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Retest should be underway; NASDAQ gives the "Tell"

February 8, 2018


2618-22, 2604-5, 2529-31, 2503-4, 2494     Support
2708-10, 2725-7,  2735-45                           Resistance

LINK TO TECHNICAL WEBINAR from last Thursday-2/1/18 -

SPX - (2-3 Days)- Bearish for at least a partial retracement of Rally from Tuesday's lows.   Near-term targets are 2618-24, and then 2604.  Under 2604 would be problematic for the bulls, allowing for potential full retest of lows and a possible break.   Under 2500, particularly if breadth starts to expand negatively, is a warning sign and right to have hedges/protection.  In the best case scenario, prices attempt a retest, but breadth improves which would be an encouraging sign to buy dips.

SX5E- EuroSTOXX 50- Bearish-   S&P's late day pullback likely means that Europe also takes some time before moving higher and could muddle around the lows for a few days before stabilizing.    Near-term range possible at 3363-3500.

HSCEI- Bearish-  While the Dollar's advance continues on a 2-3 day basis, Emerging markets and China likely underperform.  While this should prove to be a great buying opportunity next week likely, for now, the correction could continue with USD strength.  Expect some stabilization near 12500-50 and then a turn back higher which should test and exceed highs.  


Trading Shorts:   D, DOC, AHT, DUK, MNK, INCY, SHPGF, EAT, USG, EXP



Retest looks to be underway as of the poor close late Wednesday, so this could backtrack 50-61.8% of the prior move, with declines below proving to likely challenge or even briefly undercut prior lows.   Hold off on immediately buying dips on Thursday until prices start to show more evidence of stabilizing. Under 2500 would change the picture of this being simply a mild retest pullback, particularly if negative breadth begins to expand.   Important to watch this carefully in the days ahead.   

The Defensive sectors have failed to offer much protection even in the face of market weakness, and some of this in the last week has had directly to do with rates rising.   The break of near-term support in Utilities and REITS, Telecom very well might lead to additional near-term weakness until yields can find a ceiling and stall out.  For now, these groups might not offer the same degree of safety as usual during market declines. 

Sell Treasuries, Bunds, Gilts as the recent rally in rates does not look complete and a push back to new monthly highs for yields in bonds globally looks to occur. 

Long Euro vs USD should be postponed for now until Friday, as we've seen some consolidation in this trade as well.  The Euro still maintains a decent uptrend vs the Dollar, but this trade could likely go against us for another 1-2 days before hitting levels where this turns back higher.  

Not a very inspiring day for the Bulls in hoping this rally would continue.   Typically even after initial signs of capitulation, which were in place after Tuesday's early morning lows (or Late Monday night)  it takes a few "backing and filling" days before markets can truly stabilize.  Of course, this didn't happen during the last bottom of the 5% plunge into the Election in November 2016, when prices simply went straight higher without missing a beat.  This time around, however, the breadth on the advance over the last couple days looks to have dried up pretty quickly.  Tuesday showed breadth at only around 2/1 positive and then was very mixed on Wednesday before the NASDAQ's decline proved to be the major "tell".   S&P followed suit by end of day and both ended the session moderately lower.

It will be extremely important to keep a close eye on breadth in the days ahead.  It's thought that even if prices pullback, that they should do so now on lesser volume and less negative breadth, which would make for a pullback to buy into.   The number of stocks hitting new lows should also begin to wane and not reach prior peaks.   If these fail to take hold, and S&P gets under 2500, it's right to be defensive, regardless if prices are giving us better levels to buy into.   It's important to let prices stabilize a bit during these base building efforts, and not "be the hero" and try to pick bottoms until the market tells us its ready.  There was evidence of this early Tuesday.  However, the rally clearly stalled out Wednesday after its first burst off the lows, so we'll need to likely see some consolidation before gaining conviction that stocks go straight higher.   Under 2604 in Thursday or Friday's session would likely result in a complete retest of lows, so the two areas to keep in mind for possible support are 2612-8 initially and then 2604.

Additional charts and thoughts below.




S&P's recovery rally managed to recoup 38.2% of the prior decline but now sits just below a minor trend from late last week that might be important in causing initial resistance to this rise.  The area from 2718-22 initially has significance as minor trendline resistance, while over would result in a bit more push up to 2733 to 2740.   Overall, the rally was seen as a positive, though breadth could have been stronger.   Following severe drawdowns such as what occurred, its often important to stabilize a bit, which can take time, and often involve some retests of lows that occurred.  This certainly can't be ruled out, and the important thing to monitor now is the breadth on the upside and participation, along with seeing whether pullbacks to retest are marked by fewer stocks making new lows.   IF the last couple days are any guide, the next two weeks certainly promises to likely be far more volatile than what was seen last month. 



US 10-year Treasury yields managed to recoup much of Monday's pullback attempt in yields, and thus far no real damage has been done to this uptrend, which looks to also be the case when examining yield charts of German Bunds and UK Gilt yields.  It still appears likely that a move back up above 2.85% should happen and drive yields close to early 2014 highs before any peak, which would mean a possible test of 3.05%.   While Sentiment has turned understandably negative on Treasuries, which is understandable given this recent surge in yields, which likely also puts an eventual ceiling in, vs. thinking a breakout of the 30-year Downtrend channel occurs right away.   Over the next 2-3 weeks, yield gains are likely to present buying opportunities for Treasuries in late February.



The US Dollar index is staging a counter-trend rally at present, which likely has another 2-3 days to go before reaching resistance next week.   This likely will result in near-term underperformance in Emerging markets and commodities as well before this hits resistance and resumes its downtrend.   The US Dollar's gains along with Treasury yields over the last few days have had a particularly negative effect on Gold, which broke support early in the week and sold off sharply along with many gold stocks. While many scratch their head at gold not moving higher during an apparently "inflationary" environment like many claim we're in, it's important that Real rates aren't moving higher for Gold to work.  Near-term, the Dollar moving higher along with yields is a definite negative. 



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