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VIX signaling a good likelihood that an Equity downturn is near

August 31, 2018
Mark Newton CMT, Newton Advisors, LLC- Contact: info@newtonadvisor.com

S&P 500 ETF Trust SPDR (SPY)-  
289.8, 288.50, 286.1   Support
291.16-19, 292.5         Resistance


LINK TO TECHNICAL WEBINAR from yesterday: https://www.youtube.com/watch?v=KTA02Ng_gRo&feature=youtu.be

 

SPX - (1-2 Days)- Bearish, looking to sell into any end of month recovery attempt Fridaythat gets to 2917 or above to 2925 which seems unlikely, but can't be ruled out given pre-holiday- Under 2898 should lead lower to 2876 and under that level, S&P likely falls to 2861, and under to 2807.

SX5E- EuroSTOXX 50- Bearish- with stops on shorts above 3458.  It looks like Europe took the lead in turning down, as might have been expected given the ongoing underperformance.  Thursday's decline means there likely isn't another stab at new highs, and Movement uner 3423 should lead down to 3340 initially near late June lows.   Short/avoid, expecting yesterday likely served as the technical catalyst for this to start to turn lower

HSCEI- Mildly bearish, looking to sell rallies while under 10900 should lead to a test or recent lows below 10500.  


Trading Longs: NRG, ES, ETR, BIIB, ABMD, TLT, EUO

Trading Shorts:  TUR, WDC, STX, MU, NTCT, CQQQ, EEM, DBC, MHK, WHR, HIG, GT, HBI, BWA, LVS, CVS, AMBA, AVGO, SF, FEZ, VGK, DE, ITW



TECHNICAL THOUGHTS

S&P reversed right in the price window of where it should have Thursday, and time factors support the notion of a peak in stocks within the next 3-5 days and can allow for the start of at least a minor correction to this recent upswing.  Europe looks to have gotten a head start in this regard, and sold off to multi-day lows, while Emerging market weakness followed through, particularly in the currencies.   While a end of month bounce can't be ruled out, we're likely to see more selling pressure after Sept 7, but which is thought to be getting underway in most US indices in the next 3-5 days.  For S&P, getting under 2898 on a close at this point would be a negative with movement under 2876 leading to acceleration. 

Markets have reached the final day of the month, in pretty good shape thus far, and despite yesterday's selling, still are positioned to close out the month with one of the better Augusts in four years and for the NASDAQ, in 18 years.   While not wishing to rehash the old arguments of why stocks likely should fall, it's still importnat to relay that this timeframe in late August/early September is important for US Equities for a possible change of trend, and that very few seem to be positioned for any sort of setback, if sentiment is any gauge.   The non-technical reasons that many might give regarding a selloff likely will revolve around one of two things:  Either the Trump tariff "re-raise", or else the Emerging market currency meltdown, which seems to be back on the front burner.   Both could serve to shock the system at a particularly sensitive time.  Technically we've seen the minor stabilization in the US Dollar having led to pretty large selloffs in many Emerging market equities and also the currencies, with Lira, Rand and Rubel weakness, all which look to extend.  Crude looks to be near a short-term area of resistance just below 71, while Gold is stubbornly turning back down given the Dollar's attempts to stabilize.

Overall, a pullback in commodities during the first part of September makes sense, and the key themes for the days ahead seem to center on whether Technology peaks out, and whether this EM currency implosion could spread to trouble for the US.  The VIX seems to be sniffing out trouble, like it normally does and managed to close at new multi-day highs yesterday, in a very bullish-looking bottoming formation.   Remember, this kind of thing also happened in late January just prior to the market peak, so it's always wise to be onguard when volatlity is hit hard into the Fall period and then stabilizes and holds up relatively well as stocks move higher.   Near-term, the next 3-5 days should prove telling, but should likely bring about a bond rally with yields back lower and stocks showing their first signs of any kind of weakness in the last couple weeks.  While the US equity markets should outperform Europe, they're still likely going to experience declines into mid-to-late September.   

ACTION PLAN-  

Short XLK at 75.75, with targets near 72.50
Long XLU with targets at 55
Long XLV with targets at 95, 100
Long XLP with targets 54.60-55, Stop at 52.95
Short EURUSD with targets 1.15


 

Additional charts and thoughts below.

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S&P Futures have pushed all the way down to test critical near-term support, and while 2894 was relayed as an area to officially get under to have concern, any daily close under 2898 likely will kick off the start of the decline down to test 2800-7 with just minor support near 2861.   Momentum has nearly gotten oversold on hourly charts now given the 25 point S&P pullback from earlier highs yesterday, yet prices are holding above the uptrend from mid-August.  Therefore, S&P right now is in a bit stronger shape than Europe and likely to hold up a bit better.   Until this trend breaks from mid-August, it's tough to rule out a minor bounce.  Yet rallies should be used to sell, and upside should prove limited into next week.  

CBOE Volatility index, or VIX, looks to have bottomed out, and rose to the highest levels since mid-August yesterday, closing higher than the last eight trading days.  This should be the start of implied volatility turning up for a seasonal correction and pullbacks should be used to buy, thinking that a move to test and exceed early August highs is likely.   

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Europe looks to have taken the lead in turning lower, as prices on the STOXX 50 indexThursday undercut the last two trading days and finished at new four day lows, violating the uptrend line from mid-August.  This should lead to momentum starting to turn down more sharply and likely lets Europe continue to underperform in the short run.  As daily charts of the SX5E show, prices made successively lower peaks from May and then July before now peaking out in late August at a much lower level.  Movement down to test August lows looks likely at some point in September.