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Rapid Selloff shows some capitulation, but worth keeping an eye on

December 5, 2018

Mark Newton CMT, Newton Advisors, LLC

Contact: info@newtonadvisor.com



SPX Cash Index

Support: 2696, 2686, 2655

Resistance: 2729, 2745, 2764-7, 2787





SPX - (3-5 Days)- Minor bullish for a bounce to 2729 with 2696 stop on longs- Overall, bounces likely prove sellable near-term based on yesterday's weakness.. and additional 3-5 days of weakness possible near-term before decline runs its course. Expect to stabilize by end of week with 2655 being important.



EuroSTOXX 50- Mildly Bullish, Expect Europe can rally up to 3280-3300, but that remains its first real test, the area of the prior breakdown. Stops on longs at 3159



HSCEI- Bullish- Pullback buyable with stops 10577. Breakout happened Monday and should result in strength in the days and weeks to come. Long with targets initially at 11077, with stops at 10571. Above 11077 can allow for meaningful strength to 11453, and above to 11932




Trading Longs: VRSN, EXAS, AMZN, MSFT, TWTR, FB, XPH, LLY, TMO, MRK, V, MA, LB, MOS, CHD, CQQQ, FXI, FDS, CVS, ETSY, AJG, ICE, CME, VRSK



Trading Shorts: M, LEN, STX, WDC, ATVI, TTWO, KORS, GIS, CCEP, EZU, STX, WDC, ETN, RL, FLIR, EMR, VMC, OI, NFX, WMB, BCO



A couple key points, as yesterday's selloff caught many, including myself, off-guard. After a 6% move in six trading days higher for SPX, we erased nearly half of this yesterday. The positives revolve around momentum being positively sloped on daily charts, DESPITE yesterday's decline. Additionally, we saw the first instance of some capitulation in volume with heavy volume on the downside vs upside which has been sorely lacking for months. Yesterday's TRIN reading of 3.3 was the highest reading since January as volume swelled into declining vs advancing stocks by nearly a 15/1 ratio. While this doesn't 'have' to signal a bottom, particularly if it occurs near the highs of the range (See Dec 2015 for example) it does look meaningful and has been lacking of late.



Overall, the spike in Chinese Yuan which coincided with Treasuries lifting and the yield curve plummeting to near inverted territory has certainly caught the attention of many of late. While this negative turn in sentiment could be important coinciding with a capitulation in volume, we arguably are still a bit low in Equity put/call after this got very compressed into this week on last weeks rally. Additionally, the VIX wasn't as high as it could be either.



For now, there's a small window where it looks right to buy dips into this pullback given the bullish seasonality (though that really hasn't worked that well this year) and bearish turn in sentiment. But any break of 12000 in NY Composite would be a concern to the bullish case (See charts below). So a bit of wiggle room for the next 3-5 days, but it's imperative that we don't have another few days like yesterday, as this would suggest the start of another move to new lows. Stay tuned.



ACTION PLAN- 



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

Long CQQQ --targets in mid-50s, stops at 42

Long EEM with targets at 44.80- Yesterday's breakout important

Long XLB at 55.60 or better, looking for movement up to 59

Long XPH- Targets at 47, with stops at 42

Long KRE 54.99 with targets at 58.50

Long XRT with targets 48.50



Additional charts and thoughts below.

below.gif

QQQ decline was worse than might have been expected coming into yesterday, undercutting this downtrend that had been exceeded, and momentum remains positively sloped on daily charts. Thus we see a violent 3.5% decline following 6 of 8 days higher, which had carried prices up to the tune of nearly 9%. For now, this isn't a sufficient enough decline to think prices have to revisit lows. Additionally, given the recent capitulation in volume yesterday, we should be closer to a near-term bottom which can give way to a Santa rally before any larger selloff next year. The next 3-5 days will be key. For now, no rush to buy dips immediately, but it's imperative that some type of stabilization start to happen in the next few days and NOT get back to prior lows.


lows.gif

The NY Composite has acted very much like the SPX in recent weeks, with a choppy, but volatile pattern. Yesterday's decline hasn't yet broken levels that argue for immediate deterioration, and 12,000 would be important to hold to keep the chances for the Santa Rally alive. Bottom line, 12000-12223 leaves not much wiggle room for the bulls. Thus a good risk/reward to consider buying dips with a "Stop and Reverse" on any close back under 12,000.


12,000.gif

Gold is starting to perk up again and looks attractive as this has broken a minor trend and stretching up towards monthly highs. This began to strengthen early in the week as yields plummeted while the Dollar stalled out.. Two important pieces of the puzzle that typically warrant overweighting precious metals. Near-term, this looks to push higher to 1270-1300, but until 1375 is exceeded, it's difficult to have too much conviction just yet on this being anything more than just a near-term bounce. One can buy IAU and GLD and look closely for signs of GDX starting to bottom out in the near future.