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The Good, the Bad, and the Ugly- Breakout in Tech encouraging, but breadth lagging, & Industrials, Financials weak

June 5, 2018
Mark Newton CMT, Newton Advisors, LLC- Contact:

S&P 500 ETF Trust SPDR (SPY)-  
274.30, 273.86, 272.94          Support
275.30, 275.70, 276.61          Resistance



SPX - (1-2 Days)- Bullish, between now and FOMC, expecting a bit more upside for equities into end of week this week and early next, though the sector participation is likely to be low, and Financials could push up to take the place of Technology as mean reversion sets in.  2749-50 is important and above near 2767-77 for possible stalling out

SX5E- EuroSTOXX 50Mildly Bullish-  A bit more strength can happen up to 3520-30, so its likely that the next couple days continue to show further upside.  Any move back under 3389 would allow for a full retest of 3261.

HSCEI- Bullish- Move up to 12400 without too much trouble and movement above should allow for 12525-12890.  Bounce ongoing and expect Dollar weakness leads this higher


Trading Shorts:  PCG, EIX, PNW, GGP, PCAR, ITW, BLL, SWK, CMI



Long SPY w/ target 276.61
Long QQQ, but looking to sell 175.20+ with stops under 173.07
Long XLY with targets 110
Long XLF with targets 28-28.50
Long IHI w/ target raised to 205, and stops raised to 200.78
Long NYFANG index @ 2730 with targets raised to 2950 and stops raised to 2800
Long HSCEI at 11575-11650, targeting 12500
Long Grains through WEAT, or CORN
Buy Gold on any daily close above 1309, anticipating a rally back to 1346-1365

A few good signs of progress, but with the good, comes the bad.   Equities have now shown NASDAQ Comp and 100 index having broken out, which would be thought ordinarily to be quite constructive.  However, given Demark's exhaustion indicators which have served us well over the years, we'll face pretty serious signs of resistance just in the next few days into next week, making this likely a move to sell into for Technology.  Meanwhile, Financials have the opposite signals, and buys are occurring across some of the larger Banks, which could allow for BAC, JPM and XLF specifically to play catchup.  note, this directly coincides with US 10yr Yields regaining the key 2.93% area that allows yields to recapture the trendline that was broken.  So Yields very well might trend higher into next week's FOMC while the Financials follow suit and play catchup after a lengthy period of underperformance.  The Regional banks still look to outperform the Big Banks, but these Money center banks look attractive from a counter-trend perspective, and should outperform in the short run.   This looks like a short-term rally in this group only which could then be reversed following the FOMC, given the ongoing poor structure in the Financial group. 

As has been discussed, given the nature of this consolidation since late January, it's important to play Hit and Run, and be tactical as this looks quite unlikely to lead to a move back to highs across the board for US equities for the time being.   What's of concern??   Breadth is far too light on this rally to have real conviction, (Less than 2/1 during Monday'ssession)  Meanwhile,  Equity Put/call ratios remain in the low 50s and far too low from which to expect a meaningful upward thrust (as most seem to be loading the boat ahead of next week's Fed meeting)  Furthermore, the issues with regards to Italy and the Eurozone don't seem to be resolved by a long shot, so a few days of mild equity rally might cause investors to forget what's happening "Across the Pond"  but this hasn't been nearly resolved. 

All in all, while a move up above 2741 was thought to be bullish at a time when NASDAQ has moved to new highs, the lack of participation out of Industrials, Transports and Financials was disappointing.   While its thought that Financials likely join the fray briefly, this might occur while Tech takes a back seat, and allows some brief catchup out of Discretionary and Healthcare which we discussed last week.  Bottom line, it pays to be tactical, and while a long bias is still correct, utilizing tight stops into the FOMC makes very good sense, technically, as this does NOT seem like a broad-based rally which inspires confidence.  

Additional charts and thoughts below.


NASDAQ's push back to new highs seems constructive at first glance technically, though the overbought conditions combined with counter-trend signals of exhaustion are a concern for NASDAQ Comp and 100 index, and can be seen in many popular Technology names across the board like AAPL, FB, NFLX, AMZN, GOOGL just as FANG has pushed back to new highs.  While further near-term gains might happen for 3-5 days, the period in Late June could turn out to be quite a different story for Technology and for the NASDAQ, and tactically speaking, I like taking profits on longs in NASDAQ and in Technology into next week on any further gains.  Daily, weekly and monthly charts will all line up showing exhaustion, while evidence of negative momentum divergence is present, making this unattractive to think this breakout extends too meaningfully.  The area at 7720-50 looks important for NASDAQ Comp. 


Consumer Discretionary is likely to show further near-term outperformance, as XLY furthered last week's breakout and is likely to test prior highs near 110.  Note, the huge constituents like HD, NFLX, CMG have played a big role in this group outperforming and these stocks might still shine into the Fed meeting until we stall out.  At present, while prices moving outside the upper Bollinger band might make this group seem stretched, it's right to stay long and think this move extends and a bullish near-term outlook for Discretionary through XLY is prudent.  


 Financials rally overdue..  Are we here?   I think the move in Treasury yields back over 2.93% is a bullish sign for Financials, as this group followed the move in yields down last week.  Now that 2.93% has been reclaimed, ALONG with TD Sequential 13 countdown signals having been confirmed, Financials might bounce in the short run.  However, both absolute and relative charts show this bounce to be short-term in all likelihood only.  Also, there seems to have been no real net change to the Futures positioning for Treasuries on the yield drawdown.  So we still have readings of -471k for Treasuries, a very bearish omen most likely for Yields, bullish for Treasuries, thinking that any yield bounce into next week proves to be a chance to buy Treasuries.   For now, this sector might attempt some short-term mean reversion.   For those playing the group, the Regionals still likely outperform, and tough to expect a flip back to the Big banks, though this latter group should rally in the days ahead, technically.