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Market pullback could be underway as prices undercut Support

August 2, 2019

Mark Newton CMT, Newton Advisors, LLC


SPX Cash Index

Support: 2915-8, 2900-1, 2885-7

Resistance: 3004-5, 3021-3, 3040-2

My CNBC Fast Money interview from 7/31/19 discussing SPX, EEM, USD

Link to Technical Webinar from yesterday 7/31/19

Wednesday Technical Video, 7/31/19

SPX - (3-5 Days)- Bearish- Early gains faded and violated 2954 into the close which is a negative as this stretches back to early July. Expecting test of 2915-7 before bounce given positive momentum divergence on hourly charts but pays to be defensive until 3014 can be recaptured, which is a long way higher given yesterday's reversal.

EuroSTOXX 50- (3-5 days) Bearish- Expecting pullback to test 3372-85- Europe peaked out one day before S&P, but gave some ample warning. Now first support lies around 100 points below that adjoins larger trendline from December 2018 and key Fib support



Well, yesterday's selling was tough to ignore. Despite the early bounce, which proved to be nearly 1%, prices reversed 2% to finish the day down under key support at 2954 along with under lows that had held since early July. Volume expanded both in Wednesday and in Thursday's trading to levels we haven't seen since early May (8/1/19 SPY volume of 142.5mm was the highest since 5/7/19 of 144mm) While a few things did indeed point to a possible peak, price never gave any indication of falling for the major benchmark indices until yesterday. As we've discussed, it's always important to let price be the final judge, and avoid acting prematurely. (Countless times divergences and waning momentum often turn out to be just holding patterns before additional gains) Outside of US markets, Emerging markets reversed to fall sharply again, while the Dollar pushed up aggressively only to reverse course with prices very near channel resistance. The biggest technical development, however, outside of equities, proved to be in the Treasury market, with yields declining a whopping 12 bps down to 1.89, sweeping out former yield lows in the process. It goes without saying that volatility has come back in a big way very quickly, not only with equities, but also currencies, commodities, and the Treasury market.

Looking back, the following seemed important and negative:

1) Sideways action since mid-July which had a negative effect on short-term momentum

2) A drying up in volume (This past Monday witnessed the 2nd lowest volume in SPY all year)

3) Market breadth broke down in mid-July before rallying back, but now looks to be rolling over again

4) Daily momentum oscillators like MACD rolled over to negative more than a week ago (most of this was due to the sideways action, but still a negative)

5) Emerging markets had seen pronounced weakness starting back in July, never following suit to the strength in USA and Europe (USD related)

6) Semiconductors had shown weakness starting around 7/24, nearly a full week ahead of the selling (This leading sector typically is always worth keeping an eye on)

7) Transportation stocks have been lagging badly lately, and despite some minor attempt to play catch-up, DJ Transportation Avg still lies below April and below last Sept highs

8) Small-cap and Mid-cap averages have both plummeted to 10 year lows vs the broader S&P, showing pronounced weakness in every area except Large-cap Growth

9) Counter-trend Demark indicators like TD Sequential and TD Combo lined up to show a confluence of upside exhaustion on both daily and weekly charts

10) Defensive strength- In the month of July, markets showed stronger performance within the Staples group than Discretionary,

Going forward, it's going to be crucial for prices to rebound nearly right away to think this was just a minor blip. Time frame for trend change had focused on the early part of August, and given the last couple days of selling, it sure looks like we've arrived. To have any inkling that this is a false move, we'll need to see heavy volume and breadth on the upside, and make up some substantial ground to negate some of this near-term technical damage. (S&P would require a move back up above 3014) For now, I'm inclined to trust this selling, given the warnings, though feel that true damage might only prove to be 5-8% in nature given the anxious state of sentiment in its current form. Given the lack of any Trade deal and ongoing policy uncertainty, there seems to be a higher level of pessimism than ordinarily would be warranted with indices near all-time highs. Thus, a decline would serve to bring out skepticism and real fear much quicker than normally (which in turn, likely could make the selloff short-lived)


Selling long XLF and XLI

SELL EURUSD w/ bounce from 1.11 proving temporary and selling off to breach 1.11

Long GOLD by owning IAU, GLD and also GDX for Gold stocks

Long USDJPY with targets at 111

Long XBI with targets back to 94; Stops on weekly close under 82.87

Additional charts and thoughts below.

Image 8-2-19 at 4.46 PM.jpg

S&P decline broke down under prior days lows, closing near the lows of the session and representing a violation of support. Prices undercut 2954, so this represented not just a minor break to new lows but a close at the lowest level since early July. Structurally this is the first real sign of technical damage that most momentum and breadth indicators warned to be a possibility in late July. For now, patterns have grown worse and prior highs from late April have been undercut. While positive momentum divergence is in place on hourly charts, warning of a possible bounce in the near future, this has been a fairly damaging break, and could get down to 2915-7 before much support.

Image 8-2-19 at 4.46 PM (1).jpg

US Dollar on weekly charts shows a bit of a different picture than was seen on daily charts with many proclaiming how this was hitting new 2-year highs. The channel which has guided this uptrend over the last year now shows DXY right up against the highs of this pattern. Thus, the combination of near-term overbought conditions with weekly resistance likely halts DXY in its tracks and could bring about a larger reversal in trend. It's thought that both EEM and Commodities might bottom out in the next week if the Dollar peaks out.

Treasuries made a very sharp gain yesterday, with TNX falling under 1.9%. The quickness with which this move happened could be argued definitely played a role in how fast US Stock indices followed suit. Sentiment has grown quite bullish on Treasuries, as might be expected given the extent of this ongoing trend. Near-term, it's difficult to be too negative on Treasuries however until prices can at least regain prior lows that were broken at 1.94-5%. This yield decline will set up positive momentum divergence, making it unlikely to continue down too much more without a bounce. We've seen the 2/10s curve get cut in half over the last few weeks, flattening out substantially and Financials were hit hard yesterday. Overall, given the demand for Treasuries with many European sovereign yields much lower, it's difficult seeing too much of a bounce right now, but just something to watch carefully.


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