daily and weekly charts have shown with regards to trend and momentum. 

Looking back, prices failed to reach 2841, and only made it to 2823 before turning down and yesterday's break of 2783, the prior early week low actually undercut the minor uptrend from last week's lows.  Breadth was about 3/1 negative, which was bearish, yet failed to match the degree of bullish breadth seen earlier in the week  We started to see the TRIN creep up higher with a greater percentage of volume into declining vs advancing issues and expect this likely should continue Friday into next Monday/Tuesday before any serious low is in place.  

For now, Weekly trends (as the video webinar above shows from yesterday's presentation) remain very much intact for SPX, NASDAQ and DJIA, but momentum has turned negative both on daily and weekly timeframes.  This makes for a difficult time in "trend following" as the near-term trend from early October has been bearish and still in place, while the weekly trend is bullish.  Yet, Technology has begun to selloff again and Financials remain under pressure and have not yet turned up.  This will need to give to have confidence of stocks starting to turn higher, as these two groups account for >40% of the market.  Overall, its thought that the next 3-5 days "should" bring about some bottom to this decline from early October.  However, as of yesterday's close, it doesn't seem like we're quite there.  Until price action can improve, it should pay to have a defensive stance and not try to get long in a negative tape without proper confirmation. 
 

ACTION PLAN-  

Long GDX with targets at 21
Long XLE with targets at 79
Long KRE at current levels, looking to add to longs on any close at multi-day highs, or when Demark exhaustion confirmed
Short XLI targeting 76.50 , adding under 78.13, with stops on a daily close over 81


 

Additional charts and thoughts below.

below.gif

The S&P's structure has faced some adversity in the last 24 hours with prices violating Wednesday's lows which also coincided with an area of four-day trendline support for this minor uptrend.  The combination of those seems to suggest a retest is now underway, which could take prices down to 2750-55, with violations of 2750 leading down to a larger retest and possible break of 2710-2.  However, given the lesser volume and relatively better breadth this week on this pullback, this should translate into something to buy into, as opposed to thinking it leads to greater selling into late October/November.  Seasonal factors, while unreliable in recent months, have shown this period to be quite constructive for stocks.  Thus, we'll use 2783 as the guiding area for longs/shorts.  Under 2783 keeps the trend negative, while over would be a signal of a possible false breakdown.  The ability to recapture this trend would go a long way towards thinking a more sustainable bounce can happen into November.   
 

November.gif

XLK has not broken weekly uptrends from 2016 which is important given Tech's representation in the SPX, but $69 remains a key area for XLK that cannot be violated without bringing about further selling that would likely challenge early year lows.  So Tech looks to be at an important crossroads, and after yesterday's pullback, should likely face its own important "line in the sand" heading into next week.  While relative charts of Equal-weighted Tech vs SPX have broken, this remains a critical chart on an absolute basis for Technology to keep under close watch. 

Gold stocks remain attractive during this seasonally bullish month of October and have fared better than the SPX after breaking out of their recent consolidation.  While challenges remain up at $21 for GDX, this remains right to overweight during this volatile time, expecting further upside for Mining names as the Metals near-term outperformance continues.  At a price of $20, this still looks attractive to own in the next 2-3 weeks for further upward progress, and one should favor longs here technically, looking to buy dips.