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Pullback in Financials, Tech should lead to a bit more weakness into end of month, but lows look near

June 28, 2018
Mark Newton CMT, Newton Advisors, LLC- Contact: info@newtonadvisor.com

S&P 500 ETF Trust SPDR (SPY)-  
269.10, 268.30-.50, 266.60, 266               Support
273.53-.60, 274.49, 275.20-50,  276.72    Resistance


LINK TO TECHNICAL WEBINAR from last Thursday- https://stme.in/y87RQhYBKd

 

SPX - (1-2 Days)- Mildly Bearish, but feel like near-term downside should be limited to 2683-5 before stabilization and bounce into early July.   As was the case with yesterday, 2735 and also 2747 are important areas on the upside to exceed, but do not feel like this move goes straight lower, so there should be an attempt to stabilize now in the next 2-3 days which allows for a counter-trend bounce to unfold.  Elliott wave patterns suggested a final pullback under 2700 should create a low and given the uptick in fear, im an initial buyer into end of week.

SX5E- EuroSTOXX 50Mildly Bearish-Look for another 1-2 days of weakness down to 3300-3350-  Ongoing underweight vs US and weakness has reached the lowest levels since early May, and should allow for another 2-3 days of weakness which potentially can reach 3300 before any low is at hand.  

HSCEI- Mildly Bearish, No Change- Looks to be 2-3 days away from support which could come about at 10900 down to 10750. HSCEI has nearly given back 50% of its entire rally since 2016, but is getting oversold, while being 1-2 days from generating counter-trend buy signals.  Overall, its likely initially that this first pullback should be a buying opportunity.    

Trading Longs:  GLD, IAU, GDX, CSX, XOP, OIH

Trading Shorts:  KRE, KBE, ZION, FITB, SMH, AMD, NVDA, LRCX


TECHNICAL THOUGHTS


ACTION PLAN-  

Short VGK with downside targets at 54.50-55
Short KBE with targets at 47.25
Short SMH with targets at 101.50
Look to cover shorts in SPY at 268.50-269, or on ability of SPY to move over 274.50
Long XLV with targets 86.85
Long XOP with targets at 46.50
Long GLD at 119 or below down to 118, with upside targets initially at 122, then 127.50



S&P's rally attempt ended with as vicious of a pullback as it began on Wednesday, a bearish development that suggests that a break of this week's lows likely happens into end of quarter before any stabilization.  Yields gave the initial warning sign yesterday, failing to confirm the rally in Energy and Industrials, and given the flat breadth which occurred during the initial morning spike coupled with a lack of participation from Tech or Financials, S&P failed to get up above the key 2747 area, and turned promptly lower..  quickly.   Breadth went from 3/2 down to -2.5/1 negative and 10 and 30-Year Treasury yields snapped key support, creating a strong downward pull on Financials which was followed soon thereafter by Technology and a give-back in Industrials strength.   The breakdown in yields likely can allow for further near-term weakness in Bank stocks in the upcoming 2-3 days, while Technology weakness also seems likely to continue.

However, there are some bright lights in the vicinity as fear started to ramp up into the afternoon and Equity Put/call ratio has begun to climb, while hourly S&P charts began to show evidence of positive momentum divergence on the pullback.  From a wave perspective, a break of 2700 should occur on worse negative breadth and better relative momentum and should give way to at least a temporary low in prices into end of month, not dissimilar from the past three months.  Overall, technically, there are reasons to temper the near-term bearish attitude under 2700 ahead of the end of quarter and into a seasonally bullish holiday period.  One should consider utilizing weakness Thursday/Fridayto lighten up on shorts and consider longs in Industrials, Materials, and Heatlhcare.   Addiiontally, Gold has gotten down to support and should also stabilize and begin to turn higher, which likely is accompanied by a weaker Dollar in the month of July.   Overall, while the trend has been weak, there are at least a few reasons to have optimism, but stock market rallies likely cannot happen as yields plummet to new weekly lows, which happened yesterday.   Yield targets for 10-year yields lie at 2.76% and should be an area to consider selling Treasuries into and after July 4th holiday for at least a minor bounce. 

Additional charts and thoughts below.

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The S&P rapidly reversed early gains after getting right up to early targets near 2747, representing the lows of the 1st wave down from 6/21.  The quickness with which prices fell into the close still didn't drag momentum back to new lows, however, and while the pattern over the last couple days is a negative, it's thought that any minor break below 2700 likely should be buyable, ideally near 2683-5 into Friday.  Positive momentum divergence is present, and sectors like Transportation stocks and INdustrials look to be close to trading lows.  Financials and Tech on the other hand still look to face 2-3 days of weakness near-term before any support and this alone warrants a negative stance.   Overall, it's thought that further weakness from here should lose strength, creating further divergences and setting up for a rally into July 4th holiday period.  

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The breakdown in Treasury yields was a clear negative for Financials on Wednesday, and looks to have further to go on the downside into end of week.  Movement from 2.83-4 down to 2.76% looks possible before any bounce, so it's expected that the breakdown in Banks likely has further to go in the short run.  Additionally, the shape of the pattern in Treasury yield charts also casts somewhat of a dim picture for July for Equities given how yields have largely led the move in Equities, so some serious stabilization and backing up in yields looks necessary before gaining too much conviction as to the quality of any equity bounce.  

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 The breakdown in Regional Banks (KRE) directly followed yesterday's deterioration in KBE, and the near-term Head and shoulders formation was violated as of Thursday'sclose.  The long-term trend for KRE since 2016 was also breached, so this presents a definite picture of the start of greater weakness in this sector.  Financials weakness seems to be directly coinciding with Strength in Treasuries, so as long as Yields fall, which in the case of 10, 30 year Treasury yields, looks to be likely in the next 2-3 days into end of month/quarter.  Pullbacks in TNX should reach 2.76% near-term, so KRE should get down under 60.70 , whereas into end of July might very well pullback to late March/April lows.