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Trend could stay negative into FOMC ; Favor Consumer Staples outperformance near-term

December 12, 2018

Mark Newton CMT, Newton Advisors, LLC

Contact: info@newtonadvisor.com



SPX Cash Index

Support: 2583, 2575-6, 2557-8, 2532

Resistance: 2645, 2675-8, 2582-3, 2586-7





SPX - (3-5 Days)- Bearish with movement above 2687 necessary to turn constructive for a larger rally. The 40 point decline off the highs is a concern as Financials, Small-caps, Industrials remain weak, and could lead to a 3-5 day decline to retest lows one final time in December before a rally. For now, Insufficient proof of a low at hand.



EuroSTOXX 50- Bearish with target at 2900, the 50% retracement of the entire move up from 2011.Rallies will need to get back over 3125 to have any real confidence of a low at hand.



HSCEI- Mildly Bearish- Target 9900-10100 sometime this week before stabilization and then rally in back half of December- Pullback not as severe as US and should be used to buy- HSCEI has been strengthening vs US relatively , so recent weakness is not expected to break October lows.



Trading Longs: CHD, PG, AEE, EVRG, AIV, PEG, EXR, TLT, PFE, LLY, ETSY, TWTR, HEAR, TNDM



Trading Shorts: CE, DOX, FCX, QRVO, CAR, BWA, MAS, ITB, PHM, LEN, FOSL, BBY, BCC, BGG, STX, WDC, KORS, CCEP, ETN, RL, FLIR, MRO, XEC, VMC, OI, NFX, WMB



As yesterday's Morning Technical Comment stated.. Trend bearish, but over 2645 could lead to 2675-80 and requires a move back ABOVE 2682 for any sort of conviction for a low at hand and larger rally. The early morning bounce promptly reversed from this 2675-80 zone, falling 40 handles in S&P to real make-or-break areas of support. Overall, it's thought that the failure of S&P to close under its OPEN in S&P Futures and falling 40 points off its highs, could set up for a final pullback in December to test last week's lows at 2583. Demark counts look to require additional 3-5 days of pullback, and sectors like Financials, Industrials remain in tough shape technically with DJ Transports hanging on for dear life right at former lows. Small-caps continue to underperform and have broken down further vs SPX in the last couple weeks. To this last point, this isn't necessarily a bearish omen for stocks, as markets showed similar deterioration from 2015-6 and just coincided with minor equity weakness, though larger bull markets do in fact peak with a slide in Small-caps and Mid-caps to kick things off and that seems to be happening now.



Three interesting things look to be happening which are worth mentioning: Consumer staples are breaking out to the highest relative levels since early 2018 relative to SPX, something which bodes well for further outperformance (Note, the two stocks recommended Monday in the Weekly Technical Perspective from this sector as part of the Attractive Defensives- PG and CHD) Second, the US Dollar index is shaping up for a final push higher into late December, something which could coincide with a minor reversal in the recent Gold and silver rally, and put near-term pressure on commodities right ahead of the 2 year anniversary of the US Dollar peak post US Election. Third, the 2/10 yield curve looks to be collapsing, something which is coinciding with severe Financials underperformance. This could continue also in to FOMC and keep US indices under pressure for 3-5 days until markets stabilize post FOMC.



Bottom line, during this volatile period, Defensives look attractive and are far more stable than trying to pick lows in Technology, Financials and Industrials, no matter how compelling these stocks look. It's imperative for these latter groups to start to shape up a bit and near-term, trying to play the swings in Equity index futures isn't for the timid. Right now, markets still look to be under pressure. And no need to try to catch the lows, though that's what we'll try to do here. But some sense of trend improvement is truly necessary before weighing in too positively. Happy holidays.


ACTION PLAN- 



Sell GBPUSD anywhere above 1.2460 for continued acceleration down to 1.21

Looking to buy WTI Crude on weakness below $49 over the next couple weeks

Long Gold and Silver- GLD, IAU and SLV for movement higher

Long Treasuries with plans of TNX moving to 2.80-2 before stabilizing

Play for a continued FLATTENING of the 2/10 curve from 10.5 bps to 0-



Additional charts and thoughts below.


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SPX's near-term trend remains bearish and despite being near the recent 2600 lows in what many thought could provide a bounce, we saw a very sharp 40 point reversal down from mid-day highs. While exceeding 2645 was thought to be a minor positive, it was essential for S&P to climb up above 2682 to have any chance for starting to turn higher. That didn't happen, and prices closed down under yesterday's open, which opens up the possibility of further weakness into FOMC next week before any stabilization. Near-term, it's right to stay defensive and avoid the temptation of trying to pick bottoms until indices can stabilize. Only a close back over 2687 warrants a long stance on a close. Until then, it's better to look for the chance at covering shorts near last week's 2583 lows, which might be breached by a small amount before markets can turn back higher.

higher.gif

Consumer Staples finished at the highest level relatively yesterday in nearly a year, pressing up out of its recent consolidation. This should allow for further relative strength out of this group in what has become a very defensive December. The two stocks written up Monday morning in the Weekly Technical Perspective as long candidates, technically, CHD and PG, both look attractive for further gains.


gains.gif

For those with eyes on the Yield curve, we look to be completely breaking down into next week's FOMC. At 10.5 bps, yesterday's movement doesn't suggest any type of stabilization near-term, but suggests additional downside pressure in the yield curve, and it's right to play for a further flattening out ahead of next week. Yesterday's close was the lowest of the year, arguing for additional near-term compression. This likely also continues to put pressure on the Financials space, which most likely will underperform into FOMC before bottoming out ahead of year-end.