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Favor Gold miners, while avoiding Retailing near-term; Market breadth remains an issue

October 3, 2018
Mark Newton CMT, Newton Advisors, LLC- Contact: info@newtonadvisor.com

SPX Cash index
SUPPORT-  2918-20, 2898-2900, 2883-5, 2864-5,  2835, 2817
RESISTANCE- 2937, 2940-5,  2848


LINK TO TECHNICAL WEBINAR from last Thursday:   https://www.youtube.com/watch?v=j9Qb4M6pMNc&feature=youtu.be     

 

SPX - (3-5 Days)- Still looks like minor bullish retest and breakout of 9/21 highs can occur before reversal, but market getting tired.  Insufficient evidence of market reversing, but negative breadth and momentum are beginning to weigh on indices.   Targets are near 9/21 highs at 2942 initially with a possible brief overthrow to 2950.

SX5E- EuroSTOXX 50- Prices still more bearish than S&P- Down last 2 of 4 trading sessions with resistance at 3450, then maximum to near 3475-3500.  Under 3370 shouldlead down quickly to 3300, a larger area of support. 

HSCEI-  Closed this week for Golden Week holiday.  Under 10769 is a green light to press shorts for a pullback to 10500.  

Trading Longs: GDX, HAL, SM, CRC, XLE, LNG, TSS, PX, GWR, GIL, NRG, ELY, XLE, PX, ZTS, VNOM, NEP

Trading Shorts:  MHK, WHR, M, BBY, JWN, LB, FB, AMZN, AAL, ALK, JBLU, WGO, THO, ADNT, PII, KBE, KRE, IAI, TCF, TCBI, UMPQ, PBCT, FITB, ZION, BKU, OZK, UPS, CMI, JCI, JD, R, CAR, RHT, MNK, WYNN, LVS, VMC, AMBA


TECHNICAL THOUGHTS

Not much price action in S&P, NASDAQ and DJIA actually managed to make a new all-time high.  Yet the divergences are becoming more pronounced, and negative breadth and new lows escalating seem to be a definite issue with indices making progress in any sort of robust fashion.  Financials continued to drop yesterday, with KBE, KRE losing further ground (though getting to near short-term support- We'll see if this matters)  Meanwhile, Retailing has started to rollover as of yesterday, dropping to new weekly lows, with stockslike BBY, JWN, M, LB, GPS, AN making new multi-day lows.

Our colleagues at SentimentTrader reported that yesterday the DJIA closed at new all-time highs, yet the NYSE showed 3 times as many stocks hitting new 52-week lows as 52-week highs.  That has only occurred on one other occasion in the last 50 years:  December 28, 1999, which happened to be close to when the market peaked out in early January 2000.  While it's not impossible for stocks to rise from here, we'll need to see some slowdown in the downside acceleration in Financials, and some broadening out in this rally with some evidence of upward thrust in breadth.   

Gold miners is an area to consider for those seeking longs after Goldman Sachs reaffirmed their backing of Gold near-term.  Both Gold and silver had 1.3+% positive days yesterday, while the gold mining group looked to be breaking out of a reverse Head and Shoulders reversal pattern.  (More on this below)  While more work needs to be done on an intermediate-term framework, this looks attractive for a 2-3 week trade, and Miners are bullish near-term technically.  


 

ACTION PLAN-  

Long XLB with stops at 57
Long XLE with targets at 79
Long XOP targeting 45.50
Short KBE based on Thursday's close, targeting 42.50
Short XLI targeting 76.50 with stops on a daily close over 81


 

Additional charts and thoughts below.

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The S&P's stalling out after its minor breakout isn't that big of a negative just yet, and stilllooks to likely try to climb to test and briefly exceed 9/21 highs.  Yet Financials are moving to near the lowest levels seen in four months, while more stocks are moving down than up, which has been an ongoing issue for this market.  Key upside lies at 2938-45, while 2917 is initially important for S&P and above keeps this rally intact.  Below would test the more important 2907 in Dec Futures (2903 SPX cash) and under that kicks off our first real correction of the year.   For now, the structure needs to be relied on a bit more heavily than breadth and one would stay positive until this trend is broken.  
 

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Gold miners look set to make a larger bounce which is shown by the Daily GDX chart testing highs made last week.  This reverse Head and Shoulders pattern will be confirmed over 19.11, and long positions are recommended technically speaking, looking to add over 19.11 for a move up to 21-21.50.   While the US Dollar and Yields should be moving down to allow for the precious metals trade to work properly, it looks right to position now, expecting that the Dollar's gains should prove short-lived.   Rates on the other hand, still don't show meaningful signs of pulling back.  This could mean our Gold move is short-lived into end of October.  However, it's right to favor the miners given the combination of extremely bearish gold sentiment, very bullish seasonality for October for the Metals while near-term technical patterns have turned constructive. 

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Retailing had one of its largest down days in months yesterday, breaking the trend from early Spring and now challenging the larger area of importance just below at 48 whichmarks both the highs of the consolidation base from 2015 along with a one-year uptrend.  Overall, near-term weakness still looks likely in the next 2-3 days out of this group, and stocks like BBY, JWN, GPS, AN, LB, M all likely underperform.   However, the bigger "line in the sand" for Retailers lies directly below, so technically I expect this area to be challenged sometime this week or next, providing greater clues about the intermediate-term.