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No meaningful damage on yesterday's churning- A closer look at Energy as a Mean Reversion play

December 31, 2018

Mark Newton CMT, Newton Advisors, LLC


SPX Cash Index

Support: 2440-5, 2429-30, 2407-8, 2385-7

Resistance: 2519-23, 2547-9, 2565-75, 2584-7

Note: The Annual Review will be published later this week either on Jan 4, or Jan 7, and as such, no Weekly will be published today/Monday but rather information will be utilized for the Annual which should be forthcoming. Happy New Year to all !!!

SPX - (3-5 Days)- No change- Bullish the first few days of this week on a 3-5 day basis into early January with possible first target 2548, and a maximum of 2600-30 before stalling and pulling back. Look to buy any early weakness. Under 2397 would postpone the rally

EuroSTOXX 50- Rally likely into end of year with 3050-3100 likely as resistance

HSCEIMovement over 3452 needed to turn trend bullish. For now premature but if markets rally into year-end globally, this very well might follow suit.


Trading Shorts: VGK, FEZ, WY, SGMS, MGM, RCL, LB, QRVO, CAR

Largely no change on the thesis- Continued gains are likely for the next 3-5 days into early January- Friday managed to churn both higher and lower but finished marginally unchanged with much lower volatlity than in recent days.

Overall, as written in the mid-day report, S&P looks to have exceeded the downtrend from early December and is "stair-stepping" its way higher in the short run. While I do believe this trend is in jeopardy of reversing, there is insufficient proof to think we're there just yet. My opinion continues to be technically that S&P can work up to 2550-85 area and likely stalls there. If S&P gets under 2397, this would certainly change that thesis to more near-term bearish into 1/2-3. For now, its right to stay the course on this bounce.


Long Financials- XLF with targets near-term at 24.50-.75

Long Industrials- XLI with targets at 65.50 minimum and possibly 67 before stalling

Short Treasuries looking to add on a yield move above 2.81, and then more above 2.85 which would be an official breakout of the two-month downtrend

Long Crude oil, with near-term targets $48.50-$49 , expecting WTI's move yesterday likely continues. Over 50 would be quite positive for Crude

Additional charts and thoughts below.


SPX on 4 hour charts shows the minor break of this downtrend, which is thought to be bullish technically speaking. One should consider still being long into year end until/unless 2397 is broken. Movement up to the 50% retracement of this downleg since early December would put S&P up near 2584 and would be a better risk/reward area to consider lightening up considering hourly overbought conditions while weekly and monthly momentum remain sharply negative.


Energy SPDR ETF, or XLE, has sold off dramatically in recent months and has hit a key level of intermediate-term trendline support. Given the mean reversion tendencies of sectors to snap back after severe underperformance from end of year into February, this should be given a special look as a sector which might show some bounce as 2019 begins. Additionally, this sector looks less vulnerable given Crude's recent ability to stabilize and could "decline less" going forward given that this sector has already born the brunt of some substantial selling this year. While not a solid technical buy signal on a short-term basis it's thought that this sector could hold given XLE's pullback to this area of support. Furthermore, the "big-cap" names that dominate this index like XOM and CVX are thought to be potentially more defensive names to own after this severe pullback in Crude , and might offer some relative stability.


Energy in relative terms also looks interesting after this severe pullback now that ratio charts of XLE/SPX have reached a level of trendline support undercutting lows in the last year. Given that Energy has been the worst performing sector and now entering a possible time of seasonal strength, this looks interesting to consider buying dips on this weakness. Overall, selectivity here is a must given the sharp downward trend, but it's thought that as Crude starts to turn higher, this group likely stabilizes.