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Breakdown failed to show much capitulation, though sentiment growing more negative into FOMC

December 18, 2018

Mark Newton CMT, Newton Advisors, LLC

Contact: info@newtonadvisor.com


SPX Cash Index

Support: 2532-4, 2513-4, 2482-9

Resistance: 2583-5, 2600-2, 2630-2, 2674-6



SPX - (3-5 Days)- Mildly Bearish into FOMC - Weekly Technical Perspective thoughts of rallying might be postponed until FOMC with key time frame for trend change at 12/19-12/23, which hits this week. Until SPX shows a rally back over 2583 on a close at a minimum, it doesn't pay to stand in the way, though near-term lows look near & should happen in the next 3-5 days with fear starting to spike. Can't rule out move to 2482-9.. but don't feel anything more into FOMC or beyond and would look to buy weakness this week.



EuroSTOXX 50- Bearish, expecting test and mild violation of 3000 into Wednesday before bounce, with 2900 being important as an area to consider covering shorts and trying to buy dips. If prices manage to get back above 3128, that would change the thesis to mildly bullish.



HSCEI- Mildly bearish for 2-3 day basis but should hold up better than US, or Europe- Movement above 10590 on a close would be constructive-



Trading Longs: TLT, PFE, LLY, VAR, UUP, EUO, GLD, IAU, SLV



Trading Shorts: XLU, VNQ, RF, KEY, ABCB, TREE, R, EMN, WFC, CE, DOX, FCX, QRVO, CAR, BWA, MAS, ITB, PHM, LEN, FOSL, BBY, BCC, BGG, KORS, RL, FLIR, MRO, XEC, VMC, OI, NFX, WMB



Very tough to be all that constructive from a pure price basis alone after seeing Monday's decline, which violated 2583, a level that had held as a daily close back in April and also February of this year. So, despite SPX finishing about 10 points higher than intra-day Feb lows, yesterday's close proved to be the lowest since last Fall, finishing down lower than any other close in 2018, as this December's first few weeks have proven to be the most negative in over 30 years for this time of year. Volume rose, and breadth was fairly negative at 6/1 Decliners outweighing advancing issues, yet volume didn't really flow at all that capitulatory of a manner into Down stocks vs Up in trading. The later decline was far worse in terms of breadth than the early bounce attempt into Europe's close and we saw 10 sectors close down over 1% on the day, with Financials being one to close "less bad"



Bottom line, yesterday's selling didn't change my opinion that this week has the potential to produce a reversal. However, given yesterday's breakdown, it's a MUST that SPX get back over 2583 sooner than later and ideally over 2631 to have confidence. Sector-wise we started to see some of the stronger Defensive sectors give way in a broad-based fashion to join the others, which normally can happen towards the end of the pullback. Yet, volume still seemed not too overbalanced in Down vs Up issues. However, Equity put/call did finally rally to near 1 on the close, which is the highest levels we've seen since last Spring. Therefore, while capitulation might have been lacking volume wise, sentiment is definitely starting to favor a bullish bounce is approaching.



Overall a very tough tape and one that's closing in on time targets from the peak in September (90 days- always important) along with 45 days from 11/7 highs, 60 days from 10/17 lows and 315 days from the 2/9 lows. Given my reliance on time angles of the circle to show confluence for turns, this is about a strong of a lineup from prior highs and lows that we can find heading into a given week like this, while Demark TD Sequential and TD Combo signals are now present with exhaustion TD 13 buys on 60 and 120 minute charts. While not wanting to stand in the way of any downside acceleration, there are price targets at 2533-45 for SPX and below would take prices to 2479. Meanwhile, a reversal back up over 2583 has minor positive importance. Charts and analysis below.



ACTION PLAN- 



Covering IYT short which is at target

Short XLF with targets to buy 23.70-8 Tuesday-Wednesday on weakness

Waiting on a bit more weakness from WTI Crude to 48 which seems likely on yesterday's break

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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Structurally speaking, the break of 2583 was certainly not a positive technically. My thoughts last week were that this area could be retested given the Transports, Small cap and Financials weakness, but this breakdown needs to be recouped to have any hopes of a larger rally. At present area, prices are right at the February lows, and Equity Put/call has jumped to levels that formerly have shown market bottoms. Thus, from a pure pattern perspective, the charts are ugly near-term. Yet, sentiment is starting to finally get to levels which make sense to buy this dip, and cycle-wise this week has some real importance given its distance from both September highs and also February lows. Thus, I don't want to be a seller of stocks this week, but as scary as it seems, a buyer. Yet, it's right to be hedged and not be too cute on buying dips until we see proper stabilization. Two areas of importance for any bounce: 2583 and then 2631, each of these being important based on the pattern of the last couple months. Between now and the FOMC, further weakness does seem possible based on Monday's close, yet I feel the majority of the downside is behind us in the short run, technically. Thus, one can either avoid the trend until it stabilizes (and miss buying the lows) or try to buy dips in the next 2-3 days, which might require holding on during a couple big days of volatility, but I expect to ultimately prove correct during the balance of December into early January.

january.gif

Defensive selling during a "bad" tape is not something which normally is all that common, except during the latter stage of a move when the leaders turn down and the market capitulates. That process looks to have begun with yesterday's decline, and with yields closing in on support near 2.80-2%, and with equity indices nearing (what I believe) should be a trading low this week, selling Utilities, REITS, Telecom based on yesterday's weakness looks prudent as all of these groups look to move lower near-term.

near-term.gif

WTI Crude made a fairly meaningful pullback yesterday, violating the pattern from October to move back to new lows. This selling likely takes Crude down to $48, its first meaningful area where prices can stabilize. The pattern shows the ongoing churning while remaining in this downtrend which typically signifies one final pullback to finish a certain move before reversing course. That move looks to have begun yesterday, so a bit more weakness is likely Tuesday/Wednesday but should be close to an area where its right to buy dips in Crude. Overall, near-term trends based on yesterday are negative technically and require a move back up above $51 to have any real confidence of a false breakdown.