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Trade weighted Dollar breakout could spell additional trouble for EM, commodities

May 22, 2019

Mark Newton CMT, Newton Advisors, LLC

Contact: info@newtonadvisor.com



SPX Cash Index

Support: 2829-31, 2819-20, 2800-2

Resistance: 2864, , 2892-3, 2894-6



Will be on Bloomberg TV today 4:40 PM, live at Bloomberg Headquarters, NYC



Thursday's Technical Analysis Video Webinar-5/16/19-20 min

https://youtu.be/RTMG17HRncc



My CNBC interview 5/8/19 discussing Technology

https://pub-origin.cnbc.com/video/2019/05/08/tech-sector-may-be-hitting-a-peak-technician-says.html





SPX - (3-5 Days)- Bullish- Yesterday's breakout of 2858 keeps trend bullish and should lead to further gains to test recent highs near 2894. Under 2840 on an hourly close would change to bearish for a test of 2800.



EuroSTOXX 50- Bullish - No Change- Pullback here also failed to undercut former highs from Tuesday, at 3367 and can support a bounce.. Over 3402 should point back higher to 3438 retest and then 3458, 3514.



HSCEI- Bearish- Still tough to trust rallies given the degree of sharp downside momentum while US Dollar index hitting highest level in over 15 years on a trade weighted basis. Bounces should prove sellable into end of week. Increasingly it looks possible that a 100% retracement and retest of January lows takes place





Trading Longs: OTEX, QURE, ANTM, HUM, MCK, AEP, ED, WEC, FRO, PAGS, MHK, FLS, CMG, GE, COST, TNDM, COUP



Trading Shorts: ALB, COPX, BBBY, DDD, UNG, KSS, EEM, M, SIG, LVS, EMR, DVN, NOV, AOS

Yesterday's gains got off to an early start, rising up above key resistance, and never looking back. By day's end, markets had closed up near highs of the session, on much better breadth on an UP day, than the prior negative breadth had been on a DOWN session. Energy, Industrials, Technology and Materials all closed up more than 1% on the day and Semis in particular, managed to halt recent declines and turn higher to the tune of 2%. This was seen as constructive at a time when many are expecting the Trade war uncertainty should certainly cause market declines. For now, Equities have held where they needed to and turned up sharply yesterday, adding some confidence to the idea that this recent decline had likely run its course.



Key developments for yesterday centered on the US Dollar index when viewed in Trade weighted terms, moving back to the highest level in more than 15 years. Treasury yields also made a sharp move higher, in Europe and US, while the Yield curve flattened out. This is seen as bearish for commodities and for Emerging markets and China. While weve seen a minor bounce in these in the last 24 hours, it's unlikely to persist with Dollar strength (more on this below)





ACTION PLAN- 



Long TBT with targets initially at 33.40 and breakout above leads to 34.47, and then 36



Long XHS, targeting 72 then 77. Stops at 63.40



Long XLU ,targeting 59.85-60 into end of week before a stalling out



Taking profits in XLP longs as additional churning is happening near highs and near-term underperformance has begun. Under 56 would be problematic for XLP longs





Additional charts and thoughts below.

below.gif

S&P- Move over 2858 was seen as a positive Tuesday, and should drive prices back to test and exceed last week's highs. Looking back, S&P managed to bottom right where it needed to, just as Equity Put/call was spiking and higher volume into Down vs UP stocks occurred. S&P held 2840 which was thought to be important before turning up and making some structural progress yesterday. Breadth came in at nearly 4/1 positive and turned out to be a much more positive broad-based rally than Monday's decline was negative. Thus, it's right to use 2833 as support, and simply say its better to be long OVER 2833, while under 2833 would postpone the advance, and lead to a deeper retest of lows.

lows.gif

The US Dollar's recent strength looks to continue near-term, as the Trade-weighted Dollar managed to exceed highs of the last few years, putting this at the highest levels since 2002. This is a much more bullish chart of the Dollar than when looking at DXY, the commonly viewed Benchmark for the US Dollar. This latter index has over 60% vs the Euro which can often give a biased view of where the Dollar is headed, simply based on Euro strength or weakness. In the short run, further strength looks likely and should likely put further pressure on Emerging Markets and commodities into late May/early June before a bottom. One should consider betting against Pound Sterling along with many of the Emerging and LatAm currencies which have been showing increasing amounts of weakness.


Healthcare Services looks likely to show further near-term outperformance as Healthcare slowly improves. Stocks within the Managed care group showed very good performance yesterday, with stocsk like ANTM, HUM, UNH, ABC, HCA all turning in the top performance within the group over the last five trading days, showing nearly 5% or better performance each. This minor breakout of the recent consolidation for XHS, the Healthcare Services ETF, should allow for gains up to $68-69 in this sub-sector. Furthermore, healthcare is entering a very bullish time of the year seasonally and looks likely to show further relative strength.