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Bounce near given sentiment/oversold extremes, but recouping 2630 is a must

December 24, 2018

Mark Newton CMT, Newton Advisors, LLC


S&P 500 Cash Index

Support: 2400-2, 2376, 2355-7

Resistance: 2583, 2600-2, 2630-1, 2687

Happy Holidays to all! Looking forward to a safe, happy and profitable 2019!

Summary:  Stocks remain trending strongly downward in a trend that's nearly erased 50% of the entire rally from 2016 in S&P. Last week's "Make-Or-Break" comment was decided by the nasty "Break" on Monday which resulted in severe acceleration and resulted in the worst week of performance in a decade. The decline has begun to take a toll on the broader structures, which now show long-term trend breaks on monthly logarithmic charts from the 2009 lows. Momentum has rolled over sharply with the year-to-date decline in US indices of anywhere from 8-15% in what has been seen as a real shock to many investors given the relative lack of deceleration in the economy, or in earnings. Overall, most near-term technicals point to an above-average chance of some stabilization and bounce starting this week. However, the intermediate-term trend has also turned bearish, given the breakdown under SPX 2580 and long-term trendline breaks on many indices. However, from a risk/reward perspective, despite the bearish trend, the chance of a rally into the Spring remains high given the combination of sentiment, seasonality and some cycles which pinpoint next Spring as having some importance. Near-term, a snapback rally is expected, though with weakness likely lingering into January. With regards to bonds, a selloff here also looks to be around the corner, with yields having pulled back sharply to near key support at 2.70-2% while the Dollar index could be on its last legs, with a selloff expected to begin in 2019. Commodities meanwhile might shape up if the Dollar decline gets underway, and both Crude and Gold could have better years next year than in 2018. Overall, the volatility looks to be here to stay. Below is a table, courtesy of @Oddstats, showing the percentage returns on the last 5 trading days of the year. As one can see the last four years have been lower during this time and since 2008 we've seen six of the last 10 final five days finish down. While a bounce looks very near given the oversold conditions, it's certainly no guarantee that Santa rally carries the market higher during this time.


Overview:  Last week's severe decline has gone down in the record books as being the worst week since 2008 and with one more full week to go, markets could potentially record the worst December performance of all time. This current -12.45% decline already establishes December as having the worst run thus far since the 1930's with the NASDAQ now having fallen more than 22% from its peak, which many believe puts the NASDAQ in a bear market. Wilshire Associates tells us that US stocks lost over $2 trillion in value on the week, a staggering amount. Yet, this decline has been unusual to many non-Technicians as it's occurred during an economy that's healthy enough for the FOMC to have just raised rates again a fourth time this year while earnings remain sound. Thus, this decline truly calls into question the factors that many typically feel drives the market.

Technically speaking of course, there have been warning signs now since late August when Technology began to "nosedive" with the NASDAQ peaking out. Breadth fell off sharply throughout much of September, with many record closes happening on flat or even negative breadth. Markets showed classic signs of negative momentum divergence on the move back to new highs as well, as January proved to be the true peak in momentum, with RSI readings near 90. When markets reclaimed and exceeded those January peaks, it occurred on far lower RSI readings. However, it was the move in the Chinese Yuan following Trump's meeting with China's XI that truly caused the bond market to turn up sharply. Yields fell quickly starting in early December and stocks weren't far behind.

Now in trying to take stock of the damage done, it's important to look at a plethora of technical factors along with sentiment, seasonality and momentum to try to dissect the near-term and intermediate-term technical picture. My thinking is the following are important reasons why a bounce should be right around the corner:

1) Bearish sentiment- Sentiment has turned quite negative lately. The Equity Put/call ratio is now as high as we've seen in two years' time, challenging the 2016 peaks, while many traditional sentiment polls have inverted their Bull/bear status

2) Oversold conditions- Daily charts show RSI to have pulled back under 25, as oversold as early October (which was actually lower) Yet the percentage of stocks trading above their 10 and 50-day moving averages have dropped to single digits

3) Counter-trend exhaustion (Demark)- The NASDAQ along with S&P is within 2 days of possibly recording the first evidence of exhaustion per TD Sequential and TD Combo signals since early December. These worked well in September at the top as Sells, and now they'll arrive this week on a bit more weakness. My thinking is they could signal a temporary low

4) Cycles- The peak in September is now at a key 90 day juncture to this time in December, along with being 45 days from early November peaks, and 315 calendar days from February 2018 lows. This likely should result in some type of pause to this decline

5) Bullish seasonal trends- We remain in a seasonally very positive time, so a -12% decline in December certainly hasn't lived up to this standard. But in general the period from now until next Spring should allow for a counter-trend rally in stocks before the seasonality turns negative again, and for now, it's still right to consider that January- May could be positive, not negative.

From a non Technical perspective, we've heard countless opinions in the media that the economy should slow meaningfully in the years ahead. The fact that many seem to have jumped onboard with this line of thinking while economic growth has been strong enough for the FOMC to continue hiking rates seems overly bearish and might represent a time when US equities and the economy generally do the opposite of what the masses believe.

These are just a few reasons, but generally suggest this decline should be close to running out of steam as the market enters January.


Short-term (3-5 days): Expect a reversal in trend to this decline which could happen either during the shortened session Monday, or more likely Wednesday of this week which could kick off a bounce up to 2600-2630 in S&P before additional weakness happens into January. While the trend remains very bearish near-term, we've seen the presence of very oversold conditions in the short run, with just 1% of all stocks above their 10-day moving average and just 6% above their 50-day, equally as oversold as markets were back in February 2016. Demark indicators are 2 days from signaling exhaustion on S&P, & NASDAQ and hugely important stocks like AAPL are also showing the same exhaustion signs. Thus, given bearish sentiment while markets are oversold and nearing exhaustion, it makes sense to expect some stabilization this coming week and a bounce attempt. Further weakness would take markets to 2376, the 50% retracement of the entire move up from 2016, which is an important level. Thus, while markets remain under pressure, this doesn't look like the best time to sell stocks for those with a 3-6 month time horizon. This final full week of the year should provide some clues in this regard in the next couple days.

Intermediate-term (3-5 months)-  Bullish- While the trends have turned negative on an intermediate-term basis for many indices given our weakness, it's thought that a rally should be near that provides a bounce to this decline before any larger bear market continues. While the average stock is now officially in a bear market, most market indices are not, and many arithmetic charts still show the uptrends for market indices to be intact. Momentum is a different story, as long-term momentum indicators like MACD have turned negative, while RSI has not reached oversold territory (and is nowhere near oversold on a monthly basis) This suggests that any spring rally should likely constitute an excellent time to cut down on risk, and diversify into dividend rich investments and avoid the Growth stocks and Small caps. Overall, we'll leave some of our larger thoughts for the 2019 Annual report, but suffice to say, this pullback doesn't suggest to me just yet that the next 3-5 months should be negative at a time when everyone is saying the economy should now turn down.

10 Charts to review- 5 Index, & Sentiment charts, then 5 Stocks to buy following recent Weakness


NASDAQ Composite- Searching for a tradable low- NASDAQ, which has just officially reached the 20% down mark, is now suddenly very close to its 50% mark of the 2016-8 rally while being 2 days away from recording Demark exhaustion for the first time on this decline. Additionally, momentum, while oversold, is actually at higher RSI levels than were recorded in early October. Thus a few reasons suggest that this decline is close to bottoming and turning back higher. While buying into a steep decline like this is often difficult to time accurately when stocks have been falling at a pace of 1% per day, the area from 6100-6300 is important for NASDAQ, and it's worth taking a stab at buying into this given the reasons above. 


SPX nearing 50% retracement, but break of 2580 is bearish. SPX on weekly charts has now given up nearly 50% of the entire rally from 2016 and within 40 S&P points of this level at 2376. However, the pattern has grown quite bearish with the break of 2580-2600 area that most have been eyeing for weeks. Until/unless this area can be exceeded now on any snapback rally, the trend is bearish on an intermediate-term basis, with any minor bounce being used to sell. Near-term, charts have reached levels which make sense to cover shorts on any break of 2400, while traders should look at selling back into a bounce to 2600.


SPX showing long-term trend break - SPX monthly charts show prices officially having broken long-term uptrends when viewing logarithmic charts, while traditional technical metrics like MACD have rolled as the signal line has been broken and MACD is diverging lower. Meanwhile, monthly RSI is not oversold. Thus, it's important to see how the rapid selling of late fits into the long-term model and as can be seen, prices certainly have gone a meaningful amount higher after having bottomed at 666 back in March of 2009. Interestingly enough, while recent selling has been dramatic in percentage terms, the decline has literally just scratched the surface in having begun to rollover. While a move back up above 2630 would cancel the breakdown, suggesting a possible move back to 3000-3060, for now the trend is bearish and bounces should be used to sell.


Fear as high as early 2016- Equity put/call readings are now above 1.1, a level that hasn't been seen since early 2016 during the plunge from late 2015 into early 2016. Thus, while the selloff has proven orderly and not really shown evidence of real capitulation with regards to TRIN readings being excessive during the selloff, fear has slowly but surely returned to this market, and now we're seeing more puts being bought than calls, which is a rarity and normally signals that a bottom is near.


Stocks above 10, 50-day MA hitting extremes- This chart showing the percentage of stocks trading above their 10 and 50-day moving average has gotten down to very extreme low levels as of last Friday, suggesting that lows should be near. The percentage of stocks above their 10-day has reached 1%, so 99% of all SPX names are under their 10-day, while only 7% of all stocks are trading above their 50-day m.a. Thus, the market based on this metric is as oversold as we saw back in early 2016, while traditional gauges of momentum like RSI are oversold now on daily charts. This rare level of oversold readings often will result in a very sharp bounce, and we seem to be near this time.

5 Stocks to consider buying after this Weakness- Many of these are in steep near-term downtrends, but have approached attractive intermediate-term trendline support which makes buying into this pullback appealing. The time-frame for bounces in these stocks is 3-6 months, and entries should be attempted gingerly given the extreme selling, buying in small size and adding as they start to work. Stops can be considered to limit losses to 5% in each. Charts and thoughts below.


Apple (AAPL- $150.73) For the first time since AAPL peaked at $232, we're seeing evidence of counter-trend exhaustion in AAPL on both a daily and weekly basis as of this coming week. Additionally, the stock has dropped 82 points in 82 calendar days, representing nearly a perfect 1x1 price/time area where this should be close to bottoming. Near-term momentum has gotten oversold, while the stock has nearly reached its 61.8% Fibonacci retracement of the rally from 2016 and has arrived at Ichimoku support as shown by the "lookback line" hitting the bottom of the Ichimoku cloud. Overall, while the decline has been very steep in recent months, the long-term pattern remains very much intact.


FedEx Corp (FDX- $158.00) FDX has gotten down to an interesting level of support worth considering after falling 29% in the last month, the worst performing stock of all the 69 companies that make up the S&P 500 Industrials index. Prices lie right near trendline support while having given back 50% of the prior intermediate-term rally. Overall, this area has importance for a possible low. The area at $154.34 represents the key 50% area, and technically given the confluence, looks to be a low risk area to consider taking positions in FDX.


Goldman Sachs (GS- $160.05) GS has arrived near formidable support that likely suggests this stock can finally bottom out after a very difficult year. GS has been one of the worst performing stocks in all of the 67 stocks that make up the S&P 500 Financials index, having dropped more than 37% YTD thus far. Demark weekly exhaustion is nearly complete, and could happen within the next two weeks. Meanwhile, GS is within striking distance of 2016 lows and currently sits right on a larger uptrend from 2008, which originated 10 years ago. While the weekly charts show this to need another couple weeks, this should be close to forming a low and the risk/reward to buy has gotten better in recent weeks on this pullback. Look to take initial longs in small size and add to positions as GS starts to stabilize.


Lennar (LEN- $38.96) Homebuilders might very well take a breather after a very difficult 2018. LEN stands out as one to consider after losing over 38% this year, one of the worst performing stocks of all within Consumer Discretionary. However, as monthly charts show, this area just below $40 lines up with an attractive level of long-term trendline support while also hitting lows which were made near current levels back in 2016. Weekly charts show the trend from January of this past year to still be very much down, and last week's pullback looks to require another two weeks of possible weakness before this can bottom out. However, the stock is nearing its 50% absolute retracement level from those $72 highs made back in January, so at $38.96, the area at $36 should be a very strong level which causes this to stabilize and then turn back higher. Demark indicators also are within 2 weeks of showing TD exhaustion on a weekly basis for the first time since this decline started this year. This combination makes LEN very attractive to keep on the watch list and consider buying between $36-$38 on any further weakness heading into next year.


Halliburton (HAL- $25.85) HAL looks attractive from an intermediate-term basis after having lost nearly half its value this year. This stock peaked initially back in 2014 near $75 a share, so at $25.85, it's given back quite a bit in recent years and much of this has just happened in the last 10 months. Monthly charts going back since 2008 show this area near $25 to have some importance technically in adjoining a long-term support trend. TD Buy Setups will be in place by next month, and makes this interesting to consider as one to buy during a seasonally bullish time for Crude oil which typically gets underway in February. In the short run, while a bottom might take 3-5 days, this area looks appealing to initiate buys in small size and add to this as it starts to stabilize more. The first meaningful upside target lies at $38, or near the lows from August of last year which should now be important on any rise as resistance.