Please enable javascript in your browser to view this site!

Can this Run in Technology continue? Bullish into end of March, then a Stallout likely

March 18, 2019

Mark Newton CMT, Newton Advisors, LLC

Contact: info@newtonadvisor.com



S&P 500 Cash Index

Support: 2764-5, 2727-31, 2678-81, 2672-5

Resistance: 2815-8, 2824-5



Summary:  US Equities have now trended higher in 10 of the last 12 weeks, with SPX gaining nearly 500 points in just under 3 months' time, or +20% since Christmas Eve 2018. Trends which had begun to wither a bit into early February managed to hold support after just minimal drawdowns and then last week regaining all of the prior week's losses. Now the act of having pushed up to new highs on better breadth and momentum this past week keeps the near-term technical situation looking bullish and still difficult to fade, despite the extent of recent gains. While this rally is thought of as one to consider selling into next month, it's important to see signs of Technology starting to turn lower and for S&P to give back the area of its most recent breakout. At present Technology does not seem ready to rollover, and still should be overweighted this week as further gains seem likely.



Outside of Equities, we've seen signs of the Dollar turning back lower, albeit within an uptrend that began in late January. While commodities have tried to stabilize, it still looks a bit early for this to work until February lows in BBDXY index can be breached. Meanwhile, Treasuries have been persistently strong, similar to Equities with yields reaching the lowest levels since January (TNX)



Sector-wise, it was thought that Technology and Industrials would have a difficult time carrying this rally by themselves, as both are showing gains of more than 15% YTD. It was thought that other sectors would need to come to the rescue. This looks to be happening slowly but surely. Just in the last week we've seen measurable signs of Financials and Healthcare starting to outperform. This is not immaterial, as these two sectors combined account for over 25% of the SPX. Thus, there has been a broadening out in this rally that can't be overlooked. The main risks at this point have to do with Tech stalling and rolling over (discussed below with charts) along with counter-trend signs of exhaustion appearing. Meanwhile momentum not rising as quickly to confirm this recent push back to new monthly highs is important. However, the bottom line is.. we'll need to see evidence of index weakness to pay attention, and overall, that just hasn't happened.



As the chart below shows of the MSCI AW World index (EX-US), most of the globe has rallied in lockstep but at a slower pace, after having weathered a much more difficult 2018. Thus, the snapback rally here has not even recouped 50% of last year's drawdown. Yet, the act of exceeding the downtrend does still suggest further gains are possible in indices globally in the months ahead, and it looks premature to fade this rally. Note that last year's pullback got right down to important support which had held prior pullbacks as what happened in early 2016. Thus, it's often important to take a look at charts outside of the SPX to put things into perspective.

perspective.gif




TECHNOLOGY- Has this move run its course? Or is there more likely?This week's charts and discussion center on Technology, which has bolted higher to take the lead again this year with very sharp gains in recent weeks.Technically speaking, it looks premature to give up on gains into this week, as it looks very likely that this coming week and potentially the next could be positive. Technology has moved back to new all-time highs on an Equal-weighted basis, while main Technology gauges like S&P 500 Information Technology index are within striking distance of all-time highs and look likely to challenge these areas in the next 2-3 weeks. However, as will be discussed below there are some intermediate-term concerns, largely hinging on momentum having turned down sharply late last year on weekly/monthly charts. This will need to be resolved by continued sharp gains back to new highs on relative and absolute charts. However, some indices like the SOX look to be just below prominent highs and showing negative momentum divergence that likely could make this sector slow. Bottom line, for March, it looks right to be involved with Technology and overweight this group. However, on signs of Tech stalling into April and/or May, it's right to watch for the degree of any consolidation and /or decline before weighing in on the balance of the year and/or next. It's thought that Tech likely does stallout into the Fall of 2019 and might begin a period of underperformance given the monthly charts waning in momentum. But at present, it's tough to give up on this sector until prices begin to weaken materially and one cannot abandon Tech simply because of prices being overbought alone, as plenty of good charts remain in place.




Most Important Technical Developments of the Past week:



1) TNX broke down last week to the lowest levels since January (US 10yr) as did the 2 and 5 year yields. (30 year held up in stronger fashion)

2) Financials began to turn higher and outperform and Regional banks in particular look attractive to outperform. Interestingly enough, this group has worked despite yields turning down sharply


2) US Dollar index turned down over the last couple weeks, and this weakness has helped a bounce in both China and also Emerging markets


3) Momentum and breadth which flattened out a bit into late February, have turned up a bit, with momentum in particular moving up to test levels of late February. For now, momentum is not as high as was seen in late February, so this has created the start of some negative divergence. Yet, until prices turn down, this can certainly continue this current week. Breadth, meanwhile, has improved by the Advance/Decline pushing back to new highs. Yet, momentum on breadth is much lower than in late February.

4) Sentiment looks to have contracted further in the last week, with AAII converging to show just a 1.36% spread between Bulls and Bears. After having widened out into late February to nearly a 20% spread, now this has retreated to near unchanged. Thus, sentiment certainly isn't too complacent right now in a way that would put in a top. (Back in January 2018 this showed over a 40% spread between Bulls and Bears)


5) Demark "Sell Setups" were formed this past week on weekly charts for Value Line Arithmetic, SPX, NASDAQ, DJIA, SX5E, along with many major sectors, including XLK, XLI, XLE, XLY, XLB, XLF. Note that Daily counts however, have been recycled and now are continuing up on different counts. Thus, its thought that when these complete and Daily and weekly are in alignment, this should coincide with at least a short-term peak, likely in late March/early April.

6) Cycles- (time period between 3/20-4) This month brings about an important six-month anniversary to last September's peak, while being 90 days from the late December lows, 270 days from the late June 2018 lows, and 120, 135 days from the November turns, which suggest the following periods could be important: Additionally this rally from late December will be exactly equal in time to the pullback from mid-September as of March 29.

7) Crude oil looks to have made a decent about-face and should push up to $61-$63 in the weeks ahead into April. Meanwhile, Gold and Silver look to have begun at least minor drawdowns in recent weeks and this looks to continue.

8) Sectors like Industrials and materials both underperformed last week, while Technology and Healthcare made sharp gains. This continued rotation into Tech looks important and bullish in the short run.

9) Defensive sectors like Utilities and REITS did manage to both make absolute breakouts in the last couple weeks, though both are nearing areas of resistance on weekly and monthly charts. Additionally, relatively speaking, both lagged last week. It's thought that both sectors should be less likely to continue recent gains.


10) Small-cap outperformance ended quickly in late February and this has been given back sharply in recent weeks. While this isn't necessarily bearish for the overall market, it's important to mention given that the first two months showed very promising strength in this group.




LONG IDEAS within Technology: A, CRM, FLT, GPN, PANW, TEAM, RNG, PCTY, PAYC, PYPL, COUP, CYBR, SPLK, AMZN, NFLX




SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:



Short-term (3-5 days): Bullish into late March before stalling out- Last week's push above 2825 keeps the near-term trend positive and exhaustion signals are premature for a turn. The combination of these along with the fact that momentum has lessened in its intensity should still allow for additional strength this week. While the week following March Quad-expiration historically has been negative following a positive week, we'll need to see movement back down under 2788 to pay attention. Until then, trends look likely to push even further higher with targets at 2850-60 for this week

Intermediate-term (3-5 months)- Bullish- While monthly momentum remains negative for many indices given our weakness since September and particularly since December, the near-term trend remains positive from late December and the breadth thrust combined with bullish seasonality and ongoing pessimism combined with recent sector emergence (Technology and Financials breakouts) should lead equities higher into the Spring/Summer before any further rolling over happens that causes more intermediate-term damage. The latest strength over the last few weeks has now caused weekly MACD to turn positive and join the Daily momentum in moving up. Thus, it's looking increasingly less likely that an immediate retest of December lows is likely, but something of the sort certainly cannot be ruled out for September/October of this year. Structurally, as has been noted, we have seen technical improvement in US benchmark indices, with prior lows having been recouped along with downtrends from last Fall's highs being exceeded. While the average stock is now officially in a bear market, most market indices are not, and many arithmetic charts still show the uptrends for market indices to be intact. Overall, it's right to be constructive on 2019 given likely positive January performance combined with bullish cyclical trends for this year, and expect that the larger bear market likely gets postponed until 2020.


10 important Technology Charts heading into this week, sector, index charts and then 3 attractive stocks to consider

consider.gif

Technology relative to SPX- Bullish for further gains to test 2018 highs.Relatively speaking, this chart of S&P 500 Information Technology index v SPX shows the recent breakout last month that helped Technology start to accelerate and outperform in a big way. This strength helped Tech regain the top spot for 2019 performance, and this move does not yet look complete. Daily charts of Tech/SPX still argue for another 1-2 weeks of outperformance, and given the sharply upward nature of momentum recently, this looks to get near former highs from Summer 2018 before slowing. Until there is evidence of Technology stalling out, it's right to be long/overweight, expecting further near-term relative strength, and likely a lack of any market correction until late March.


march.gif

Technology (S&P 500 Information Technology index) Bullish, but faces a tough task after rallying to near 2018 highs. Technology as seen on monthly charts began to turn up sharply back in 2016 and accelerated faster once prices got up above former highs from 2000. Often the first breakout above a former high should allow for some upward follow-through. While the last three months have been higher this year after last year's drawdown, it's imperative for Technology to reach and exceed last year's highs to keep this chart in good shape. The slowdown in momentum from last year remains a concern on an intermediate-term basis for Technology, so it's thought that Tech faces its first real test in the next 2-3 months after this recent run-up. Bottom line, movement back up over 1338.90 sooner than later would be a very good sign. More likely, however is that Tech stalls out this Spring slightly under this level and consolidates. Movement back under 1162.76, or February 2019 lows, would be problematic for Tech for this coming Summer and Fall, so this is what to watch for that could be an issue for Technology and for the market as a whole.


whole.gif

NASDAQ vs SPX relatively-No signs of this turning back lower. Along with keeping a close eye on Technology, watching the relative performance of the NASDAQ itself is often useful as it's Tech and Biotech heavy in weighting, and the start of relative out/underperformance can often give early warning signs about Technology along with turns in the broader market. As this relative chart shows above, the NASDAQ/SPX chart peaked out last June, providing a three-month warning on when the broader market topped out. The decline undercut its lengthy uptrend in early October 2018, coinciding with the start of more substantial market weakness which lasted through December. In similar fashion, the turn back higher managed to exceed downtrends from last Fall earlier than the broader market accomplished this. Thus, an early warning on market strength occurred which preceded the larger advance in the broader market. Overall, relative chart of the NASDAQ to broader market can be helpful to watch closely. For now these are still pointing to a bit more strength over the next 1-2 weeks.


weeks.gif

NY FANG index (Bloomberg)- FANG looks to be breaking out. As relayed last week in "Newton's Notes" , The FANG stocks look to have exceeded a meaningful area of trendline resistance that has served as resistance for this group since last Summer. This goes a long ways towards explaining some of the underperformance earlier in the year. The last week of strength, however, seems to argue that this part of Technology is now trying to play "catch-up" after the lengthy consolidation.


Semis look to be nearing resistance & likely stall by the end of March -The Philadelphia Stock Exchange Semiconductor Index (SOX) has strengthened up to an area of important resistance stretching back since mid-2017. In the short run, this is likely to provide some solid near-term resistance at 1425-1450 that likely holds prices. However, in the event this is surpassed, prices likely would trend up to 1500-25, which should constitute a strong area to sell. Given the 18 month consolidation and downturn into last December, this recent rise has had little effect on momentum which has been much weaker than what's been seen back in late 2017. Thus, the start of negative momentum divergence looks to be a serious challenge for the longevity of this advance, if and when prices push up to new highs. Bottom line, the next 3-5 days look to be positive for Semis, but one should expect a stalling out, and the next 2-3 years might prove difficult to achieve the kind of gains which occurred in 2016-7 given the slowdown in momentum.


momentum.gif

Equal-weighted Technology vs SPX (SPXEWIN index-Bloomberg) v SPX- Near-term bullish for Tech, as the breakout now has managed to exceed former highs from 2018 and looks poised to push up further this coming week. When looking on an equal-weighted basis for Technology, relative to the SPX (SPXEWIN index vs SPX) the breakout late last year provided a "green light" for Tech outperformance, as this equal-weighted index had exceeded a key downtrend going back since last Summer. At present, we've seen some stalling out, but now in the last two days, this ratio has begun to turn higher yet again. Overall, movement back to new highs over the next 2-3 trading days looks likely, which should translate into further Technology outperformance into late March, and a continued market rally. Once this begins to stall out and reverse, some clues about SPX and its turn back lower will be evident. For now, it pays to stay the course this coming week, anticipating further gains.

gains.gif

Apple Inc (AAPL- $186.12) AAPL is growing close to resistance, which could come about between $188-$190 this coming week. The combination of near-term overbought conditions coupled with prices having risen above its upper Bollinger Band and within 2 days of counter-trend exhaustion all makes this a less than perfect risk/reward technically at this juncture in the near-term. While the breakout happened earlier last week near $176-8, at current levels it doesn't have as much appeal. However, the intermediate-term picture given the upward shift in momentum over the last few months is still attractive. Thus, for traders, one would look to sell into gains between Wednesday and Friday this coming week, looking to buy dips. On any weakness back to $178-$180, this present attractive buying opportunities between April and September.

September.png

Salesforce.com Inc. (CRM- $161.51) Attractive to buy for a test/breakout of late February highs. The consolidation in CRM proved mild over the last couple weeks and resembles a Cup and Handle pattern to the chart pattern since last September. Movement back higher looks to have started late last week and it's right to lean long, expecting a test of $166.87 around $5 higher. Movement above this on a weekly closing basis would argue for a push up to $180 as this would constitute a breakout of this six-month bullish base. For now this latter part might prove premature, but heading into this current week, longs are recommended technically, with thoughts of an upcoming challenge of former highs. Any movement back down under $157 would stop out shorts.


shorts.png

Palo Alto Networks (PANW- $239.72) PANW is attractive for further gains to near $260 in the near future. Its quick rally back to challenge and briefly exceed last Fall's highs looks important technically. This level also was important based on the prior highs hit back in 2015 when PANW made it slightly over $200, a significant high, albeit at a slightly lower level. Overall, further near-term gains look likely to 260, with gains over this level leading quickly up to near $280. Only a pullback under $222 disrupts this rally potential, leading to consolidation before gains can occur.

occur.png

Agilent Technologies Inc. (A-$81.10) Bullish as the last few weeks have exceeded the highs of a lengthy bullish base that began back in early 2018. Last week's recovery of the pullback attempt on weekly charts is constructive for a bit more rally in the near future. While weekly Demark indicators are close to completion, this likely will not be in place until early April to signal any sort of upside exhaustion. In the short run, movement up to $85 looks likely, with movement above that taking Agilent up to $90. This lengthy bullish base shown on weekly charts from early 2018 was important when exceeded last month. While the stock has rallied somewhat since that time, the full extent of the rally cannot be called complete, and this pattern remains constructive for further gains. Only under $75 would the advance be postponed.

Utilities look attractive for further outperformance

March 11, 2019

Mark Newton CMT, Newton Advisors, LLC

Contact: info@newtonadvisor.com



S&P 500 Cash Index

Support: 2764-5, 2727-31, 2678-81, 2672-5

Resistance: 2815-8, 2824-5



Summary:  Equities have begun trending lower as of last week, marking the first weekly close at multi-week lows of 2019. Asian indices also fell to new weekly lows, while Europe began a minor drawdown, but arguably held up much better than the rest of the world. Treasury yields fell back to prior yield lows though held prior support, while the US Dollar's gains hit new three-month highs, resulting in meaningful weakness for Emerging markets along with most commodities and China. Overall, it was thought that the breadth and momentum slowdown might finally catch up with stocks, and last week's early Reversal on Monday proved to be the technical catalyst, with a key reversal day on huge downside volume. Given the extent of the move off the lows, which in many indices and sectors has proven to be 15-20% within the last 10 weeks, the upside for the next few months is likely to be not nearly as robust, and selectivity will be very important. To review, in the short run, there were a few reasons to suspect this recent rally might be susceptible into March. Technically speaking, breadth and momentum deterioration, a lower than average Equity Put/call ratio, Demark exhaustion (daily and weekly), defensive outperformance in Utilities, and limited upside based on Weekly Bollinger Bands (2% Std. Deviation) all stood out as potentially having importance, along with the fact that markets peaked out near the 10-year anniversary of 2009 extreme lows (which started this 10 year Bull) All of those looked important.

However, on an intermediate-term basis, we've seen some very constructive signs that still warrant a bullish outlook on an intermediate-term basis for this year. Those concern : 1) Greater than average market breadth on a weekly basis starting with late December/early January breadth thrust /Advance Decline for all equities back at new all-time highs 2) Pattern improvement (SPX getting back UP above areas of important resistance 2630 and then 2715, exceeding trendlines from last Fall 3) Ongoing skepticism about a China deal and overall subdued sentiment after many drew down risk into this decline in December/January and have been slow to add risk back on 4) Bullish seasonality stats going back since 1950 about the time following mid-term election year troughs and the resulting push back higher 5) Technology breaking back out to new all-time highs on an equal-weighted basis (20% of SPX) 6) Decennial cycles of years ending in 9 coinciding with bullish pre-Election year cycles- Both of these suggest this year has a higher than average tendency to be positive 7) Bullish January and February which produced some of the best early year gains in years (while near-term overdone, this factor alone argues for intermediate-term strength 8) Bullish momentum on a weekly basis


So after these negative and positives, we're left with a constructive trend on a weekly basis, yet near-term concern. Last week proved to be the first down week that largely undercut prior lows.. so now what? The daily chart below serves to put this move into perspective. Last week's decline managed to sell off sufficiently to nearly reach the lower Bollinger Band on daily charts. Counter-trend exhaustion now on the downside has nearly completed, and we've seen a contraction in Bullish sentiment in the last week, with AAII gauges (chart below) pulling back to see just a 10% spread now between bulls and bears. So after a huge 15% rally, last week's pullback alone was sufficient to turn sentiment back down and show some meaningful contraction. This looks to be important, as declines that cause sentiment to rise this quickly likely should prove to be short-lived. Thus, it's likely technically in my opinion that this first draw-down is near completion and should not get under 2700.

2700.gif



Most Important Technical Developments of the Past week:



 1) The Arms index, or TRIN, (Advance/Decline divided by Advancing Volume/Declining volume) produced a very high reading after its rally into last Monday's close, with that reversal day bringing about the highest reading of volume into declining vs advancing stocks for 2019. While TRIN readings over 2 often can bring about capitulatory lows in the market, when they occur following steep rallies on reversal days, the effect is often the opposite (See late 2017)



2) Sentiment seems to have contracted quite rapidly on last week's pullback. Popular gauges like AAII sentiment contracted last week to just 10 percentage points of Bulls over Bears, in a rapid about face to the previous widening. Thus, while Investors Intelligence remains showing a high 30+ spread between Bulls and bears, AAII is now just a tad above neutral. Furthermore, the Equity Put/call ratio showed a steep gain up to .75 which is the highest since mid-January. Overall it's thought that bearish sentiment spiking is a bullish sign for stocks.



3) US Dollar index bottomed out and turned higher sharply to the highest levels in weeks. This looks to have hurt commodities and EM of late, though these might prove temporary once the Dollar turns back lower.



4) China and EEM pulled back sharply given the Dollar rise. The move in China had been delayed and had not followed the US or European move, so last week's late breakdown looked meaningful.



LONG IDEAS within Utilities: PNW, ETR, NI, DTE, AEP


Short-term (3-5 days): Expecting that last week's pullback is nearing support and weakness under 2700 is unlikely before this turns back higher. While Friday could have marked the low, one can't rule out additional near-term weakness given the recent pullback, but should not prove widespread given both the breadth acceleration and some signs of fear coming back quickly. Look to buy into dips this week and expect that markets should start to turn back higher.

Intermediate-term (3-5 months)- Bullish- While monthly momentum remains negative for many indices given our weakness since September and particularly since December, the near-term trend remains positive from late December and the breadth thrust combined with bullish seasonality and ongoing pessimism combined with recent sector emergence (Technology and Financials breakouts) should lead equities higher into the Spring/Summer before any further rolling over happens that causes more intermediate-term damage. The latest strength over the last few weeks has now caused weekly MACD to turn positive and join the Daily momentum in moving up. Thus, it's looking increasingly less likely that an immediate retest of December lows is likely, but something of the sort certainly cannot be ruled out for September/October of this year. Structurally, as has been noted, we have seen technical improvement in US benchmark indices, with prior lows having been recouped along with downtrends from last Fall's highs being exceeded. While the average stock is now officially in a bear market, most market indices are not, and many arithmetic charts still show the uptrends for market indices to be intact. Overall, it's right to be constructive on 2019 given likely positive January performance combined with bullish cyclical trends for this year, and expect that the larger bear market likely gets postponed until 2020.


10 important charts on Utilities and Sentiment/Breadth

breadth.gif

Utilities bullish for further outperformance XLU looks to be on the verge of a 3-5 week period of outperformance given the breakout above prior highs from both December 2018 and also late 2017. This is considered to be a constructive technical development and a pattern widely considered to be a giant Cup and Handle spanning the last 16 months. Utilities is the only one of the major sectors showing such a bullish breakout pattern at this time, and should be considered as a Technical overweight, particularly considering last week's selloff after such a lengthy run. Movement up to $59-$59.50 looks likely, and one should use minor dips as something to add to existing longs.

longs.gif

Utilities bullish near-term, but upside likely limited to $60 in XLU. The weekly XLU puts this recent Cup and Handle pattern in perspective. While the 16 month breakout is certainly constructive, the intermediate-term trend channel should be important in holding this rally on gains over the next month, which lies up near $59.50-$60. This has held this rally on two separate occasions since it began in 2015 and likely should hold on this go-around as well. Thus, it looks right to be near-term bullish, but one should temper enthusiasm about this proving to be anything more than just a 5-7% rally given this meaningful resistance.

resistance.gif

Utilities vs SPX in relative terms appears attractive- XLU v SPX looks to be bottoming out given the breakout, pullback and rise to the highest levels in the last few weeks. Relative charts show a very good chance of this rising further in the weeks ahead, and should rally to challlenge prior highs made earlier this year. Many times these relative charts tend to show movement far before the absolute movement occurs. In this case, this appears like an attractive breakout, pullback and now turn back higher, while the absolute charts were more of a traditional breakout.

breakout.gif

The breadth correction started in the last week after recent push back to new highs. Advance/Decline on "All stocks" has just pulled back to violate the trend from late December. The strength of the move from late December is thought to be a real positive but yet now has begun to correct this move to new highs. Overall, this pullback and trend break is a minor negative but overall should prove short-lived given the positives of the push back to new highs.

highs.gif

American Association of Individual investors Sentiment (AAII) has contracted to just 10.6 points of Bullish vs Bearish spread as of last week. This is a pullback from earlier 25 just a couple weeks ago and shows the extent to which this recent weakness and signs of economic slowdown have taken a toll on sentiment. This goes to show that further intermediate-term weakness could prove short-lived as sentiment might turn bearish too quickly.

Pinnacle West Capital Corp (PNW- $93.16) PNW has formed an attractive Cup and Handle pattern in the last 16 months that makes this appealing to buy the breakout, expecting further gains ahead. Similar to the broader Utility space, PNW has just gotten up above prior highs from December 2018 along with November of 2017. Weekly momentum is not overbought, and Demark exhaustion is still premature on monthly charts based on TD Combo, requiring another 2 months of gains before this should begin to stall out. This looks precisely like an appealing time to own this near-term given some of the recent market volatility which began again last week. Gains up to $100 look likely and one should use pullbacks to 90 to add to longs given the improvement in its technical structure. While near-term targets lie near $100, one can use trailing stops and own provided this remains above $92.64 on its advance.

Entergy Corp (ETR- $92.49) Bullish- ETR has broken out to the highest levels since 2008 just in the last couple weeks, exceeding the highs of a bullish base which had begun in early 2015. This should allow for additional upside in the weeks and months ahead, and targets the 61.8% retracement zone of its 2008-9 decline near 101. Specifically the appeal for ETR here despite a 10%+ move YTD has more to do with its intermediate-term pattern shown above, and exceeding this larger 4 year triangle is thought to be quite constructive technically. While ETR has reached the 50% level of its prior drawdown from 2008, no counter-trend measures of exhaustion are in place that would suggest this should peak out here. Thus, additional upside looks probable given this recent technical improvement, and this should be overweighted for the weeks/months ahead.

ahead.gif

NiSource (NI- $27.42) NI just starting to show evidence of breaking outafter having trended neutral/range-bound for the last few years. Last week's rally managed to exceed the trendline guiding the highs of the recent short-term triangle pattern. This likely carries NI back above $30 and could extend given the extent of the longer-term range-bound pattern which has been intact since 2015. Overall this appears like one of the better risk/rewards given a breakout in Utilities given that NI has not already made its move but has been basing. This recent push to new multi-week highs should serve as the technical catalyst for further acceleration.

acceleration.gif

DTE Energy (DTE- $123.20) Bullish- Move to 130 likely Similar to the broader Utility space, DTE has appeal given its move to just exceed prior highs of this recent base which has been intact over the last couple years. The act of making a weekly close above $121, specifically given the trend connecting this high to the prior from 2017, should allow for upward continuation in the weeks ahead. Movement up to near $130 looks likely, with stops on longs put near $118. Overall, it's worth following the Utilities that are breaking out coinciding with the larger sector making a similar move, and this should lead performance in the weeks ahead.

American Electric Power (AEP- $81.95) Bullish given the act of pushing back up above areas of resistance that have held since late 2017. While similar to the broader Utility space, AEP has made a series of higher highs within a larger channel starting in 2015, it's been the most recent bullish base formed since 2017 that gives reason for the near-term optimism. Given that both weekly highs occured between $877-$80 and AEP has just gotten above this area, the pattern reflects a Cup and Handle which likely propels this up near $85 in the weeks ahead. Thus, while broader market volatliity has come back over the last week, this Utility has just broken out to new highs and should offer some outperforamnce into April for those looking for selective longs. Stops on longs under $78 on a close with upside targets near $85.

Healthcare looks to be on verge of turning higher relatively; Stock indices look to be nearing exhaustion

March 4, 2019

Mark Newton CMT, Newton Advisors, LLC

Contact: info@newtonadvisor.com



S&P 500 Cash Index

Support: 2764-5, 2727-31, 2678-81, 2672-5

Resistance: 2815-8, 2824-5



Summary:  Equities have now risen for 9 of the last 10 weeks (SPX) with late January missing just by a hair in being positive. Breadth and momentum, which had both started out fairly positive in late December/January, has flattened out a bit in the last couple weeks, but we've seen precious little evidence of anything but rising prices with a huge string of higher highs, higher lows and higher closing prices on weekly charts since late Christmas Eve. Overall, Markets will be unable to continue rising at this pace, as we've now seen gains of more than 450 points in 10 weeks time, or 19.2%. It's likely that March brings about some type of trend reversal (at least on a short-term basis) but it's expected to prove minimal and end up being a buying opportunity for further gains into April. Overall, until there is evidence of prices turning down, it's difficult to highlight the negatives over the price structure alone which has proven downright resilient. We'll be on watch for evidence of some stalling out (as given some of the reasons listed below, i do feel there's an above-average probability of this happening) Yet, it still looks proper to use 2764 as the dividing line in the sand for Bull/Bear and being over this level keeps the rising trend intact. With regards to Fixed income, the most technically important move last week seemed to come with Yields starting to turn higher dramatically ,which happened in the 10 and 30 year Treasury, while USD/JPY also followed suit. This had been sorely lacking in previous weeks and was listed as a warning sign, but similar to early January, yields look to be following the bounce in Equities, not vice versa. Furthermore, the Dollar decline looks to have reached a temporary floor and last Friday's gains look nearterm bearish for commodities, particulalry the Precious metals after a big run. Overall, the risk appetite seems to be slowly coming back into stocks, but positioning still indicates that Money market inflows are the highest in nearly two years, and had risen last month to the largest level since early 2016. This BofA Merrill Lynch GFSI Money Market flow index shows net flows into Global money market funds as a fraction of total Equity market capitalization. Since the October-December 2018 decline resulted in such a huge period of risk being taken down, this hasn't all come back yet. Thus, intermediate-term sentiment is telling a different story than some of the recent complacency that's entered the market, suggesting that pullbacks in March still could prove to be buyable.

buyable.gif




Most Important Technical Developments of the Past week:


 1) TNX and USDJPY both showed very sharp rallies into end of week, suggesting that the recent non-correlation to Equities might be ending. This is seen as a promising sign for Financials as the Yield curve has begun to steepen as well




2) US Dollar index looks to have bottomed near-term. While the patttern in the last few years remains range-bound and the larger pattern suggests a period of Dollar weakness in the years ahead, at least for the short-term, the Dollar looks to have bottomed out.




3) Momentum and breadth which both started out quite positive in early January, have both flattened out in recent weeks. Daily MACD has turned negative based on last week and both the Advance/Decline and Stocks trading above their 200-day ma both peaked around 2/20-5.




4) Sentiment looks to be finally nearing a time when AAII has joined Investors Intelligence in widening out in the spread between Bulls and Bears (It only took 10 weeks and a 19% GAIN !!! ) Bulls/bears now is over 20% in AAII, and is more supportive of a near-term peak in stocks




5) Demark "Sell Setups" should be present this week on a WEEKLY basis for Value Line Arithmetic, SPX, NASDAQ, DJIA, SX5E, along with many major sectors, including XLK, XLI, XLE, XLY, XLB, XLF. This is the first time that Weekly exhaustion has lined up with Daily since late December, and utilizing weekly counts often can add to greater success when looking for reversals.




6) Cycles- This month brings about an important six-month anniversary to last September's peak, while being 90 days from the late December lows, 270 days from the late June 2018 lows, and 120, 135 days from the November turns, which suggest the following periods could be important: Additionally this rally from late December will be exactly equal in time to the pullback from Early October as of mid-month. Looking at March, the following periods have the potential to be important: 3/5-6, 3/15-7 and 3/24-6.




7) Gold and Silver look to be peaking out in the short run and given the 1-2 combo of Rates and Dollar rising, these could selloff more in the short run with targets down near 1250 for Gold and a likely maximum move to 1220 which should be buyable.




8) Sectors like Industrials, Tech and Discretionary are all nearing upper Bollinger Band areas on weekly charts, which combined with the Demark exhaustion, will make for a difficult time pushing too much higher without consolidation.




9) Small-caps have made an impressive enough comeback vs the Broader market that it should pay to own Small caps this year, as the RTY vs SPX managed to break out above its six-month downtrend and RTY also got above three different prior lows since 2016. This looks meaningful and RTY should be favored and bought on pullbacks.




10) Healthcare looks to be on the verge of starting to turn back higher after nearly six months of underperformance. Some of this was due to mean reversion and turning down after a very decent period of performance. But this group is now showing Daily and weekly downside exhaustion and it looks right to position long in Medical devices, and Pharma while still avoiding the Services stocks


LONG IDEAS within Healthcare: MTD, ZTS, VRTX, REGN, SRPT, VCEL, COO, DXCM, SNN, AZN




SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:




Short-term (3-5 days): Expecting short-term peak this week or next- but until weakness happens, trend still bullish until/unless 2764 broken - Raising stops on longs- Still no evidence of any deterioration, but stock indices and many sectors will show counter-trend exhaustion this week, while momentum and breadth have started to falter. It looks right to consider selling out of Technology to go into Healthcare




Intermediate-term (3-5 months)- Bullish- While monthly momentum remains negative for many indices given our weakness since September and particularly since December, the near-term trend remains positive from late December and the breadth thrust combined with bullish seasonality and ongoing pessimism combined with recent sector emergence (Technology and Financials breakouts) should lead equities higher into the Spring/Summer before any further rolling over happens that causes more intermediate-term damage. The latest strength over the last few weeks has now caused weekly MACD to turn positive and join the Daily momentum in moving up. Thus, it's looking increasingly less likely that an immediate retest of December lows is likely, but something of the sort certainly cannot be ruled out for September/October of this year. Structurally, as has been noted, we have seen technical improvement in US benchmark indices, with prior lows having been recouped along with downtrends from last Fall's highs being exceeded. While the average stock is now officially in a bear market, most market indices are not, and many arithmetic charts still show the uptrends for market indices to be intact. Overall, it's right to be constructive on 2019 given likely positive January performance combined with bullish cyclical trends for this year, and expect that the larger bear market likely gets postponed until 2020.


10 important Charts heading into this week, Recent Technical developments in Equities, along with Healthcare charts

charts.gif

SPX trend bullish near-term, but warnings now appearing on daily and weekly charts suggesting trend should reverse in March, even if short-lived. SPX has now gained nearly 20% in the last 10 weeks from intra-day lows on Christmas Eve 2018. This retracement has carried over 75% of the prior decline and puts prices within 5% of all-time highs. At present, the risk/reward isn't as ideal for new longs heading into March based on the following developments. First, as seen in this weekly chart above, counter-trend "TD Sell Setups" can be formed as early as this week with just a move over 2813.49 in SPX cash on weekly charts. These have been important in the past in signaling exhaustion that has led to trend reversals. Second, the upper area of the 2% Bollinger Band hits just above current levels. This is likely going to provide at least some minor resistance. Third, momentum based on gauges like RSI is now at a 69 on daily charts and has begun to diverge from peaks made in mid-February. Fourth, other momentum gauges like MACD have rolled over to negative now on daily charts. Thus, there seem to be some things in place now which argue for this rally to stallout and make at least a minor reversal before prices are able to reach former highs. Risk/reward is not as favorable and one should be on the lookout for trend reversals in the next couple weeks, potentially as early as this Wednesday/Thursday. Under 2775 would serve as the first warning and then under 2764 allows for a pullback to get underway, which should prove short in nature.

nature.gif

Treasury yields broke out of minor trends last week- Daily charts on 5, 10 and 30 year yield Treasuries show the last few days of gains in yield terms, which exceeded the minor trend of the last month. This looks to be an important development technically at a time that yields had lagged the equity move as both Treasuries and Equities were moving higher in tandem through the back half of January into February. Now Yields along with USDJPY both look to be moving higher to join the Equity rally, not dissimilar from what was seen in early January. While Yields have pushed up above the higher Bollinger band, any minor dip in yields should prove to be a chance to sell Treasuries, expecting higher yields in the month of March.

march.gif

Gold and Silver have both turned down in recent days as the Dollar and Yields have shown signs of hitting support and turning back higher. As mentioned above the Yield breakout looked to be significant. The Metal trade meanwhile broke down below the uptrend of the last six months. It's thought that Gold could pullback down to 1250 without too much trouble. While the intermediate-term prospects have improved for the Metals given the Dollar weakness, it's recent pullback looks to have additional downside in the month of March before this stabilizes. One should hold off on buying dips until this move plays out.

out.gif

XLK- Technology ETF- Technology looks to be nearing absolute levels of importance, and could stall out in early March. While as we've discussed in the daily reports about Technology breaking out in relative Equal-weighted terms vs SPX, the XLK itself is set to record signs of exhaustion now on a counter-trend basis in early March, while nearing the highs of its downward sloping Bollinger Band, the 2% standard deviation of price movement. Additionally, when Tech broke down under its 2-3 year uptrend, it was thought to be bearish and did in fact lead lower. Now we're seeing prices on the verge of retesting the area of its breakdown, something which also has importance. Overall, it's thought that the area at 71.50-73.50 has real significance as a key area of resistance, and one should consider either lightening up into this area, or hold off from chasing the Tech rally.

rally.gif

Healthcare looks to be on the verge of trying to bottom out and turn back higher, something which on a relative basis bodes well to consider using recent relative weakness to overweight this group. As weekly charts of XLV/SPX show, we saw a breakout last year of nearly a 3-year downtrend in Healthcare. However as the broader market bottomed out in December, this group undperformed relatively. Now we're seeing evidence of both Daily and weekly exhaustion counts on Healthcare right at a time when this is testing the area of the lower Bollinger Band, just above the area of last year's breakout. This creates an attractive risk/reward to overweight Healthcare and look to add to this on evidence of this confirming these Demark signals and turning higher.

higher.gif

Healthcare might be better to favor in the months ahead vs Technology.Relative charts of XLV to XLK, or Healthcare vs Technology, show a similar pattern of a breakout in this pattern followed by a retracement in the last couple months. This brings about an attractive risk/reward in trying to buy into Healthcare vs Tech, and investors that are too "tech-heavy" might want to consider Healthcare which looks attractive to buy dips after this minor pullback.

pullback.gif

Pharmaceutical stocks look attractive given the bullish base in DRG which has grown more attractive in its ability to push higher to test the highs from late last year. DRG peaked out in 2015 and this level wasn't retested until late last year. While a natural area of resistance that resulted in some backing off in this index, we see that prices have immediately pushed back to just below these former highs. The quickness with which prices have moved back higher is seen as a very bullish development for this sector, and should drive prices to make a larger breakout in the weeks and months ahead. Given the signs of Healthcare trying to bottom out relatively, a breakout in Pharma stocks would make good sense, and something to watch for carefully in the weeks ahead.

ahead.gif

Biotech likely to stall out near former highs within 1-2 weeks. Biotech, as shown by the XBI, or SPDR S&P Biotech ETF, looks likely to show further near-term strength which should retest former highs. Yet, this sector has already made a large rally in the last couple months given the extent of the drawdown, and weekly exhaustion counts, similar to the SPX, are within 1-2 weeks of forming. Thus, this rally likely should stallout near former highs vs thinking an immediate breakout is imminent. One can still favor many of these stocks on an intermediate-term basis, but near-term, it's more likely that some type of stallout happens in March, so one should look to buy pullbacks if given the chance in the weeks ahead.

ahead 2.gif

IHI, or the Medical Devices ETF, has just pushed back to new high territory, something that leaves this sub-sector in much better technical shape than what's happening with either Pharma, or Biotech. While near-term overbought, the act of pushing back to new high territory should help prices move to 240-5 without too much trouble before hitting resistance. Overall, the Medical Devices sub-sector appears to be the strongest part of Healthcare.

healthcare.gif

Healthcare Providers, on the other hand, are the weakest part of Healthcare and should be avoided as an area to consider, in favor of Medical Devices, Pharma or Biotech. Charts of the IHF, the Ishares US Healthcare Providers ETF, Weekly charts show the large uptrend in this group being broken and prices recently being repelled after having rallied to test the area of the former breakout. This often is important in suggesting further weakness. Thus, until there is evidence of February highs being exceeded for IHF, it's right to hold off on buying dips, and expect that further underperformance is possible in this one area of Healthcare.

Rally extends to Dec highs as China trade truce extended

February 25, 2019

Mark Newton CMT, Newton Advisors, LLC

Contact: info@newtonadvisor.com



S&P 500 Cash Index

Support: 2727-31, 2678-81, 2672-5, 2622-4

Resistance: 2800-1, 2815-8, 2824-5



Summary:  Equities continue to charge higher, as this past week now marks 8 of the last 9 weeks of gains. While sentiment is growing a bit more constructive from its December 2018 pessimistic levels, it's nowhere near levels of complacency that marked the peak around this time last year back in January 2018, 13 months ago. Trends remain bullish near-term, momentum has turned bullish on daily and weekly basis, and Breadth has been much more constructive of late. Thus, heading into the final week of February, there still seems to be little with regards to price or momentum lately that would suggest this trend is stalling out. Bond yields meanwhile have been churning but largely lower, and have all but ignored the equity gains of late. The Dollar continues to show signs of peaking out, and has turned down a bit more forcefully of late. Meanwhile Commodities have begun to lift along with Materials and mining stocks and Emerging markets have firmed. Most of this still seems quite constructive heading into this week. While it's right to try to pinpoint factors that might allow for a slowdown and/or reversal, price is the most important factor and nothing price wise has yet to show meaningful enough deterioration that would allow for a reversal. Thus, while counter-trend signals are now abundant this coming week in suggesting some type of Reversal should be near, we'll continue to utilize the uptrend from December, and until this is broken, it will be right to still stay the course. The chart below highlights the Value Line

Vale line.gif

Overview: Equities continue to be largely "unloved" while trends have steadily pushed higher. The uncertainties of China Trade policy have largely had little effect in causing any ripple to this bounce, and technically speaking it's always been right to lean more on trends then to anticipate what might be factored into the market or not on Trade. Technically it's likely that this trend DOES show some type of stalling as we enter March, given the confluence of both Counter-trend exhaustion now on multiple sectors, indices while Treasury yields remain quite weak. However, trends remain bullish near-term and simply have not given us much reason to want to fight them, regardless of momentum "nearing" overbought levels, or Treasuries rallying sharply as well. Breadth has been quite strong in the last months, and Summation index (chart below) has risen to the highest levels in over 2 years. Skepticism of this rally is also a factor and many who missed the rally are now holding out for pullbacks to buy, as opposed to chasing this move. Furthermore, the "smart" money as per CFTC data shows no evidence of shorting into this move and indicates a bullish bias, which is largely constructive on an intermediate-term basis. This week, the focus this week will be trying to pinpoint what still CAN work, as opposed to trying to fight this move. After all, as discussed, there still has been no meaningful change in this trend from late December. Until this trend starts to give way, it's right to just concentrate on what has an above-average chance of continuing to work in the days and weeks ahead. However, it's not wrong to think that this recent pace of gains will be very difficult to sustain in the coming months. Given the extent of the deterioration which took place in October-December, monthly momentum remains negative and quite a bit below the peaks which were registered near this time last year. Thus, this recent rally has largely had little to no effect in carrying momentum back to near recent highs and this will continue to be an intermediate-term issue for stocks.


Overall, the recent technical damage in the US Dollar looks important and the focus should be diversifying out of Equities after a 17% bounce and into Commodities given their recent stabilization. Metals and mining stocks, and Chemical names look like better risk/rewards than Technology, though selective longs in Industrials, Discretionary and Tech still looks prudent given the extent of the positive momentum of late. Bottom line, the bullish seasonality combined with a less than enthusiastic sentiment situation and recent trend breakouts looks to still favor a bullish view on Stocks overall for the months ahead, with any minor pullback that breaks uptrends from December thought to be short-lived and not something which immediately leads to a retest.


LONG IDEAS: TOL, ITB, STX, WDC, FTNT, CRM, FXI, CLX, CHD, INFO, STOR

SHORT IDEAS: TTWO, ACOR, M, SNPS, HAE


SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:


Short-term (3-5 days): Bullish until/unless 2731 broken - Raising stops on longs- Markets have flattened a bit but the trend has not turned down sufficiently to think this week will be lower. SPX is now within striking distance of early December highs, which was thought to have some importance heading into Late February. (overnight futures higher on china tariff truct delay) Counter-trend signals will be in place this week. Yet, quite a few indices and sectors have now broken out, and it's thought to be likely prove to be a short-term stalling/reversal only which then should be buyable into this coming Fall. Above 2803 would lead to 2815-8, and this could have importance into mid-week. But important to see evidence of 2731 broken to have any real concern and then this would likely lead down to 2681 the 2/8 lows. Remaining above this over the next couple weeks keeps the trend in very good shape.


Intermediate-term (3-5 months)- Bullish- While monthly momentum remains negative for many indices given our weakness since September and particularly since December, the near-term trend remains positive from late December and the breadth thrust combined with bullish seasonality and ongoing pessimism combined with recent sector emergence (Technology and Financials breakouts) should lead equities higher into the Spring/Summer before any further rolling over happens that causes more intermediate-term damage. The latest strength over the last few weeks has now caused weekly MACD to turn positive and join the Daily momentum in moving up. Thus, it's looking increasingly less likely that an immediate retest of December lows is likely, but something of the sort certainly cannot be ruled out for September/October of this year. Structurally, as has been noted, we have seen technical improvement in US benchmark indices, with prior lows having been recouped along with downtrends from last Fall's highs being exceeded. While the average stock is now officially in a bear market, most market indices are not, and many arithmetic charts still show the uptrends for market indices to be intact. Overall, it's right to be constructive on 2019 given likely positive January performance combined with bullish cyclical trends for this year, and expect that the larger bear market likely gets postponed until 2020.


10 important Charts heading into this week, showing some of the recent Technical developments in Equities, FICC, and Sentiment

Sentiment.gif

Equal-weighted Technology is now moving back to new highs.Bloomberg's Equal-weighted Tech index on an intermediate-term basis has shown remarkable improvement in the last week vs the broader market during a time when it was thought that most Tech was nearing resistance. While counter-trend exhaustion still looks to be close for Technology, this Equal-weighted Tech vs SPX chart has just broken back out to new all-time high territory. This can't be viewed any other way than bullish in the near-term. While Semiconductor stocks certainly have work to do given the SOX still under 1400 (See charts below) this movement in Tech is a welcome development that should allow for additional Tech strength in the weeks and months to come.

come.gif

Industrials breaking out- Industrials when shown on Equal-weighted Basis, are also now just breaking out, with last week's close above the highs of this intermediate-term trend of Equal-weighted Industrials vs SPX. (Measured using Invesco's S&P 500 Equal-weight Industrials index (RGI) vs SPY ) Given GE, MMM, BA weight in index, it's thought to be more accurate to use Equal-weighted Industrials vs just the XLI. Overall, a breakout of the trend which has held since last year is thought to be a positive development for this sector and can allow for additional gains.

gains.gif

Europe is getting close to its first meaningful area of upside resistanceWhen eying the IEV, the Ishares Europe ETF, additional gains look likely early in the week, but appears to be heading right towards a serious area of trendline resistance drawn from last year's highs. Similar to the SPX, counter-trend exhaustion will form this week and this looks to be a better area to consider selling into than SPX considering the ongoing downtrend which has not yet been surpassed. So while the near-term trend is bullish, one could look to take profits on further gains this week and/or consider shorting above 43.50, as from a risk/reward basis, longs look unattractive going into March with prices still under this longer-term downtrend. 

downtrend.gif

Semiconductors- SOX still trending higher, but finally getting to areas of importance which has held since peaking out last March. Similar to European ETF, IEV, the Philadelphia Semiconductor index, or SOX also lies just below important levels. Movement back up to 1385-1400 from 1364 still appears likely, so Semis still appear a bit early to sell into at current levels. Following another 3-5 days higher which gets over 1385, this would be a better suited Sell vs at current levels. Momentum remains positively sloped and this uptrend from late December remains very symmetrical in sloping higher. So given this sectors leading tendencies, it remains important to highlight that the current uptrend has not shown any evidence of peaking, but does look to be close to key levels, which are just 20-40 points above, and Demark indicators will signal exhaustion within 1-2 weeks. This points to an above-average chance of this stalling out into March at a one-year anniversary of last year's peak. 

peak.gif

Transportation Breakout likely leads to additional gains- Transportation has been one of the driving forces in the Industrial move lately, but yet much of this has come from the Rails. The DJ Transportation Avg has officially exceeded the downtrend from last Fall as of last week, which puts this trend on better terms, suggesting that further gains should be likely. Stocks like CSX, NSC, and UNP have all enjoyed gains of over 9% in the last month, and despite some of the woes in stocks like FDX and UPS which have underperformed along with the Airlines, Transports look like a group to favor given this rally back over key resistance. Transports should have resistance at 11044 near December highs, and IYT still looks to trend higher to 200 from its current 190.

190.gif

Bloomberg Dollar index- The extent of the Dollar weakness in recent weeks is an important part of the larger thesis of why Emerging markets might outperform in 2019 along with Commodities finally starting to turn higher for intermediate-term gains. China has strengthened relatively to the US lately and it's thought that this strength can continue and might begin to outperform US stocks. Near-term, this Dollar weakness looks to persist and if 2019 lows are violated, this would also constitute a breakdown of this entire structure over the last year. On a development of this sort, one should consider intermediate-term Pound Sterling and/or Euro longs and also longs in commodities as an asset class that could give stocks some meaningful competition this year as an outperforming asset class. 

class.gif

Utilities have managed to engineer a much stronger comeback than many anticipated lately, as this group has turned in strong enough performance to rank fourth best over the last month and the 2nd best performing sector last week. So this recent outperformance during times of market strength is thought to be unusual and something to pay attention to. Technically speaking the last 4-5 weeks have given a snapshot at why further strength might be likely in this sector, as we've seen a move right back higher to test both prior highs in a very short period of time. Thus, when it seemed likely that the peak and selloff into December might bring about further intermediate-term weakness, this ability to snap back as quickly in recent weeks bodes well for an intermediate-term breakout back to new all-time highs. In the short run, there is some resistance directly above. However, this is thought to be temporary and any pullback should be used to buy with targets in the low 60's.

60's.gif

Breadth much stronger than expected of late- Minor waning proved just temporary- Looking at weekly Breadth, this has risen pretty dramatically in the last couple months, and was thought to be something to keep a close eye on in terms of gauging whether this rally had any "legs" or whether just a minor bounce that should then give way to a move back to lows. As this weekly chart of the Summation index shows (the Smoothed gauge of McClellan Oscillator) this has gotten above all levels seen in the last year, and has reached the highest levels since 2016. Thus, recent strength has been remarkably broad-based in a manner that was initially thought to be very difficult heading into this year. Technically in my experience, breadth surges like this are an impressive guide to what could play out in the next 3-5 months. While momentum seems to be nearing near-term overbought levels, it's becoming increasingly clear that this rally might have more to go on an intermediate-term basis, either into late April/May, or into Late August before a more meaningful top.

top.gif

VIX getting down close to levels where it's right to consider owning implied volatility. VIX has now fallen off dramatically from December peaks and is within striking distance of levels that were important all of last year. While this looks to potentially have a final maximum flush down to 10 from its current 13.51, we can see that the area from 9.50-11 has largely held for the last three years. Thus, any further drop in implied volatility would likely constitute an attractive area to buy implied volatility for means of hedging and/or long-dated speculation on Vol levels rising from these depressed levels later in the year.

year.gif

Sentiment has gotten slightly bullish, but certainly not at extremes- Sentiment polls are worth highlighting, since bearish sentiment seems to have evaporated, as might be expected with a friendly FED and 17% rally in the last 8 weeks. Yet, DSI and Investors Intelligence readings still haven't lifted AAII Bulls all that dramatically over Bears. (American Association of Individual investors) Last week's reading was a 13% more Bulls than Bears. Thus, positive and a big improvement over the bearish readings from late December. Yet, historically it's only been when both AAII and Investors intelligence both showed readings +30% either Bullish or bearish to really make a difference.

Financials should be favored for Outperformance

February 18, 2019

Mark Newton CMT, Newton Advisors, LLC

Contact: info@newtonadvisor.com



S&P 500 Cash Index

Support: 2727-31, 2678-81, 2672-5, 2622-4

Resistance: 2780-2, 2785, 2800-1, 2824-5



Summary:  Ongoing resiliency for US Equities and none of the catalysts that were thought to be potentially warning signs given the uncertainty have brought about any real weakness of late. Much of the slowdown which has happened a couple different occasions during this runup from late December proved to be 2-3 days maximum before trends pushed back higher. Specifically, equity indices remain trending in bullish uptrends and managed to close out the week near weekly highs. Bond yields have been largely under pressure in recent weeks and still no real evidence of yields turning back higher. The real news this past week concerned the US Dollar having begun a potential larger move back to the downside, which served to help commodities strengthen. While a bit more weakness is thought to be necessary to call for a larger decline in the Dollar throughout the spring and summer, this turndown looked important last week. Moreover, the breakout in commodities reached multi-week highs and cleared a multi-week sideways base which had kept the group largely churning sideways of late. Heading into this current week, technically we'll need to see some evidence of price weakness to think that the Bulls don't carry indices even higher into early March. Momentum is not yet overbought while Demark indicators still haven't lined up in an ideal fashion to signal a reversal. The Chart below shows prices having shown little to no real damage thus far. So bottom line, we'll need to see a break of this trend for concern, and until then, trends remain bullish.

bullish.gif


Overview: Equities head into this current week having trended higher for seven of the last eight weeks. We've seen a snapback higher in Technology Industrials and Financials, while momentum has been strong enough to push back to positive territory on weekly charts. Structurally, SPX remains in much better shape than this time two months ago, and has managed to rally over 400 points off the lows, or greater than 17%, nearly 1/2% a day for 34 trading days. Breadth, which started off strong in late December/January, has gradually waned somewhat, but has not turned lower as thought might be the case in mid-February. Additionally, markets continue to trade within a thick cloud of uncertainty as many still express doubts that the Government shutdown can be averted all together after the initial funding, while many are skeptical of a true Chinese deal that would satisfy what was agreed upon last month. However, the prospects of a deal of some sort seems to be helping to underpin an ongoing bid in Equities as few believe that a true deal has been completely discounted by stocks. Thus, while many are hopeful that a deal of some sort can be put into place by March 1, many are not willing to buy into this rally without a pullback of some sort. But trends remain near-term bullish and momentum is now positive on both Daily and weekly charts.

Specifically, two things have improved in the last week which were mentioned as negatives but seem to have recently fallen by the wayside. First, we've seen Defensive strength largely start to reverse course in the last week, as groups like Utilities, Staples and REITS have all begun to flounder and weaken back to former weekly lows. This past point in particular is often an important harbinger of gains in stocks and normally it's important to see the Defensives really start to gain ground before expecting too much of a correction. Second, breadth has failed to show any real weakness which was thought to happen last week and start to show a negative reversal. Last Friday's gains happened on nearly 3/1 positive breadth, and this has not turned down as might be expected. Finally, it's worth pointing out that Demark indicators have not confirmed any type of exhaustion just yet and while both TD Sequential and TD Combo are in place, the Setup count has been pushing higher in another count,(which is now a 4) which very well could lead to 9 daily bars before registering a 9-13-9 pattern. (In plain English, this simply means we might very well get another 4-5 days of rally before this move is complete)



In terms of the negatives that remain, and are important to highlight, the chief concern revolves around Yields remaining quite weak and not following suit and/or leading Equities higher. Given the past positive correlation, this was thought to be important, while a divergence in Yields and stocks should be cause for suspicion. At present, both Bonds and stocks have been persistently strong. Additionally, Technology seems to be nearing resistance, both with SOX near key trendline resistance at 1385-1400 and also Equal-weighted Technology right near former highs. Without at least some proof of Technology starting to weaken, however, it's tough using this point as a real negative for now.


This week we tackle the Financials, a group which was largely weak for most of last year, having peaked at nearly this exact time in February 2018, while this February we've seen the group start to emerge. Specifically, Financials have made sufficient technical improvement of late by means of trendline breakouts in XLF, KRE and Relative breakouts on a short-term basis to expect further near-term strength out of this group. On a weekly basis, it should be mentioned that longer-term relative charts of XLF/SPX have not improved sufficiently to make the case for a year-long rally in this group. Therefore, a near-term bullish call only is appropriate for now. Though given some divergence in Technology in following Equity indices lately, one can make the case that those who are long in Technology might benefit from a move into Financials. One should position long in Regional banks, along with the Credit-card processors, while expecting the larger banks to start gradually joining in on the strength. Longs to consider at this time technically are found in V, AMTD, JPM, WABC and PRU. Charts and analysis of these are found below.




SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:



Short-term (3-5 days):  Bullish until/unless 2681 broken- The trend heading into February has failed to show any signs of weakness thus far in the uptrend from late December. Thus given S&P has gotten up above 2760, and given last Friday's strength, prices still look to have the possibility of pushing higher within this trend, but likely have maximum upside to near December highs near 2800. On the downside, we'll need to see weakness down under 2731 at a minimum to have any sort of inkling of an impending pullback. However a move to new multi-week lows under 2680 would break the uptrend from December and give more conviction. As mentioned, several of the negatives have not played out to stall this uptrend, and it's important to see the weakness in Trend before weighing in that any decline should get underway.


Intermediate-term (3-5 months)- Bullish- While monthly momentum remains negative for many indices given our weakness since September and particularly since December, the near-term trend remains positive from late December and the breadth thrust combined with bullish seasonality and ongoing pessimism combined with recent sector emergence (Technology and Financials breakouts) should lead equities higher into the Spring/Summer before any further rolling over happens that causes more intermediate-term damage. The latest strength over the last few weeks has now caused weekly MACD to turn positive and join the Daily momentum in moving up. Thus, it's looking increasingly less likely that an immediate retest of December lows is likely, but something of the sort certainly cannot be ruled out for September/October of this year. Structurally, as has been noted, we have seen technical improvement in US benchmark indices, with prior lows having been recouped along with downtrends from last Fall's highs being exceeded. While the average stock is now officially in a bear market, most market indices are not, and many arithmetic charts still show the uptrends for market indices to be intact. Overall, it's right to be constructive on 2019 given likely positive January performance combined with bullish cyclical trends for this year, and expect that the larger bear market likely gets postponed until 2020.


10 important Financials Charts heading into this week 5 Sector, index, relative charts and 5 technically attractive Long ideas

ideas.gif

Financials relative to SPX (S&P 500 Financial index vs SPX) We've begun to see some definite stabilization in Financials in the last month after a very poor showing in 2018. The group peaked out in relative terms nearly at this exact same time last year, while arguably now bottoming relative to the SPX. Daily charts showed a minor trendline breakout from the last month, while weekly (shown above) highlights the bottom made late last year, the rally, and now what appears to be a higher low. While we'll need to see movement now back over January highs in relative terms to have conviction of an intermediate-term bottoming in this group, the stabilization to this downtrend from last year as seen above, (with the downtrend having given way to sideways trading) is a definite positive to weekly momentum. It looks right to favor Financials to strengthen further in the weeks and months ahead given the absolute breakout in both KRE and XLF in the last week, which has helped momentum improve on near-term and also intermediate-term timeframes. 

SPDR S&P Regional Banking ETF (KRE- $55.97) - Bullish near-term after KRE broke out above the downtrend that had guided the Regional banks lower in recent months. This strength has helped this group recoup nearly 50% of the damage done since last Fall, and counter-trend exhaustion remains premature to sell into this move. Thus, KRE still looks attractive to own here with thoughts that a move up to near $60 is possible before any stalling out. KRE has outpaced the recent gains in XLF and should be favored relative to the group as well (Additional charts on this below)

below.gif

KRE v XLF (Regional Banks relative to Financials XLF) Regional Banks should be favored for additional outperformance. This relative chart of KRE to XLF shows the recent breakout that happened with Regional banks when compared to the XLF, which had been trending lower since last June. This looks to be a very favorable development for KRE which had underperformed much of last year but seems to have rebounded nicely in the last month. Thus, when deciding how to play this Financials move, Regionals look like the better bet after coming back to life following a very tough 2018. 

2018.gif

SPDR S&P Bank ETF (KBE- $44.92) Constructive given recent bottoming and technical improvement. KBE is bullish given the rebound from key support and rally back over the downtrend that held this sector under pressure for the back half of 2018. This monthly chart helps put the decline into perspective, as the Bank weakness failed to get down sufficiently to turn the intermediate-term trend negative. The corrections in this sector over the last 10 years found key support near a giant uptrend line connecting lows going back since March 2009. As can be seen, the pullback into 2011, 2016 and now late 2018 all held where they needed to in order to avoid violating this giant uptrend. Additionally, the rally back over the prior lows which had held throughout much of last year was an important and positive technical development. Thus, while momentum did turn down sharply from last year, this rebound has begun to help weekly momentum begin to stabilize and weekly MACD has started to converge again from its negative state. Bottom line, a rally up to the high $40's looks very possible given the technical improvements in the last month. Only a move back down under December lows would cause the intermediate-term picture to worsen. 

worsen.gif

XLK vs XLF (Technology vs Financials)- Tech looks to be peaking out relative to Financials. This daily chart of XLK to XLF shows the relationship of Technology to Financials over the last couple years. While Tech has indeed been positive over the last few years relative to Financials, this ratio turned more neutral starting last year and the recent lift from December in Equities has brought this ratio up to levels where it makes sense to consider switching from Tech to Financials for the weeks and potentially months to come. As can be seen, relative ratios of XLF/XLF have hit trendline resistance and begun to stall in the last couple days. Thus, while the longer-term trend in Tech has been in good shape, while Financials have been falling for the last year, it looks like a good risk/reward time to favor Financials after a very sharp rally has taken place within Tech. Despite much of the focus on Technology these days, some sector rotation appears to be in order, so it looks right to favor XLF and in particular Regional Banks- KRE, over Tech in the short run.

short run.gif

Visa Inc. (V- $144.91) V is attractive technically and the Credit card processors continue to be one of the more attractive subsectors within the Financial space. This stock broke down nearly $30 from last year's highs before regaining the area near prior lows back in late December. Similar to the SPX, this represented a structural positive that has allowed prices to trend higher sharply over the last month. While prices have gotten a bit stretched vs its most recent uptrend off the December lows, no evidence of any counter-trend exhaustion is now present. Additionally the stock has exceeded an area of trendline resistance drawn from last Fall (not shown) Overall a rally back to 150-2 looks likely in the short run before any stalling out, or nearly 5% higher from current levels. One should consider any minor pullback to $140-1 as a chance to buy dips for further gains in the months ahead.

ahead.gif

JPMorgan Chase & Co. (JPM- $105.55) JPM looks attractive technicallygiven the stocks breakout last week above the last four week's highs. This area also coincided with the lows made throughout much of 2018, so last week's strength was important and positive for JPM's structure. Additional gains look likely in the short run to 108-110 and over 110 would help to drive this stock back higher to test former highs made last year. Overall, this has lagged some of the other Financials lately but the move back over 105 should help this begin to show better strength in the days/weeks ahead and makes this more attractive to own technically.

technically.gif

TD Ameritrade Holding Corp (AMTD- $56.86) AMTD is bullish given the breakout of this downtrend which has held since last Summer in 2018. While the stock had been under quite a bit of pressure last year, not dissimilar from the whole group, this breakout back over its downtrend near $52 has helped the structure improve tremendously from a technical perspective. While the stock has seen a bit of consolidation in the last couple weeks, this has helped to lessen recent overbought conditions and last week's strength likely results in AMTD pushing up to the low $60's without too much trouble. Overall, this stock looks attractive to own and buy dips in the weeks ahead.

ahead2.gif

Prudential Financial Inc (PRU- $94.15) Attractive from a risk/reward basisafter PRU's 30%+ selloff late last year failed to violate importnat support that would have turned the larger structure negative. As weekly charts show going back over the last 10+ years, the stock's pullback last year managed to hold 10-year trendline support and has successfully bounced back over $90 in recent weeks. Thus, last year's breakout was nearly 100% retraced from the pivot area near 90, and now the stock has turned up sharply to test the downtrend from last Year's peak (shown in Green) Rallies back over $97 should drive PRU up to at least $110 with a good likelihood of a retest of former highs. Dips can be used to buy with stops placed at December lows, as any break of last year's lows would also violate the uptrend line going back since 2009. For now, this looks like a good risk/reward and can be owned here technically with the plan of adding on an additional trend breakout or on any minor pullbacks in the weeks to come.

come.gif

Westamerica Bancorporation (WABC- $63.30) This Western Regional bank is appealing technically given the lengthy bullish base this has formed since the beginning of 2017. The stock's recent churning in recent months does not take away from the stock's attractiveness and its rebound from late December has managed to carry the stock again back to key resistance between $63-$65 which has held for the last two years. However, the quickness with which this has regained recent losses makes this bullish to buy at current levels, anticipating a breakout of $65 in the weeks ahead. The Regional bank breakout as seen by KRE should help WABC to make its own base breakout in the weeks to come. Thus, buying here ahead of the breakout makes sense, as this area should lead to an upcoming move in the near future

Avoid Energy, Commodities, Emerging Markets; Technology closing in on resistance this week

February 11, 2019

Mark Newton CMT, Newton Advisors, LLC

Contact: info@newtonadvisor.com



S&P 500 Cash Index

Support: 2681-2, 2672-5, 2622-4, 2596-8

Resistance: 2738-40, 2744-6, 2750-1, 2760-2



Summary:  US Equity indices have now extended gains for six of the last seven weeks, and S&P is higher by more than 12% from its December low weekly close at 2413, while up over 17% intra-week from Christmas Eve. While weekly momentum and breadth have been constructive factors supporting this rally, some of the recent slowdown in the last week suggests indices might have a difficult time getting through the balance of February without at least a minor correction (More on this below) Bond yields have moved straight lower, as stocks and bonds have been trending in unison lately, while the Dollar has managed to break near-term uptrends in pushing higher for six consecutive days. This push up in the USD, meanwhile, has been problematic for the commodity trade and also for Emerging markets, which look to be taking a breather. Thus, while the broader landscape for Risk assets appears to have recovered meaningfully on an intermediate-term basis, there are some reasons for short-term concern where investors should be alert (and these will be discussed below) Below we highlight the Value Line Arithmetic index on a weekly basis, the Equal-weighted gauge of 1700 names. As has been mentioned last week, the recent strength managed to both regain prior lows as well as achieve what looks to be a meaningful breakout of the entire downtrend from last Fall. This broad-based gauge showing material strength does give some reason for optimism in the months ahead. The chart below shows this as being a clear-cut case of a failed reversal pattern, as prices have gotten back into this former base. This takes some of the bearishness out of the equation for the next 3-5 months as opposed to if SPX had held 2630 and turned back lower. Near-term, however, as we've discussed for the last couple weeks, there are some near-term warning signs that could allow for some minor backing and filling before this rally continues. More on this below.

below.gif

Overview: S&P and other US benchmark indices have now given their first real "scare" on this run-up in backing off on two consecutive sessions before rallying on Friday up off the lows to just avoid a third day's loss. While not proving damaging in the least on weekly charts, this has served to take some steam out of near-term momentum, and breadth indicators also have reached prior extremes that suggests there could be some selling in the month of February before a further rally higher can occur.




The following points seem important to highlight:



1) Bond yields and USDJPY have lagged on the Equity bounce from December and Bond yields have gone lower in recent weeks which gives reason for concern given recent trending tendencies (positive correlation)



2) Technology has snapped back in a big way, but remains trending lower from last June and October and looks to be reaching an area of resistance in the next 1 week that could be important and serve as a Headwind. The SOX in particular shows strong resistance directly overhead.


3) Structure has gotten more bullish for equities with the breakout of the downtrend from last Fall and Breadth was noticeably strong in early January, yet now breadth is beginning to stall out again and last week's decline occurred on much heavier downside breadth than what rallies had occurred on to the upside



4) Sentiment largely remains subdued, and while less bearish than last month, this hasn't gotten bullish yet. Last week's comments on Trump not visiting with Pres XI prior to early March were widely attributed to having "caused" the decline. While I tend to favor cycles as a reason, vs news, if any sort of news had this kind of power, a further decline on "news" would cause sentiment to turn back to bearish very quickly and likely limit the extent of any decline



5) The Dollar has managed to make a very good rally of late from important support- This broke minor trendlines and looks to be a key factor that has adversely affected Emerging markets and also commodities (Charts on all of these below)



6) Last year's major low in early February coincided with the same window last week which proved to be important in causing stocks to stall out and for SPX to turn down, right at a key 1 year anniversary (2018 low projected forward a year resulted in a 2019 high) and the 90 degree time frame from early November also lined up into last week.



7) Defensive sectors began to gain ground last week, with meaningful relative breakouts in Consumer Staples and also some upturn in Utilities. REITS have been quite strong, but now up against more difficult levels to expect follow-through. Thus, the best risk/reward among the Defensives looks to be Staples.




Overall, it was thought a few weeks ago that 2710-5 would hold rallies. This was surpassed, and allowed for a brief push back up to 2740 before reversing to move right back to the same area near 2710. However, much of the reason for near-term caution continues to be important to highlight heading into this current week with regards to a slowdown in short-term breadth and momentum, counter-trend sells, cyclical importance combined with near-term overbought conditions (intra-day only- Daily charts are not quite there) Bottom line, nothing has changed dramatically, flattening out in Market exposure makes sense over the next 1-2 weeks, but one should look to buy into dips into 2/19-20 on any pullback (important time-wise) , as the improvement in structure at this point likely should not lead to a larger selloff to test/violate December lows. Additionally, the China deal likely will end up being helpful to markets, regardless if the Date is pushed out. For now, this seems to be the key narrative with regards to what many are pinning the ebbs and flows of stocks on.





SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:




Short-term (3-5 days): Upside limited to 2760- It's thought that early week strength likely fails to make meaningful movement over last week's highs and should stall out at 2745-60 at a maximum before turning back lower. (IF 2624 is broken, this would serve as a downside catalyst of importance) While prices managed to close back up near highs of the session Friday, making the brief two-day pullback not overly important, we did see momentum and breadth start to wane. It's thought that early week strength should be a chance to sell into this move, and that a larger pullback can still happen in February that would take SPX down under 2600 before any low.




Intermediate-term (3-5 months)-  Bullish- While intermediate-term momentum and trends remain negative for many indices given our weakness since September and particularly since December, the near-term trend remains positive from late December and the breadth thrust combined with bullish seasonality and ongoing pessimism combined with recent sector emergence (Technology and Financials breakouts) should lead equities higher into the Spring/Summer before any further rolling over happens that causes more intermediate-term damage. While a retest of recent lows certainly can't be ruled out, it looks less likely in the short run, given the positives of former lows being recouped along with downtrends from last Fall's highs being exceeded. While the average stock is now officially in a bear market, most market indices are not, and many arithmetic charts still show the uptrends for market indices to be intact. Overall, it's right to be constructive on 2019 given likely positive January performance combined with bullish cyclical trends for this year, and expect that the larger bear market likely gets postponed until 2020.

10 important Charts heading into this week

SPX- Daily

daily.gif

SPX has made a minor pullback last week, though the extent of last Friday's bounce into the close might allow for another 2-3 days of gains, which then find resistance and turn lower. It's thought that equities still have an above-average chance in weakening in February, and last week proved to the start of this, as the minor two-day pullback did negatively affect both breadth and momentum. Additionally, one Demark sell (TD Combo) was confirmed last week, (which is bearish) while the other (TD Sequential) did not, but is 3 days away. Thus, a minor bounce which fails to break above 2760 but shows a couple days of mild gains where breadth falters further, would be a big tell this week to the possibility of a further decline, which is looking increasingly likely in the short run. Under 2624 is necessary to think a larger pullback is underway, and would lead initially to near 2578-80. On the upside, early week gains are expected to stallout and not get above 2760 in this scenario. While many are mentioning the 200-day m.a. as being resistance, it should be noted that this largely failed to have any real meaning late last year when it was pierced on the upside and downside several times to no effect. (The 200-day in the NDX looks more important, as this lines up with a key 61.8% Fibonacci retracement level for NDX when studying this chart.

chart.gif

Stocks diverging from Yields, Dollar/Yen- This overlay chart shows the degree that US Stocks , Treasury Yields and USDJPY have all largely trended in unison in recent months, except for the last few weeks. Stocks have continued higher, while Yields have been pulling back. This could be problematic if the past relationship between bond yields and stocks is any guide. On both prior occasions in the last six months where stocks diverged from yields, stocks ended up following yields, which led the way lower. This time around we've seen bond yields turn down sharply again, while S&P has bounced. It's thought that any early week strength in Equities likely results in a stalling out and should result in a pullback in Equities which joins Treasuries yields in the near-term before yields find support and rally.

rally.gif

Technology - Close to resistance- Sell into early week gains- Technology has successfully made a very good bounce in recent weeks, which directly followed the relative charts of S&P 500 Information Technology index v SPX surpassing the downtrend line from last Fall. This resulted in very good performance over the last month (Technology was the third best performing sector in the rolling 30-day period, with gains of +8.42% vs SPX +5.18%) Last week proved to be even better for this group relatively as it finished second best, with returns of +1.76% for the rolling five days, second to only Utilities. Overall, this daily chart of Tech relative to S&P still looks to have another 2-3 days of outperformance/gains, which are thought to be a potential source of early week strength for the market. Yet, the group is nearing what's believed to be a very important area of overhead resistance that likely limits gains and causes a stalling out. Given Tech's 20% weighting within SPX, this area which has held since last June's peak should be important as resistance this week, causing a further stalling out in this group in the short run.

run.gif

Energy remains a very weak link in the market right now, and its January outperformance looks to have reversed pretty violently given the downturn in Crude which resulted in XLE, OIH and XOP all turning lower. The chart above highlights the Exploration and Production ETF, or XOP which looks far weaker than either XLE or OIH. Thus, this should be the "Go-To" for those wishing to fade and/or short Energy this coming week. Energy gave up over 3% last week, yet still looks early to bottom, and XOP still looks attractive as a technical short, with areas of importance down near $25.50-$26, a meaningful distance still from Friday's close of $28.36.

28.36.gif

Financials seem to be nearing their first meaningful area of support on this pullback after the breakdown two weeks ago. The relative chart of XLF/SPX looks to have 2-3 days of further selling max this week before showing signs of stabilizing given the presence of a possible TD Buy Setup (Demark) on daily charts. Thus, while the intermediate-term trend for Financials remains bearish from early last year with the recent rally holding where it needed to before turning lower, we look to be nearing the first important area of support which might cause some stabilization in this group after the last couple weeks of selling. This is important naturally given that Financials represent 13% of SPX. It should pay to be on the lookout for any weakening in Treasuries and/or steepening in Yield curve and stabilization in Financials, which should be beneficial for US Equities.

equities.gif

Consumer Staples are starting to turn up meaningfully in the last week, a sign of defensive positioning that often comes about as Equities start to weaken. This relative chart of the XLP/SPY broke out late last year relatively on SPX weakness in December. The group pulled back as the bounce got underway, yet now has begun to turn higher in a meaningful way in recent weeks. Staples managed to turn in gains of 1.12% last week while the S&P was just fractionally positive, and Staples actually ended up besting Discretionary, which fell for the week. Overall, this looks likely to lead to additional strength in the weeks ahead for the Staples group, and one should not be too quick to ignore.

ignore.gif

US Dollar bounce from support still looks to have some upside- The Bloomberg Dollar index (<35% v Euro) has successfully rallied off key support and broken out above the minor downtrend connecting recent highs in this decline. This is a positive development and likely coincides with this making additional headway higher this coming week and potentially the week thereafter. While the larger chart remains problematic from a structural perspective, it looks right to still bet on more Dollar strength in February which likely is a negative for Emerging markets and also for commodities. UUP is a popular ETF designed to profit as the Dollar rises. (UUP- Invesco DB US Dollar index Bullish fund)

fund.gif

Commodities rolling over- The Thomson Reuters Equal-weight Commodity index broke support of the last few weeks, and the recent Dollar gains look likely to coincide with additional downside in commodities in the month of February before any type of larger rally can get underway. While the Dollar overall should begin a larger selloff sometime this year that would be beneficial for commodities, in the short run, this CCI move is bearish and likely leads this group lower. One can bet against the group using DBC, the Invesco DB Commodity index tracking Fund.

Fund2.gif

Ishares MSCI Emerging Market ETF- EEM- Short-term breakdown after intermediate-term breakout- This Emerging market ETF managed to violate the uptrend from December, putting this rally also in jeopardy in the short run as the US Dollar makes ground higher. Near-term, it's likely that any bounce in EEM stalls near prior highs from last week near $43.50. While a 3-4 day rally would help counter-trend signals to line up, momentum is also starting to reflect a crossover in Daily MACD which is a negative. Thus, despite the larger breakout of the one-year downtrend early last month, this looks to require some backing and filling in the weeks ahead before EEM can move higher. This coincides directly with the recent bounce in USD, and in the short run, EEM should be avoided, expecting strong resistance at $43-$44.50 and support down near $40.75-$41.

41.gif

Equity Put/call ratio- While daily readings have pulled back from extremes, moving averages still show heightened levels of Put/call and highest since 2016. While sentiment has gradually become "less bad" on this rally from late December, we still face a situation where the 21 and 34 week moving averages lie at the highest levels we've seen since early 2016. Thus, on any pullback in Equities in the weeks to come, it's likely that sentiment gets fearful that much more quickly, given that we're already starting at a pretty high base. Overall, this is one of the factors that should limit extent of any pullback as any selloff would make fear go back into the market very quickly.

Short-term Stalling out likely this week, though larger patterns have grown more constructive

February 4, 2019

Mark Newton CMT, Newton Advisors, LLC

Contact: info@newtonadvisor.com



S&P 500 Cash Index

Support: 2650-3, 2630-2, 2596-8, 2570, 2550-1, 2513-5

Resistance: 2675, 2683-5, 2700-5, 2709-10



Summary:  US Equity indices remain in in steep near-term uptrends as January came to a close last week, having risen over 7% for the month of January, putting last month's performance in the top 10 January's of all time. Momentum remains positively sloped on a daily basis, while negative on monthly charts, but the recent uptrend has been strong enough to now cause momentum to turn positive on a weekly basis. Neither daily, nor weekly momentum is overbought and prices have broken downtrends from last Fall while having regained over 60% of the decline from last September's highs. Globally we've seen some attempts at both Europe and Asia stabilizing after their own drawdowns from last Fall, Bonds have followed stocks in the last week, showing some rare divergence from their recent negative correlation, but the yield curve has largely gone sideways since early December after having been cut in half since October highs. The Dollar, meanwhile has pulled back sharply in recent weeks to an area of nine-month trendline support which looks to be a temporary holding area for this correction. Commodities meanwhile have largely begun to act much better in recent weeks, with precious metals turning up sharply and Crude oil continuing its recent stabilization after last year's decline. Overall, a very good start to the year thus far for both Equities and Commodities with Emerging markets acting well as the Dollar has begun to weaken after peaking at nearly an exact two-year anniversary of former highs. The chart below highlights the Value Line Arithmetic index, the Equal-weighted index of 1700 names, which has made a constructive breakout of the downtrend from last Fall, similar to SPX, NDX and DJIA. This broad-based gauge gives some reason for optimism in the months ahead. While approaching areas which could result in a temporary stallout, the combination of improving momentum, bullish seasonality and ongoing skepticism about the economy, China, FOMC, and earnings should help stocks fare better than many expect this year. Some charts and a few good risk/reward ideas in stocks are presented below.

below 1.gif



Overview: S&P has now rallied for five straight weeks, rebounding over key areas thought to be potentially be problematic near 2630 (Nov lows) and turning in performance of greater than 7% for the month of January. This ranks in the top 10 January's of all time and data from Stock Traders Almanac shows us that the 20 top January's since 1950 with 4% or greater performance all led to positive performance for the year as a whole. Every one. So while some might be skeptical at the power of the so-called "January Effect" (which has been right about 75% of the time in showing that a positive January can lead to a good year) history shows Zero "down years" in the top 20. So this is definitely something to give some consideration.




The following seem to be pertinent issues and highlights, technically, heading into the first full week of February.( Each point is followed by whether this is a positive, or negative)




1) Trendlines from last Fall's highs have now been exceeded by SPX and DJIA to join the NASDAQ, while Value Line Arithmetic index has also broken out above this key resistance. (Positive)




2) Weekly momentum indicator MACD has now turned back positive. So now SPX has positive momentum on both a daily and weekly basis, while not overbought, and structure has improved. (Positive)




3) Financials have turned lower relatively speaking in recent days after pushing up to key relative trendline resistance vs SPX (Negative)




4) Treasury yields and USDJPY have both been trending down over the last week, diverging from Equities. This happened also back in late November and it was right to follow Treasuries as they ended up leading Equities down(Negative)




5) US Dollar seems to have found good initial support after its recent pullback. Technically I expect a bounce, which might negatively affect Emerging markets and Precious metals in the month of February




6) Counter-trend Sell signals to this uptrend on indices like SPX, NDX, RTY and others can all appear this week on strength, which would be the first signals to show up since the rally began in late December. (Negative)




7) Summation index as a smoothed breadth indicator, has now reached peaks seen last Fall and is due to stall out this week or next. Counter-trend exhaustion has also appeared on this indicator also. Bottom line, this indicates a good likelihood of a breadth slowdown/reversal, and that should be a temporary negative for stocks (Negative)




8) Sentiment still looks to be muted at best and certainly not all that enthusiastic despite a 13% rally in 5 weeks. This is bullish, in that any minor drawdown would cause investors to get pessimistic far more quickly than normal, and is a reason to support a larger intermediate-term rally (Positive)





Overall, my recommendation last week was to look to sell into rallies at SPX 2710-5, an area which has largely been reached. Structurally patterns are better than a few weeks ago and momentum is not overbought. However, the presence of counter-trend sells appearing this week is important (they have been in the past) and the divergence of Treasury Yields and USDJPY is also a concern. Financials turning down relatively speaking represents about 13% of the market, and has to be watched carefully. Yet, markets still have shown little to no signs of reversing course however, and this truly is important before betting on any pullback after five "UP" weeks. The key issue for bears early this week centers on the fact that some time factors still look a bit premature to suggest any imminent downturn. But I do recommend increasingly a more cautious stance to this bull move in the short run (While not advocating shorting indices here, I think buying implied volatlity for February/March makes a ton of sense) Risk is very well defined for those that are negative and positive in that one has a difficult time being short over 2715. Meanwhile stops for longs are largely down at 2596, which might be a bit more than some wish to risk. Flattening out in Market exposure makes sense over the next 1-2 weeks, but one should look to buy into dips, as the improvement in structure at this point likely does NOT give the Bears the gift they want in seeing indices get back to December lows. Additionally, non-technical factors like a China deal seem to be approaching. While many believe China will never concede to the issues demanded of them, it's logical to expect a deal of some sort to materialize and my thinking is the market will still view this as a positive, and has not been priced in.




SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:




Short-term (3-5 days): Upside limited - I'm expecting markets to stall out either this week or next, and for now, there are still a few time-related aspects which are not perfect to sell right away, and also price has given us precious little indication of rolling over. Thus, after a five-week rally, it's a must to have at least one reversal day which makes a multi-day low before thinking any pullback is imminent. Near-term, I do like exiting longs on indices at 2710-5 and would await weakness, and prefer buying stocks that are just breaking out and offer a bit better risk/reward than the indices themselves here.




Intermediate-term (3-5 months)-  Bullish- While intermediate-term momentum and trends remain negative for many indices given our weakness since September and particularly since December, the near-term trend remains positive from late December and the breadth thrust combined with bullish seasonality and ongoing pessimism combined with recent sector emergence (Technology and Financials breakouts) should lead equities higher into the Spring/Summer before any further rolling over happens that causes more intermediate-term damage. While a retest of recent lows certainly can't be ruled out, it should prove brief in nature, allowing for further strength which could allow for a lot higher retracement before more weakness happens.

While the average stock is now officially in a bear market, most market indices are not, and many arithmetic charts still show the uptrends for market indices to be intact. Overall, it's right to be constructive on 2019 given likely positive January performance combined with bullish cyclical trends for this year, and expect that the larger bear market likely gets postponed until 2020.

5 important Charts heading into this week along with five technical long ideas to consider

consider1.gif

McClellan's Summation index- This recent bounce has caused breadth to expand rapidly, but we've now reached an area that's caused resistance on three separate occasions since late 2017. Additionally, counter-trend Demark exhaustion is now present for the first time on this bounce. Thus, I expect markets slow and begin to make at least a minor pullback in the upcoming weeks and this looks to be an early warning sign of at least a partial slowdown and/or upcoming reversal in market breadth.

breadth.gif

US 10yr.Treasury Yields- It's always important to monitor if yields and stocks have been trending together (they have in recent months) and when this starts to diverge. Treasury yields have now been falling for the last two weeks and we've also seen the Yen higher in the month of January. This is at least a minor warning that all might not be what it seems. Previously we saw yields turn down in November and stocks followed, so this is an important chart to pay attention to heading into this coming week.


week.gif

FinancialsThe last week has seen the Financials turn down pretty sharply on a relative basis, and relative charts of XLF/SPX show this to be a pretty major area to monitor which looks to have been resistance on this bounce. While a move back above would be very positive, this is not likely going to happen until yields can stabilize a bit more. Near-term, this downturn in Financials is seen as a minor negative, given the 13% weighting in this group within SPX.

SPX.gif

US Dollar seems to have found initial support - The recent downturn in the Dollar looks to have arrived at its first real area of importance after the pullback from last Fall. This drawdown coincided with Emerging market strength along with precious metals outperforming. Both of these could now be subject to at least a minor trend reversal after their recent runups. The Dollar vs the Pound specifically looks to rally after recent BREXIT-inspired weakness, but yet as we've discussed, a big bounce in the Dollar into February should be something to sell into. Charts, momentum and cycles all suggest intermediate-term Dollar weakness. However, heading into February, it does look like a minor reprieve is here.


here.gif

Gold looks to be near its first area of resistance on its rally, which could produce some stalling out in the metal after its decent bounce in the last couple months. While technical trends and momentum have both improved in Gold in the short run, Gold has gotten overbought and now shows evidence of upside exhaustion. Moreover, the Dollar is showing some evidence of wanting to rally near-term, so the combination of these could be a negative for Gold into February. However, dips should be used to buy in Gold in the weeks and months to come, as the larger pattern has been slowly improving. As i've mentioned in recent weeks, gold needs to get up over 1375 to jumpstart the intermediate-term rally, something which will be important and quite bullish when it happens.



5 Technically Attractive Long Ideas to Consider

consider1.gif

Medpace Holdings (MEDP- $65.73) This recent breakout back to new highs is quite bullish technically as the move exceeded both prior highs of a bullish base going back since last Fall. This looks like an excellent risk/reward to consider for longs and a move into the low 70's is possible into the Spring. Pullbacks should be used to buy dips if this occurs anytime in the next two weeks. For now, this is a an attractive long.

long.gif

Trade Desk (TTD- $145.24) Trade Desk is bullish technically and last week's breakout above the entire trendline connecting highs should allow for further strength to areas of resistance near $165. This entire consolidation from last Fall is seen as a corrective move and now should allow for a rally back to new high territory sometime this Spring. Near-term, the breakout from last week doesn't show any evidence of near-term exhaustion and the fact that TTD has been sideways since late last year has helped to alleviate any near-term overbought readings in momentum.

momentum.gif

Atlassian Corp PLC (TEAM- $99.27) TEAM just managed to push back up above former highs back to new all-time high territory last week, which puts this stock on very good ground, technically. Additional gains are likely to targets near $105 and then $110 before this faces much resistance. Similar to many names, this peaked out last Fall. Yet, the recent rally has been strong enough to break back out to new all-time highs. Technically this is a very constructive development, and bodes well for TEAM to continue to push higher to targets mentioned above.



above.gif

Finisar (FNSR- $22.66) FNSR has gradually been showing better technical strength after pushing up to new monthly highs in December. Its weekly pattern shows a formation that looks to be bottoming out after the pullback from last year. Gains up to $25 look possible after the recent strength this stock has shown, while any movement back under recent lows would serve to stop out longs. Overall, this looks to just be trying to push higher and weekly charts closed at multi-week highs after this recent consolidation, which is a positive.

positive.gif

Intelsat SA (I-$24.90) Bullish breakout bodes well for follow-through- This Satellite services company has seen some impressive ability to turn back higher after losing 50% of its value from October into December of last year. The act of climbing back above January highs is quite constructive technically speaking and should allow for further gains up to the low to mid $30's. Overall, this looks quite attractive given the recent breakout while remaining well down off all-time highs.

Major S&P Sector Review

January 28, 2019

Mark Newton CMT, Newton Advisors, LLC

Contact: info@newtonadvisor.com



S&P 500 Cash Index

Support: 2650-3, 2630-2, 2596-8, 2570, 2550-1, 2513-5

Resistance: 2675, 2683-5, 2700-5, 2709-10



Summary:  Stocks have defied odds yet again, and remain trending higher since late December to the tune of nearly 12% as part of the ongoing downtrend from last September. Technicals had suggested gains might be possible this past week, but now we face a much more difficult situation as January comes to a close. Prices have nearly reached make-or-break levels with a bullish near-term technical trend and momentum sloping higher, yet this remains part of a downward trend with bearish momentum on both weekly and monthly charts. Hence the difficulty in this market of truly finding a trending situation that offers a good risk/reward. The Dollar showed perhaps a more technically significant move than Stock indices this past week, rolling over and sparking jumps in Emerging markets, commodities, particularly the precious metals, and many Materials names. Treasuries meanwhile extended gains, breaking down out of key near-term trends (though last Friday's snapback in yields is worth noting) Overall a difficult rally for many to have participated in over the last month as many pared down risk, understandably, and were left to chase this market higher as it's risen not unlike last January's rally. The issues of Government Shutdown, China Trade , or FOMC worries that were in place in December that many attributed to the market selloff really haven't dissipated, so many who use news to follow markets have been left to chalk up our 12% rally to Earnings alone.


Bottom line, this looks to be a very tough time to initiate new longs in many stocks, or to go short this rally just yet, without any real evidence of stock indices rolling over. The next 2 weeks likely provide some real clarity in this regard, as either S&P gets over 2715 and continues going throughout the Spring. or prices stall out and turn lower starting sometime this week. For now, it doesn't look like a time for big bets, but to simply let this move play out and respect whatever direction it takes. The chart below highlights the S&P's move and how this fits into the larger framework. As can be seen, prices are literally right below make-or-break resistance and have recouped nearly 60% of the entire pullback from September. Within the last two weeks, prices have regained the former lows from February, April, October and November lows, and have strong resistance between 2685-2715. It's thought that another 3-5 days of gains could be possible based on last weeks rally. Yet, it's proper to respect any decline that kicks off next week that undercuts 2596 given that prices have reached a window where changes of trend are absolutely possible. Given the choices mentioned above, the highest probability seems to be another few days of rally which then stall out and turn lower into February. But it pays to be aware and ready for any outcome, as movement above 2715 would be one to follow.

follow.gif



Overview: S&P is now higher by 13.3% from Dec 24, 2018 close, and seems to have defied expectations of most in recent weeks, just at a time when many had begun to throw in the towel on this economy and had begun taking down risk. Making money on V-shaped recoveries is often quite difficult, as it's rare that one avoids losing money on the drawdown, invests at the lows and profits on the rally. Many tend to lose money on longs and divest during some part of the pullback, fail to get in on the rally, particularly with so much ongoing uncertainty, and are left with tough decisions now heading into February with markets up over 6% for the month of January.



Bottom line, the positive factors of early Breadth thrust from December/January combined with recent breakouts in Technology relatively speaking (SPXEWIN/SPX) and lack of any technical deterioration during this rally along with the absence of overbought conditions and Demark exhaustion are thought to be positives right now. These coupled with very bullish seasonality factors heading into Pre-election year argues for gains over the next 3-6 months. However, negatives such as a dropoff in breadth in the very near-term (last week) along with cyclical projections to this time in late January and some flattening in momentum could very well prove to be negatives heading into the new month. The largest potential negative concerns the ongoing bearish technical structure for indices like SPX and DJIA which remain under downtrends from the mid-September 2018 peaks.


Overall, indices are at a real crossroads after this runup heading into the final few days of January into early February. It's not wrong to consider both bearish hedges and/or implied volatlity after this runup, and both bullish and bearish theses have credence, though the positive thinking applies much more to a 3-6 month timeframe than near-term. One can attempt to sell into this rally anywhere from 2685 up to 2715, but over 2715, it's right to think the rally extends and shorts would be wrong. For those bullish, one can't say with a lot of confidence that there's a Zero chance that this recent rally continues moving higher. After all, the first big resistance level at 2630 proved not to be all that effective on the first push higher and prior November lows gave way to strength, in SPX, DJIA and NASDAQ, the latter which now arguably is trying to breakout of the larger intermediate-term downtrend. For those with a long bias, getting or staying long here is not wrong with the potential for movement up to 2685-2715 , knowing that over this level, S&P rallies even more. However, the key level for stops on longs would be 2596 and anything under this level argues that a larger selloff can unfold. SO in both cases, the area for risk is very well defined, and it's thought that the next 2 weeks, a definitive answer will be determined which should shed some light as to what's in store. For now, indices lie at a very important area, and it makes Big bets unattractive until this pattern is resolved, one way or another.


SECTOR HIGHLIGHT: ST- Short-term



BULLISH- Communication Svcs, Consumer Discretionary, Energy (ST) Utilities, Financials, Technology, Real Estate (ST) Materials (ST)




BEARISH- Industrials, Consumer Staples (ST) Heatlhcare (ST)


SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:


Short-term (3-5 days): Upside limited in short-run- Reversal possible from current levels, or up at 2710-5 later this week- Indices lie at levels now where selectivity is important, until S&P can breakout above 2715. The absence of a breakout of the downtrend from September makes for a poor risk/reward for longs after this push higher. While Demark signals are not yet in place to suggest imminent drawdowns, cycles have importance now that US indices have reached the 1-year anniversary of last year's peak, and prices have pushed up 13% to right below important trendline resistance. So the risk/reward is poor currently until markets show more evidence that breakouts can happen. Bottom line, trend will be bullish until 2596 is breached.



Intermediate-term (3-5 months)-  Bullish- While intermediate-term momentum and trends remain negative for many indices given our weakness since September and particularly since December, the near-term trend remains positive from late December and the breadth thrust combined with bullish seasonality and ongoing pessimism combined with recent sector emergence (Technology and Financials breakouts) should lead equities higher into the Spring/Summer before any further rolling over happens that causes more intermediate-term damage. While a retest of recent lows certainly can't be ruled out, it should prove brief in nature, allowing for further strength which could allow for a lot higher retracement before more weakness happens.

While the average stock is now officially in a bear market, most market indices are not, and many arithmetic charts still show the uptrends for market indices to be intact. Overall, it's right to be constructive on 2019 given likely positive January performance combined with bullish cyclical trends for this year, and expect that the larger bear market likely gets postponed until 2020.

S&P Major Sector Review- S&P 500 GICS Level 1 indices & ETFS, shown RELATIVELY vs SPX for purposes of relative weakening, strengthening, and early trend detection

detection.gif

EnergyBullish short-term, but ongoing bearish intermediate-term downtrend More work needs to be done before thinking Energy will outperform for the year just based on January's sharp outperformance. Weekly charts of OIH vs SPX as a proxy for Energy (more realistic than XOM, CVX heavy XLE) remain short-term bullish, trending sharply higher within an ongoing intermediate-term downtrend. It was thought that rallies could happen early this year in Energy given the combination of mean reversion, severe oversold conditions and bullish seasonality. Energy remains the best performing sector YTD with returns of 9.58%, with Financials close on its heels at 9.03%. Further gains seem likely despite such a robust January performance, and pullbacks should be used to buy technically, as WTI Crude looks apt to move into the 60s which should be an ongoing boon for Energy stocks. OIH remains preferred over XLE, and gains in this sector look possible into trendline resistance, where this daily uptrend will meet its first real test. Overall, despite the weekly downtrend in place, the first month's momentum and performance has been strong enough to endorse favoring further outperformance in Energy during the seasonally bullish February-May period for Crude.

crude.gif

Consumer Discretionary- Short-term and intermediate-term Bullish-Structurally this looks to be one of the more attractive areas in the market right now, having powered higher to the tune of >17% since the Christmas Eve low, the best performing sector off its December lows. While the S&P 500 Consumer Discretionary group does have some high weightings in stocks like Amazon, Home Depot, McDonalds, Nike to name a few, the Equal-weighted Consumer discretionary group is showing a similar level of strength, having just broken out vs the Equal-weighted Consumer Staples. The relative pattern on Discretionary vs SPX shows a rapid rise back to new highs into last Fall with just a minimal amount of deterioration before a push back up to exceed the highs of this consolidation (Shown by resistance line over recent highs ) Such constructive price action out of this group bodes well for additional outperformance, and overweighting looks prudent until this starts to show some evidence of faltering.

faltering.gif

Financials-Short-term stretched after a rally in XLF up to important resistance near $26. Intermediate-term bullish given the trend breakout which happened last week. This group, in relative terms to SPX, has just broken out of the downtrend from last Winter, which on a weekly chart, can be seen by relative XLF/SPX having exceeded the trend from the highs made early last year. This should be a bullish development for Financials, and while rates continue to be depressed, Financials have turned up pretty sharply and are only second best to Energy for performance for the year, higher by over 9% for the month of January. While many believe this kind of performance is due to fail, it's impressive that this group has broken out of the long-term downtrend, and is a bullish factor for markets overall this year. One should use mild pullbacks to buy into Financials, thinking that last week's breakout can lead this group higher.

higher.gif

Technology - Short-term Bullish, Intermediate-term bearish- Tech has shown some impressive evidence of rallying back sharply in recent weeks, just at a time when many had given up on the growth trade and Tech in general in favor of Value. Relative charts of the Equal-weighted Technology index vs SPX show the break of the uptrend from 2016 which happened last Fall, but also the ability of Tech to have recovered and successfully exceeded this downtrend from last year's highs. Overall, the Semi results last week helped to bolster this sector, which broke back out vs the broader market relatively. Additionally, many FANG related names have begun to snap back in recent weeks, which might have been expected. Yet, despite the rally from December lows, intermediate-term trends remain under pressure given the snap of the two-year uptrend, and any evidence of Tech stalling in the month ahead likely would cause momentum to start to turn back lower. Overall, this sector looked to have rallied back at a time when it was sorely needed, and the resulting consolidation for Technology proved very much short-lived compared to the extent of its rally last in recent years. Software remains the sub-group of Tech to consider owning, while the Semiconductors have begun to stabilize and now many rallying sharply ,and Stocks like AAPL have begun to slow in their rate of descent and are trying to work back higher.

Healthcare remains near-term bearish, yet intermediate-term bullish. This group has experienced quite the roller coaster ride in recent years, as we saw severe underperformance out of Healthcare from 2015-2018 until this group turned higher and broke out over the longer-term downtrend that caused many momentum indicators to turn bullish. Just this past November, the group turned back lower and has just violated the uptrend which has been in place over the last year. Thus, while groups like Medical Devices and Pharma remain in very good shape technically, this group has been a laggard over the last week and over the last 1 month timeframe and many of the Pharma names have experienced selling pressure. Overall, mean reversion in a strong group like Healthcare was in 2018 is not unusual to kick off a new year, but this should not prove to be a prolonged period of underperformance in these names, and weekly and monthly structure still supports buying into pullbacks technically.

technically.gif

Industrials- Near-term bearish, intermediate-term neutral. This group took a turn for the worse late last year with its breakdown of $71 in XLI which also coincided with longer-term relative charts breaking key two-year uptrend line support. While a snapback in the group has happened along with many other sectors, the near-term view looks challenging given both absolute and relative trends which remain in tough shape. XLI on absolute charts has rallied into key resistance, while the weekly relative chart vs SPX has been range-bound. While stocks like GE, URI, LUV, UNP, FLR, PWR have all rallied more than 15% YTD thus far, others like UAL, DAL, SWK, EXPD, MMM have barely covered much ground, all being up less than 3% YTD. Overall, it's likely that the recent rally stalls out in the next 1-2 weeks and makes at least a minor pullback of its gains since December. And while the long-term trend was broken for industrials, the selloff hasn't gained much overall traction. Thus, the medium-term view is more neutral until additional strength or weakness occurs.

occurs.gif

Communication Services - Short-term neutral; Intermediate-term Bullish-This Tech/Telecom combined sector has actually been shaping up quite nicely in recent months, and the broader trend looks constructive for additional gains. Relative charts of the XLC v SPY show this base-building in effect for Communication and the recent pullback should be buyable for movement back to recent highs. It's relative pattern appears like a reverse head and Shoulders pattern with movement above recent highs needed to confirm this formation. At present, the pullback over the last month looks to be stabilizing, but yet still difficult to label the short-term bullish. However, it's expected that Communication does start to push back higher in the weeks to come, so it's worth taking an intermediate-term stab at this group, which is largely Technology based, but yet includes the major Telecom providers.

providers.gif

Real Estate- Short-term bullish- Intermediate-term Neutral- The REITS look to be gaining a bit of steam in the short run, after two successful rally attempts since the broader trend began to breakdown into early last year. The relative trend, as shown above, made one false move higher initially, but has been followed by an even steeper advance which has just happened in the last few weeks. The downtrend from last Fall's peak looks to have been exceeded, while prices are just now beginning to recapture the prior lows that were violated. So there are reasons for optimism technically now with this group which weren't apparent heading into the end of 2018. Yet on a longer-term timeframe, more work needs to be done to help these stocks truly begin a larger bullish recovery. The absolute trend of REIT ETFs like VNQ remain largely neutral since 2016, and this recent bounce has not changed that view. Movement over $86 would likely coincide with the relative charts starting to show much more relative strength. For now, it's right to own the Real estate group, but yet be watchful that gains can continue to materialize and help make up some of its losses from last year before weighing in too bullish.

bullish.gif

Consumer Staples - Short-term bearish; Intermediate-term bullish- The breakout in Staples which happened towards the end of 2018 on market weakness coincided with its relative chart v SPX moving up above a two-year downtrend which signified potentially the start of some meaningful outperformance. However, the market rally of late coincided with this turning back lower relatively speaking, and it still hasn't deteriorated sufficiently to think the larger breakout has been nullified. Thus, While near-term trends in Staples are negative, any further decline over the next few weeks would bring this group down to a very attractive area to consider buying dips for some outperformance at some point in 2019. For now this relative chart breakout looks almost completely opposite to what has happened to US stocks. Yet from this reverse position, this selloff should create a decent chance to buy dips given the long-term breakout. Thus, this should be a group to favor owning on a bit more relative weakness into February (broader market strength)

strength.gif

Utilities- Short-term and intermediate-term bullish. The breakout which happened in Utilities on relative charts in January has made this group worth considering yet again, while longer-term charts of the group also remain constructive on both a daily and weekly basis. As weekly XLU/SPY charts show above, the breakdown which happened last year was thought to be bearish for the group, but once yields began to turn back lower, along with the broader market decline beginning last Fall, this resulted in outperformance for Utilities. This group over the last 12 months since 1/25/18 has been only one of two positive groups in the last 12 month timeframe and was the best group in the prior 12 months from 1/25/18-1/25/19. The breakout back into this base shown above was the first constructive sign, followed by the breakout of the downtrend from last year. Combining this bullish picture with the absolute strength in this group, and relatively little technical evidence as of yet of Yields turning higher, it's still right to bet on the Utes in thinking this group moves higher in the weeks ahead.

ahead.gif

Materials remains short-term bullish, but yet weekly trends have not yet given sufficient evidence that the trend has begun to turn higher. Thus, a neutral intermediate-term stance looks prudent, until this group can break existing downtrends vs SPX which is shown above. From a broader market perspective, the downturn in the US Dollar should be quite constructive for EM and Materials stocks. Yet, the downtrend in this group has not yet been exceeded. Thus, it remains a tough area to invest in overall just yet. However, evidence of weekly momentum strengthening should gradually help its trend to start turning back higher in the days/weeks to come. Gold and gold stocks in particular have begun to look more interesting given last week's Dollar decline and might be an area to consider for those wishing to get an early jumpstart in investing in this group while the larger relative trend is down.

Stocks might have limited Upside this week; Favor Energy given Crude's breakout

January 22, 2019

Mark Newton CMT, Newton Advisors, LLC

Contact: info@newtonadvisor.com



S&P 500 Cash Index

Support: 2650-3, 2630-2, 2596-8, 2570, 2550-1, 2513-5

Resistance: 2675, 2683-5, 2700-5, 2709-10



Summary:  The near-term bullish uptrend in stocks continues, and last week's ability to have recaptured former lows from February, April, October/November in S&P is seen as a structural positive. While a 11% rally in four weeks makes for a tough environment to consider getting back into stocks for those that have been on the sidelines, pattern-wise this IS a definite positive to have reclaimed the former area of the breakdown. In the short run we've seen momentum get ever closer to overbought levels on daily charts while both weekly and monthly remain negatively sloped. The NASDAQ Composite managed to break out of the entire downtrend from October last week, while the SPX and DJIA now lie just fractionally below similar levels, which equates roughly with the 61.8% Fib retracement of our Oct-Dec downtrend in S&P just over 2700. Overall for stocks this remains a counter-trend rally given the downtrend remains very much intact, though the strength in recent weeks is starting to make any retracement less likely to completely retest lows. Meanwhile both WTI, Brent Crude managed their own breakout last week, adding strength to the argument about a possible move in Crude to the low to mid-$60's. (this also should help fuel the Energy trade a bit longer- More on this below) Treasury yields have also begun to turn higher, and what's interesting to note is that the recent positive correlation seems very much intact with regards to Crude, Treasury yields and Stocks. For now, the key takeaway heading into this week, is that the area near November lows which was though to be strong resistance on this recent rally has been surpassed. This has caused both short-covering and momentum buyers to begin chasing this rally, and the big structural area that many investors and the media had all been pointing to, myself included, has been surpassed. Given the long weekend now, earlier cycles had pinpointed 1/17-1/21 as having significance, with the next important area at 1/28. This latter would help Demark indicators to line up and might serve as a stronger area to consider fading this rally. Overall, it's thought that this rally likely comes to an end in the short run within the next week and should begin at least a minimal retracement. Yet it looks right to bet on stocks pushing higher into Spring, not lower. Technically, the call to flatten out thus far looks premature as this rally has continued unabated. While buying into this now looks ill-advised as meaningful resistance looks to be directly above, it's also tough to short this market near-term until tangible signs of reversing course have appeared. Thus, buying implied volatility makes more sense for those wishing to hedge long exposure. We kick things off with the weekly chart below, which shows the SPX having successfully recouped the levels of its prior breakdown- This is certainly positive and getting back above 2630 should have stopped out shorts. Now at 2670, SPX lies just below key Fib retracements, still part of the downtrend from last Fall, while weekly momentum is negatively sloped. A very tough call heading into this week on direction. Until one sees evidence of the downtrend reasserting itself, it's prudent to expect a possible further 3-5 day rally into 2700 or just above. Yet this seems to be a very poor risk/reward until this can be resolved after 10% in 4 weeks time while structurally still in tough shape. The next few weeks will speak volumes. Stay tuned.

tuned.gif

Overview: Last week's rally now brings the four-week total of gains up over 10% and in some cases nearly 15% for US indices, but at current levels, markets are at a very difficult juncture. SPX and DJIA remain in bearish downtrends from last Fall's highs, so this remains a counter-trend rally within a downtrend. Furthermore, momentum is negatively sloped on weekly and monthly charts, which carry more weight than daily charts. Meanwhile, prices have just gotten back OVER prior lows that many, including myself, thought would be important. Thus, structurally patterns have improved in the short run, yet look to be close to sell into on intermediate-term charts. (Monday evening Futures are down -.50%, yet have not even come close to undercutting last Friday's lows. Unless 2596 is broken, pullbacks should be used to buy dips)




A few relevant points worth making.




1) Positive correlation remains very much in place on Treasury yields, stocks and Crude oil. Given that these three have largely moved in tandem in recent months, the recent uptick and breakout in Crude and Yields, we still likely are a bit premature to sell into this stock rally




2) Counter-trend exhaustion signals (Demark) which had lined up in unison early last week on many sectors and indices, were not confirmed, and prices managed to continue higher, largely starting a new count. This is also problematic to the bearish case near-term, as near-term rallies might not prove imminent




3) Cycles had shown the area late last week into 1/21 as being important and while prices have extended above this level, there remains a high likelihood of some kind of change of trend between now and 1/28 near last year's January highs.




4) Over 94% of all SPX names are now over their 10-day moving average and more than 72% of stocks are above their 50-day ma. a far cry from a few weeks ago when these were both in Single digits.




5) Put-Call ratio for Equities has pulled back to 0.54, a level that's uncomfortably low given a 10% rally in four weeks as part of an ongoing downtrend.




6) Financials managed to turn back higher relatively speaking while Technology has broken out in Equal-weighted terms of the entire downtrend that's been in place since last June. This is a positive for both groups, and Financials now as a sector is close to its own relative breakout, which would happen on a move above November highs v SPX.




7) Breadth indicators were very strong during the latter part of December/early January, rallying sharply from very extreme low area to very extremely high, in a period of time that's been seldomly seen over the last 100 years. This is definitely seen as an intermediate-term positive.




8) Countering this argument above, breadth has begun to slow in the last week and most of the "up" days were accompanied by just fractionally positive breadth readings (though not negative while momentum has waned on intra-day charts. This last point is partly to blame for having a less than enthusiastic stance in the short run. However, breadth has not turned negative yet, but merely has slowed. This very well could have importance in the days ahead if this starts to turn back lower.




So the cumulative effect of these statements warrants a selective stance here. While shorting might seem premature, it's proper to recognize that our 10% rally has come as part of a downtrend that is still very much intact. Thus, it's important not to get too caught up in the markets ability to carry from low to high right away. This move in all likelihood will need to be digested, and areas of importance in both price and time are coming up in the near future which merits paying attention.




Sector Highlight: Energy

ENERGY SHOULD CONTINUE TO OUTPERFORM SHORT-TERM




This week we revisit our call for Energy outperformance from December and highlight a few charts that serve to reinforce this view, and cover some of the charts of Crude along with the sector itself on both an absolute and relative basis. Last week saw WTI and Brent Crude breakout, while charts of the OIH managed to exceed initial resistance in a manner that should allow this rally to extend.




LONGS to CONSIDER

USO-United States Oil Fund LP-$11.31-Rally to $12 likely, then $12.76

OIH- VanEck Vectors OIl Services ETF- $17.24- Rally up to $19.72 and potentially $21

Crude oil futures WTI- $53.80- Long here with targets at $60, then $63.45







SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:




Short-term (3-5 days): Mildly bullish into 1/28 and 2700-10, with pullbacks under 2630 reversing this call. Expect early week pullbacks should prove to be buying opportunities (Mon eve Futures -0.50%) and further rallies can happen over the next few days. Largely this optimism is justified given the extension late last week which served to reset the exhaustion indicators, while being short of upside targets. Given that 2630 was exceeded, this will need to be violated again to expect markets are turning down with areas near 2596 being important and would cause a trend violation of the rally from December.. Resistance should come in near 2700-2710 on rallies, and indices are entering a time when this rally could slow/reverse. For now ,the call for flattening out has been proven premature. Shorts cannot be attempted until 2630 is re-broken, and SPX gets back under 2596 on a close.




Intermediate-term (3-5 months)-  Bullish- While the trends have turned negative on an intermediate-term basis for many indices given our weakness, it's thought that a rally should be near that provides a bounce to this decline before any larger bear market continues. While the average stock is now officially in a bear market, most market indices are not, and many arithmetic charts still show the uptrends for market indices to be intact. Momentum is a different story, as long-term momentum indicators like MACD have turned negative, while RSI has not reached oversold territory (and is nowhere near oversold on a monthly basis) This suggests that any spring rally should likely constitute an excellent time to cut down on risk, and diversify into dividend rich investments and avoid the Growth stocks and Small caps. Overall, we'll leave some of our larger thoughts for the 2019 Annual report, but suffice to say, this pullback doesn't suggest to me just yet that the next 3-5 months should be negative at a time when everyone is saying the economy should now turn down.

10 Charts to review- ENERGY- Crude, OIH, Relative charts, Seasonality and 5 stocks which still look like appealing risk/reward longs

longs.gif

Crude oil (WTI- $53.80) Bullish for a continued rise given last week's ability to close at the highest levels since early December. While US inventory levels continue to lift, Crude is entering a bullish seasonal period and momentum has begun to turn sharply higher given the recent breakout. No evidence of any counter-trend signals are in place, and technically a further lift looks likely to levels near $59.50-$60 which represents the first meaningful upside area of importance. This coincides with the 50% retracement of Crude's two month decline, and should be an initial target, followed by the low $60's. USO and/or Crude futures look attractive to buy for the weeks/months ahead, technically with tight stops on a close back under last Friday's lows.

OIH- $17.08- Bullish for further gains to Vaneck Vectors Oil Services ETF broke out of its seven-day range last Friday, rising to the highest levels since early December. Technically speaking this is a bullish move and should be able to help OIH reach $19.72 or even 21 before stalling out. While an 11% gain in Energy thus far isn't normally something to chase, it's worthwhile noting that this sector is undergoing normal mean reversion after being last year's worst performing sector. Momentum turned up sharply early this year and Friday's move cleared a full week of highs, which is normally very positive in suggesting upside continuation. Counter-trend exhaustion signals are premature and momentum is not yet overbought given the consolidation that's taken place. So last Friday's close should still represent an attractive risk/reward to buy for gains in the days ahead.

ahead.gif

Relative Chart- OIH vs SPX (Daily) - Energy still bullish and further outperformance likely- Charts of OIH vs SPX in relative terms show the breakout which happened early this year in Energy, which consolidated over recent weeks before turning back higher again last week. This minor relative sector breakout which happened again last week coinciding with Crude's breakout bodes well for additional strength in this group and longs are favored for Energy expecting further outperformance in the months ahead.

ahead2.gif

Relative Chart- OIH v SPX (Weekly) Energy on weekly relative charts shows a far more subdued picture with ongoing downtrends still very much in place after the breakdown last least year. However, near-term, this rising tide hasn't yet run its course, and technically it's anticipated that the next few months should prove strong for this group and outperformance can continue. While last year's negative January proved to be a harbinger of poor performance for the Energy sector in 2018, it's thought that 2019 could be exactly the opposite. Early strength in momentum coupled with mean reversion and bullish seasonality should be able to lift this sector higher in the short run, and Energy remains an overweight.

overweight.gif

Energy seasonality tends to be the strongest between February and June of any given year and Seasonality charts on the Energy Select SPDR ETF show that over the last 5 years this has certainly rung true. Thus, with Energy having pulled out of the gate quickest thus far in 2019, many might be wary about chasing this group. Yet, it still seems likely that Crude's recent strength might bode well for OIH, XLE, XOP and others to show decent outperformance during the winter months, and one should use minor weakness to buy, technically speaking.



5 Stocks to consider buying in Energy for intermediate-term Outperformance

outperformance.gif

Cabot Oil & Gas (COG- $25.62) While the long-term chart on COG might not initially appear as a technical standout, it's worth noting that COG maintains one of the strongest Relative strength ratings of any of the stocks that make up Energy over the last 3 and 6 month periods. COG has been range-bound since 2016 after its decline from 2014 highs, yet has begun to show real signs of stabilization and minor strength in recent months. Its move from $22 up to $25.62 in recent weeks has helped momentum begin to strengthen, and its near-term progress should help COG make headway up to $29 in the short run, to test highs made back in early 2018. On an intermediate-term basis, this will be the level which needs to be surpassed to allow for a larger move back to test 2013/4 highs. At present, near-term strength looks likely and stops on longs would be placed near $21 which can't be broken without postponing any advance.

advance.gif

Occidental Petroleum (OXY- $67.03) OXY is yet another stock which has faced severe weakness since last Spring, losing over 30% in value before bottoming out near former lows made in the Summer of 2017 which served as decent support. OXY made the list of the 9th best (or least worst) performing Energy name within the S&P 500 Energy index in the last 12 months, with a -11.09% loss and has dropped just 6.77% in the last 3 months. The stock's attractiveness come from last week's gains, which broke out above a downtrend from last Fall, helping this to begin what's thought to be a comeback from the decline from last Summer. At $67, this looks to move into the mid-$70s without too much resistance given this recent breakout, and initial levels come in at $72.25 which is a 50% retracement of the entire drawdown of last year. Additional levels of importance come in at $75.88 which is a 61.8% Fibonacci retracement level and lines up near the initial lows of September 2018. Stops on longs are placed at $62.75 under the lows from two weeks prior.

Phillips 66- (PSX- $95.30) Rally to $101 likely- PSX, likely many others in the space, broke down, severing long-term trends, but now is beginning its recovery which could result in above-average near-term outperformance. The stock has gained over 20% just since December 24, causing weekly momentum to begin to stabilize and try to turn higher. While the trendline break last Fall did cause some intermediate-term trend damage, in the short run, this likely should continue higher given Crude oil's breakout last week. The first meaningful upside target lies just above $101 which represents a 50% retracement of the entire decline. More meaningful resistance comes in at $106-$108.50, which represents its 61.8% Fibonacci retracement as well as former lows from July-September which should now be resistance on gains. Additionally the entire uptrend also intersects this area, so getting above would help the trend out substantially. For now, a long bias is prudent, looking to buy any dips into mid-week for continued gains.

gains.gif

ConocoPhillips (COP- $67.90) COP is attractive given its trend breakout, and should push higher in the weeks ahead with initial targets found near 71.40. COP makes the list for one of the best performing stocks in the last 3 months within Energy, only losing -6.46% and structurally it remains in good shape, within striking distance of former highs. The downtrend from October was exceeded two weeks ago, and has enabled the stock to recoup nearly 50% of the entire decline from October very quickly. While being down 20% off its all-time highs seems substantial, COP is in better technical shape than many in the space and is far stronger technically. This looks like one of the better Energy stocks to own given the degree of strength this has shown of late along with bullish structure, and should result in this getting to $71.40 initially and then over to $74.85. Only a move back under $62 would postpone the advance.

advance2.gif

Marathon Petroleum (MPC- $66.09) MPC is likely to continue the recent snapback rally this began last month and should reach targets at $71 and above near $75 that both look important. MPC did suffer a long-term trend break late last year, so the recent bounce will have to be seen as counter-trend until it can get back above $71, which is the first target. Momentum is positive on daily charts but negative on a weekly basis, yet no counter-trend signals of exhaustion are present that would suggest this should be sold right away. Thus, further rallies in MPC look likely and should lead this higher by 5-10% on this Energy bounce in the months ahead. Stops for longs lie at $61

10 Technical Shorts to Consider after this bounce

January 14, 2019

Mark Newton CMT, Newton Advisors, LLC

Contact: info@newtonadvisor.com



S&P 500 Cash Index

Support: 2400-2, 2376, 2355-7

Resistance: 2583, 2600-2, 2630-1, 2687



Summary:  Stocks remain trending higher in the short run, in what appears to be a bounce as part of an ongoing downtrend from last September and more recently, from December highs. While the breadth on our recent lift has been encouraging, indices are now approaching key areas of resistance at areas near where prices broke down that should represent strong overhead resistance to this initial bounce. Specifically for the S&P this is thought to intersect between 2630-50 and could be important this week. Bonds meanwhile have begun to turn back higher after just a few days of selling and the downtrend for Treasury yields remains intact and should bring about an upcoming decline in TNX down to 2.50-5% before any stabilization, but this area remains attractive to sell Treasuries into a move of this sort. The Dollar has begun to rollover and now nearing its own key support near a multi-month support trendline. Crude oil and Gold meanwhile are both showing some evidence of stalling out after their recent run-up, and given the close positive correlation between Crude, TNX and SPX, watching movement in Crude is increasingly more important. Overall, it doesn't appear like global assets have rebounded sufficiently to prevent the next wave down from unfolding and in fact this should be likely as markets approach mid-week for cyclical and Demark exhaustion reasons.

reasons.gif


Overview: To recap, in the last 12 trading days, S&P has risen 10.4%. My Weekly Technical Perspective from 12/24/18 reviewed some of the reasons why I thought indices might rally. They were as follows:



1) Bearish sentiment- Sentiment has turned quite negative lately. The Equity Put/call ratio is now as high as we've seen in two years' time, challenging the 2016 peaks, while many traditional sentiment polls have inverted their Bull/bear status



2) Oversold conditions- Daily charts show RSI to have pulled back under 25, as oversold as early October (which was actually lower) Yet the percentage of stocks trading above their 10 and 50-day moving averages have dropped to single digits



3) Counter-trend exhaustion (Demark)- The NASDAQ along with S&P is within 2 days of possibly recording the first evidence of exhaustion per TD Sequential and TD Combo signals since early December. These worked well in September at the top as Sells, and now they'll arrive this week on a bit more weakness. My thinking is they could signal a temporary low



4) Cycles- The peak in September is now at a key 90 day juncture to this time in December, along with being 45 days from early November peaks, and 315 calendar days from February 2018 lows. This likely should result in some type of pause to this decline



5) Bullish seasonal trends- We remain in a seasonally very positive time, so a -12% decline in December certainly hasn't lived up to this standard. But in general the period from now until next Spring should allow for a counter-trend rally in stocks before the seasonality turns negative again, and for now, it's still right to consider that January- May could be positive, not negative.



Now the easy part is done. and the Hard part awaits. As daily S&P charts show above, prices have rallied right back into this area which has been very strong as former support/current resistance to this rise. The lows from late November at 2630 up to 2650 which also lie just directly above the former lows from both February and April. S&P has in fact gotten back over this area at 2581-3 which marked the low close around this time last year. However, the key upside area of importance lies near this 2630-50 area which marks the bottom of the move down into late November right near the US Thanksgiving holiday. Getting above that would truly change the technical picture. For now though this is not expected, so upside should prove minor this next week and rallies should prove brief before turning lower for a retest.



The following are technical reasons to expect that prices peak out and turn down, with the greatest likelihood between 1/15-1/17, with 1/21 also having importance.



1) As mentioned, prices have bounced sharply but are now right near the area of the breakdown as part of the bearish downtrend from last September. Structurally the area at 2630-50 is very important over the next 1-2 weeks



2) Near-term momentum has neared overbought territory on daily charts while weekly and monthly are bearish. This is a concern towards thinking prices should extend given the negative intermediate-term momentum



3) Counter-trend signs of exhaustion on SPX, NDX, INDU, Crude Oil and other assets are within 3-5 days of lining up after this bounce. Given that these were important at former highs and at lows (as Buys) it's important to pay attention then they line up after a 10%+ rally.



4) Financials have begun to rollover technically when eyeing relative charts of XLF to SPX. this group still makes up 13% of the market and has decisively broken down in the last week after a mild bounce.



5) Cycles from both 12/3 and 10/17 highs in 2018 that project into this coming week, with others from 3/13/18 and 1/26/18 also being very prominent as the one-year anniversary of last year's late January peak.



6) Treasury yields, Crude and Equities have all shown a remarkable degree of positive correlation of late. Now Crude oil is showing signs of upside exhaustion after its rise , after hitting the highs of the daily Bollinger band while TNX is also near the edge of its downtrend after rallying from 1/3. In both cases, both look to peak out in the short run and turn lower in the next few days. It's thought that given the recent correlation, equities should also peak.




SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX



Short-term (3-5 days): Early week pullbacks likely are buyable until S&P can reach 2630, barring a close UNDER 2572. This would mean the pullback has begun. For now, first 2-3 days of this coming week are likely bullish technically as exhaustion signals per Demark are not complete and prices are shy of upside targets which stand out as resistance . However, an early week surge would likely drive money into markets at a time when it's right to be selling into this move. The risk/reward of taking down risk on this first bounce is quite appealing given the larger bearish structure. Entering this week, there hasn't been signs of early weakness persisting on a close that would matter.



Intermediate-term (3-5 months)-  Bullish- While the trends have turned negative on an intermediate-term basis for many indices given our weakness, it's thought that a rally should be near that provides a bounce to this decline before any larger bear market continues. While the average stock is now officially in a bear market, most market indices are not, and many arithmetic charts still show the uptrends for market indices to be intact. Momentum is a different story, as long-term momentum indicators like MACD have turned negative, while RSI has not reached oversold territory (and is nowhere near oversold on a monthly basis) This suggests that any spring rally should likely constitute an excellent time to cut down on risk, and diversify into dividend rich investments and avoid the Growth stocks and Small caps. Overall, we'll leave some of our larger thoughts for the 2019 Annual report, but suffice to say, this pullback doesn't suggest to me just yet that the next 3-5 months should be negative at a time when everyone is saying the economy should now turn down.


10 Charts which offer attractive technical risk/reward opportunities for shorting

shorting.gif

Emerson Electric (EMR $62.02) Bearish, and recent bounce should prove to be a shorting opportunity for movement back to recent lows. The 12% bounce in EMR over the last few weeks has carried EMR up to near downtrend line resistance as well as getting this closer to an area of key resistance to sell into. As weekly charts show, EMR broke a two-year uptrend back in December, dropping down to its 61.8% retracement area of the 2-year rally. However, at $62, this has very little appeal technically as this rally has occurred completely within the framework of the existing downtrend. No evidence of exhaustion is present on weekly charts to suggest the recent low should have all that much credibility and rallies now should present opportunities to sell into. While EMR could trend higher on a 2-3 day basis early this coming week, the area at $63.50-$64 should be ideal from a risk/reward basis to sell into, expecting a pullback down to the mid- $50's. Key support lies near 12/26 lows at $55.38.


55.38.gif

American Airlines (AAL- $31.80) AAL looks ripe for stalling out and turning back down to lows after barely any rally in the recent market bounce. While NYSE ARCA Airline index XAL has rallied more than 10% off the lows from late December, AAL has shown precious little ability to follow suit. This has consolidated near recent lows while not giving much indication of any sort of meaningful low. Given that AAL has been one of the biggest laggard in this space, there needs to be more indication that this is ending before continuing to avoid and/or underweight this stock. An upcoming move back under $29.75 is likely in my view and this should be used to add to shorts for a move down to test 2016 lows in all likelihood which lie just above $25.

$25.gif

Celanese Corp (CE- $94.76) Structurally this stock remains in poor shape and rallies should be used to sell, ideally at $98-$100 with pullbacks back lower to $82 likely in the weeks ahead. CE had a very bad break on an intermediate-term basis, with prices undercutting lows going back since the early part of 2017. Its snapback rally has temporarily gotten back over October lows, but yet this remains a giant reversal pattern from 18 months ago and it's thought that upside likely is minimal before turning back lower. Prices would require a move back up over $102 to change this thinking back to bullish, but for now, an $11 rally in recent weeks as part of a negative overall pattern is reason to sell into.


into.gif

Seagate Technology (STX- $40.67) Look to sell into strength this week for a move back lower. Most of the Disk drive makers have enjoyed sharp rallies as part of ongoing downtrends, and STX stands out as one continuing to show a very negative overall pattern and has rallied up to test the highs of its most recent Bollinger Band and Ichimoku cloud after a sharp counter-trend rally. Yet, the area from $40-$42 is important and likely represents an attractive area to sell into strength for movement back lower. Weekly and monthly momentum remain quite negative and STX has not broke out above the downtrend that's guided this stock lower over the last year. The next 2-3 days should represent an opportune time to consider selling into this for a move back lower.

lower.gif

Roper Technologies (ROP- $273.16) ROP's 10% rally over the last 12 trading days has carried this back to appealing levels to sell into on this bounce. Trading patterns remain negatively sloped from September and the area at 279-81 would be ideal to consider shorting ROP for a move back to test and break recent lows near $245. The stock appeared to have broken out of a giant reversal pattern stretching back since early last year. It's recent bounce has helped daily momentum carry back to neutral territory while weekly and monthly remain negatively sloped. One should consider selling into gains given the ongoing negative structure, expecting a pullback in the weeks ahead.


ahead.gif

Overstock (OSTK- $15.27) OSTK's bounce over the last few weeks should represent an excellent opportunity to sell into gains for a move back lower in the weeks ahead. OSTK remains trending down over the last year, having lost nearly 85% in the last year. However, given the shape and structure of the bounce attempt from December, it looks unlikely that OSTK has truly bottomed out. No counter-trend evidence of exhaustion is present, and the move from December has been largely more sideways than a sharp rally of Five waves higher. Thus, it's likely that this stalls between $15.25-$16.50 and turns back lower to undercut $12.33 at least one more time before any serious low is at hand. Breaks of $14 on a daily close should likely lead to $12.33 and breaks of that could lead to a maximum near $10 before this starts to stabilize and then try a more serious rally. For now, buying here looks premature and right to sell into and use rallies to short in the days ahead.

ahead..gif

Vodafone (VOD- $19.70) VOD stabilization since October hasn't served to change the broader downtrend in place for VOD, and the small bounce attempt since December and from earlier last week is miniscule given the degree to which the market has rallied in recent weeks. This disappointing bounce should serve as an opportunity to sell into gains given the lack of any downside exhaustion in place on multiple timeframes and should allow for rallies to hold $20-$20.50 for a move back lower to $17.90-$18.25 . For now this looks like an appealing stock to consider fading in its consolidation attempt for another pullback to new lows before this has bottomed.


bottomed.gif

Las Vegas Sands (LVS- $56.96) It looks right to sell into the bounce in LVS and other casino stocks in recent weeks as this group has been one of the weakest since last Summer when many peaked out in late June. LVS gave up nearly 70% of the rally from 2016 before reversing course and bouncing sharply in the last three weeks. However, prices still remain below highs from early December and counter-trend exhaustion on weekly charts remains premature. So after nearly a 20% bounce in three weeks, LVS is now up to prior highs from the last few months and maintains a larger downtrend. Even in a basing process, this will likely require some consolidation and additional base-building before this can start to trend higher. Near-term, shorting this rise looks prudent heading into this week technically at $56.96 up to $59, expecting a trend reversal and move back lower to under $50. Failure to break lows from three weeks ago might turn out to be an early warning sign about a possible bottom. For now, this is early and fading this rise looks like the right move.


move.gif

CBOE Global Markets (CBOE- 91.39) CBOE remains the weakest technically of the major exchanges, and given the recent drawdown in this group, the stock has fallen from $115 to near $91 over the last few months to test prior lows. While a bounce attempt happened into early January, this proved futile and the stock turned back lower. Overall, weekly exhaustion remains premature and momentum is negatively sloped. Last week's decline undercut all of last year's weekly closes putting this at the weakest since mid-2017. Additional drawdowns here look likely given the rollover in the Financials space and can get down to the mid 80s with idea targets near $78. Trends will remain bearish unless price gets back up over the highs from two weeks ago near $99.50 which looks unlikely in the near future but would be a stop for shorts.


shorts.gif

Apache (APA- $31.10) Bearish and the rally over the last few weeks has carried up to an attractive risk/reward area to sell into this bounce. Overall, the breakdown in APA into end of year managed to violate both March 2018 and also Jan 2016 lows. thus, the breakdown has taken this to the lowest levels since 2002 before the rally attempt in recent weeks. While a 23% rally over 12 days is nothing to sneeze at, structurally this remains in very poor shape. Prices remain under these prior lows and momentum is now nearing overbought levels while weekly and monthly momentum are negatively sloped. Additionally, counter-trend exhaustion is not in place at the lows of weekly or monthly charts to suggest a low of any magnitude. Meanwhile daily charts now show upside exhaustion of TD SELL SETUPS as of last Friday . (9 consecutive closes above the close from four days prior) This likely will allow for a slowdown in this stock and reversal this coming week. Shorting APA looks prudent technically on this rally, from $31 up to $33 with expectations of a pullback to test and break recent lows at $25.

Bounce near given sentiment/oversold extremes, but recouping 2630 is a must

December 24, 2018

Mark Newton CMT, Newton Advisors, LLC

Contact: info@newtonadvisor.com



S&P 500 Cash Index

Support: 2400-2, 2376, 2355-7

Resistance: 2583, 2600-2, 2630-1, 2687

Happy Holidays to all! Looking forward to a safe, happy and profitable 2019!



Summary:  Stocks remain trending strongly downward in a trend that's nearly erased 50% of the entire rally from 2016 in S&P. Last week's "Make-Or-Break" comment was decided by the nasty "Break" on Monday which resulted in severe acceleration and resulted in the worst week of performance in a decade. The decline has begun to take a toll on the broader structures, which now show long-term trend breaks on monthly logarithmic charts from the 2009 lows. Momentum has rolled over sharply with the year-to-date decline in US indices of anywhere from 8-15% in what has been seen as a real shock to many investors given the relative lack of deceleration in the economy, or in earnings. Overall, most near-term technicals point to an above-average chance of some stabilization and bounce starting this week. However, the intermediate-term trend has also turned bearish, given the breakdown under SPX 2580 and long-term trendline breaks on many indices. However, from a risk/reward perspective, despite the bearish trend, the chance of a rally into the Spring remains high given the combination of sentiment, seasonality and some cycles which pinpoint next Spring as having some importance. Near-term, a snapback rally is expected, though with weakness likely lingering into January. With regards to bonds, a selloff here also looks to be around the corner, with yields having pulled back sharply to near key support at 2.70-2% while the Dollar index could be on its last legs, with a selloff expected to begin in 2019. Commodities meanwhile might shape up if the Dollar decline gets underway, and both Crude and Gold could have better years next year than in 2018. Overall, the volatility looks to be here to stay. Below is a table, courtesy of @Oddstats, showing the percentage returns on the last 5 trading days of the year. As one can see the last four years have been lower during this time and since 2008 we've seen six of the last 10 final five days finish down. While a bounce looks very near given the oversold conditions, it's certainly no guarantee that Santa rally carries the market higher during this time.

time.jpg

Overview:  Last week's severe decline has gone down in the record books as being the worst week since 2008 and with one more full week to go, markets could potentially record the worst December performance of all time. This current -12.45% decline already establishes December as having the worst run thus far since the 1930's with the NASDAQ now having fallen more than 22% from its peak, which many believe puts the NASDAQ in a bear market. Wilshire Associates tells us that US stocks lost over $2 trillion in value on the week, a staggering amount. Yet, this decline has been unusual to many non-Technicians as it's occurred during an economy that's healthy enough for the FOMC to have just raised rates again a fourth time this year while earnings remain sound. Thus, this decline truly calls into question the factors that many typically feel drives the market.




Technically speaking of course, there have been warning signs now since late August when Technology began to "nosedive" with the NASDAQ peaking out. Breadth fell off sharply throughout much of September, with many record closes happening on flat or even negative breadth. Markets showed classic signs of negative momentum divergence on the move back to new highs as well, as January proved to be the true peak in momentum, with RSI readings near 90. When markets reclaimed and exceeded those January peaks, it occurred on far lower RSI readings. However, it was the move in the Chinese Yuan following Trump's meeting with China's XI that truly caused the bond market to turn up sharply. Yields fell quickly starting in early December and stocks weren't far behind.



Now in trying to take stock of the damage done, it's important to look at a plethora of technical factors along with sentiment, seasonality and momentum to try to dissect the near-term and intermediate-term technical picture. My thinking is the following are important reasons why a bounce should be right around the corner:



1) Bearish sentiment- Sentiment has turned quite negative lately. The Equity Put/call ratio is now as high as we've seen in two years' time, challenging the 2016 peaks, while many traditional sentiment polls have inverted their Bull/bear status



2) Oversold conditions- Daily charts show RSI to have pulled back under 25, as oversold as early October (which was actually lower) Yet the percentage of stocks trading above their 10 and 50-day moving averages have dropped to single digits



3) Counter-trend exhaustion (Demark)- The NASDAQ along with S&P is within 2 days of possibly recording the first evidence of exhaustion per TD Sequential and TD Combo signals since early December. These worked well in September at the top as Sells, and now they'll arrive this week on a bit more weakness. My thinking is they could signal a temporary low



4) Cycles- The peak in September is now at a key 90 day juncture to this time in December, along with being 45 days from early November peaks, and 315 calendar days from February 2018 lows. This likely should result in some type of pause to this decline



5) Bullish seasonal trends- We remain in a seasonally very positive time, so a -12% decline in December certainly hasn't lived up to this standard. But in general the period from now until next Spring should allow for a counter-trend rally in stocks before the seasonality turns negative again, and for now, it's still right to consider that January- May could be positive, not negative.



From a non Technical perspective, we've heard countless opinions in the media that the economy should slow meaningfully in the years ahead. The fact that many seem to have jumped onboard with this line of thinking while economic growth has been strong enough for the FOMC to continue hiking rates seems overly bearish and might represent a time when US equities and the economy generally do the opposite of what the masses believe.



These are just a few reasons, but generally suggest this decline should be close to running out of steam as the market enters January.




SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:


Short-term (3-5 days): Expect a reversal in trend to this decline which could happen either during the shortened session Monday, or more likely Wednesday of this week which could kick off a bounce up to 2600-2630 in S&P before additional weakness happens into January. While the trend remains very bearish near-term, we've seen the presence of very oversold conditions in the short run, with just 1% of all stocks above their 10-day moving average and just 6% above their 50-day, equally as oversold as markets were back in February 2016. Demark indicators are 2 days from signaling exhaustion on S&P, & NASDAQ and hugely important stocks like AAPL are also showing the same exhaustion signs. Thus, given bearish sentiment while markets are oversold and nearing exhaustion, it makes sense to expect some stabilization this coming week and a bounce attempt. Further weakness would take markets to 2376, the 50% retracement of the entire move up from 2016, which is an important level. Thus, while markets remain under pressure, this doesn't look like the best time to sell stocks for those with a 3-6 month time horizon. This final full week of the year should provide some clues in this regard in the next couple days.



Intermediate-term (3-5 months)-  Bullish- While the trends have turned negative on an intermediate-term basis for many indices given our weakness, it's thought that a rally should be near that provides a bounce to this decline before any larger bear market continues. While the average stock is now officially in a bear market, most market indices are not, and many arithmetic charts still show the uptrends for market indices to be intact. Momentum is a different story, as long-term momentum indicators like MACD have turned negative, while RSI has not reached oversold territory (and is nowhere near oversold on a monthly basis) This suggests that any spring rally should likely constitute an excellent time to cut down on risk, and diversify into dividend rich investments and avoid the Growth stocks and Small caps. Overall, we'll leave some of our larger thoughts for the 2019 Annual report, but suffice to say, this pullback doesn't suggest to me just yet that the next 3-5 months should be negative at a time when everyone is saying the economy should now turn down.


10 Charts to review- 5 Index, & Sentiment charts, then 5 Stocks to buy following recent Weakness

weakness.gif

NASDAQ Composite- Searching for a tradable low- NASDAQ, which has just officially reached the 20% down mark, is now suddenly very close to its 50% mark of the 2016-8 rally while being 2 days away from recording Demark exhaustion for the first time on this decline. Additionally, momentum, while oversold, is actually at higher RSI levels than were recorded in early October. Thus a few reasons suggest that this decline is close to bottoming and turning back higher. While buying into a steep decline like this is often difficult to time accurately when stocks have been falling at a pace of 1% per day, the area from 6100-6300 is important for NASDAQ, and it's worth taking a stab at buying into this given the reasons above. 

above.gif

SPX nearing 50% retracement, but break of 2580 is bearish. SPX on weekly charts has now given up nearly 50% of the entire rally from 2016 and within 40 S&P points of this level at 2376. However, the pattern has grown quite bearish with the break of 2580-2600 area that most have been eyeing for weeks. Until/unless this area can be exceeded now on any snapback rally, the trend is bearish on an intermediate-term basis, with any minor bounce being used to sell. Near-term, charts have reached levels which make sense to cover shorts on any break of 2400, while traders should look at selling back into a bounce to 2600.

2600.gif

SPX showing long-term trend break - SPX monthly charts show prices officially having broken long-term uptrends when viewing logarithmic charts, while traditional technical metrics like MACD have rolled as the signal line has been broken and MACD is diverging lower. Meanwhile, monthly RSI is not oversold. Thus, it's important to see how the rapid selling of late fits into the long-term model and as can be seen, prices certainly have gone a meaningful amount higher after having bottomed at 666 back in March of 2009. Interestingly enough, while recent selling has been dramatic in percentage terms, the decline has literally just scratched the surface in having begun to rollover. While a move back up above 2630 would cancel the breakdown, suggesting a possible move back to 3000-3060, for now the trend is bearish and bounces should be used to sell.

sell.gif

Fear as high as early 2016- Equity put/call readings are now above 1.1, a level that hasn't been seen since early 2016 during the plunge from late 2015 into early 2016. Thus, while the selloff has proven orderly and not really shown evidence of real capitulation with regards to TRIN readings being excessive during the selloff, fear has slowly but surely returned to this market, and now we're seeing more puts being bought than calls, which is a rarity and normally signals that a bottom is near.

near.png

Stocks above 10, 50-day MA hitting extremes- This chart showing the percentage of stocks trading above their 10 and 50-day moving average has gotten down to very extreme low levels as of last Friday, suggesting that lows should be near. The percentage of stocks above their 10-day has reached 1%, so 99% of all SPX names are under their 10-day, while only 7% of all stocks are trading above their 50-day m.a. Thus, the market based on this metric is as oversold as we saw back in early 2016, while traditional gauges of momentum like RSI are oversold now on daily charts. This rare level of oversold readings often will result in a very sharp bounce, and we seem to be near this time.




5 Stocks to consider buying after this Weakness

Many of these are in steep near-term downtrends, but have approached attractive intermediate-term trendline support which makes buying into this pullback appealing. The time-frame for bounces in these stocks is 3-6 months, and entries should be attempted gingerly given the extreme selling, buying in small size and adding as they start to work. Stops can be considered to limit losses to 5% in each. Charts and thoughts below.

Apple (AAPL- $150.73) For the first time since AAPL peaked at $232, we're seeing evidence of counter-trend exhaustion in AAPL on both a daily and weekly basis as of this coming week. Additionally, the stock has dropped 82 points in 82 calendar days, representing nearly a perfect 1x1 price/time area where this should be close to bottoming. Near-term momentum has gotten oversold, while the stock has nearly reached its 61.8% Fibonacci retracement of the rally from 2016 and has arrived at Ichimoku support as shown by the "lookback line" hitting the bottom of the Ichimoku cloud. Overall, while the decline has been very steep in recent months, the long-term pattern remains very much intact.

intact.gif

FedEx Corp (FDX- $158.00) FDX has gotten down to an interesting level of support worth considering after falling 29% in the last month, the worst performing stock of all the 69 companies that make up the S&P 500 Industrials index. Prices lie right near trendline support while having given back 50% of the prior intermediate-term rally. Overall, this area has importance for a possible low. The area at $154.34 represents the key 50% area, and technically given the confluence, looks to be a low risk area to consider taking positions in FDX.

fdx.gif

Goldman Sachs (GS- $160.05) GS has arrived near formidable support that likely suggests this stock can finally bottom out after a very difficult year. GS has been one of the worst performing stocks in all of the 67 stocks that make up the S&P 500 Financials index, having dropped more than 37% YTD thus far. Demark weekly exhaustion is nearly complete, and could happen within the next two weeks. Meanwhile, GS is within striking distance of 2016 lows and currently sits right on a larger uptrend from 2008, which originated 10 years ago. While the weekly charts show this to need another couple weeks, this should be close to forming a low and the risk/reward to buy has gotten better in recent weeks on this pullback. Look to take initial longs in small size and add to positions as GS starts to stabilize.

stabilize.gif

Lennar (LEN- $38.96) Homebuilders might very well take a breather after a very difficult 2018. LEN stands out as one to consider after losing over 38% this year, one of the worst performing stocks of all within Consumer Discretionary. However, as monthly charts show, this area just below $40 lines up with an attractive level of long-term trendline support while also hitting lows which were made near current levels back in 2016. Weekly charts show the trend from January of this past year to still be very much down, and last week's pullback looks to require another two weeks of possible weakness before this can bottom out. However, the stock is nearing its 50% absolute retracement level from those $72 highs made back in January, so at $38.96, the area at $36 should be a very strong level which causes this to stabilize and then turn back higher. Demark indicators also are within 2 weeks of showing TD exhaustion on a weekly basis for the first time since this decline started this year. This combination makes LEN very attractive to keep on the watch list and consider buying between $36-$38 on any further weakness heading into next year.

year.gif

Halliburton (HAL- $25.85) HAL looks attractive from an intermediate-term basis after having lost nearly half its value this year. This stock peaked initially back in 2014 near $75 a share, so at $25.85, it's given back quite a bit in recent years and much of this has just happened in the last 10 months. Monthly charts going back since 2008 show this area near $25 to have some importance technically in adjoining a long-term support trend. TD Buy Setups will be in place by next month, and makes this interesting to consider as one to buy during a seasonally bullish time for Crude oil which typically gets underway in February. In the short run, while a bottom might take 3-5 days, this area looks appealing to initiate buys in small size and add to this as it starts to stabilize more. The first meaningful upside target lies at $38, or near the lows from August of last year which should now be important on any rise as resistance.

Stabilization & bounce could happen this week after Tech strength amidst rampant pessimism

December 17, 2018

Mark Newton CMT, Newton Advisors, LLC

Contact: info@newtonadvisor.com

S&P 500 Cash Index

Support: 2583-5, 2564-5, 2513-5

Resistance: 2687, 2708-9, 2731, 2800

Summary:  Stock indices remain trending lower from early December as part of a larger decline from mid-September, but now appear to be at real "make-or-break" levels with regards to technical structure that has guided lows in SPX, NDX and DJIA since early 2018. Patterns appear to have broken down for some indices like the DJ Transportation Avg, and Russell 2k, while last week's close undercut October lows by a small amount in many of the major US indices. However, the larger patterns in SPX, NDX, DJIA remain intact at this point, while sentiment has begun to show real evidence of uneasiness. Fund flows back up this sentiment shift, with Lipper data by Reuters showing a record $46 billion of outflows from Equity mutual funds and ETF's in the week ending last Wednesday, with an equally high $13.4 billion being yanked out of Bond funds, the most since 2015. 2018 has proven to be a most difficult year for many asset classes, with poor returns from Equities, Bonds, Commodities and Cryptocurrencies alike. (We don't hear much about TINA (There is No Alternative) these days, and for good reason. Now with 10 full days of trading left for the year (a bit more than two weeks), many investors are all too Fed up with the "Holiday Red" on their screens daily, and are hoping that the much heralded Mid-term election year bullish seasonality is ready to kick into gear. The Sentiment polls from AAII , as just one source, would suggest some kind of relief should be right around the corner: Based on latest readings from 12/13/18, the Percentage Bears has jumped to near 50% at 48.87, while Bulls has receded to 20.9%, the lowest Bullish reading since May 2016. While Investors intelligence polls still showed a small bullish majority as of last week, the new reading due this week is likely to contract further given recent market volatility, adding to the degree of negativity.

negativity.jpg

Overview:  2018 is shaping up to be one for the record books, but not for the way many expect, and despite good earnings and economic data, US markets are set to turn in quarterly results of -10.78% at current levels for the SPX, and -14% for the Nasdaq with down markets for the year for the US, Europe and Asia. While market indices have not entered bear market territory, the average stock arguably has, with nearly 50% of all stocks lower by more than 20% off their 52-week highs. And now markets are faced with a growing number of Experts" who are warning of an upcoming slowdown, something which seems to have begun already in China and Europe despite the ECB abandoning its QE program. Regardless of what one feels about the economy and Powell hiking interest rates this week, which looks all but certain, the opinions of next year are all over the map. Yet, the Fed funds futures seem to be nearly always better as a gauge for Fed hikes than most economists, and this is now showing only one more hike in 2019 and not until September. Meanwhile, the other "elephant" in the room centers on the trade war and whether to believe the administrations positive tone on an upcoming "big" announcement with regards to trade with China. Our recent tariffs have certainly shaken the perception of an economy growing without any slowdown, but it seems increasingly likely that this recent "thaw" in trade war tension is likely to accelerate into next year. This begs the question, if market indices are still largely intact while sentiment has turned negative and some upcoming positive trade war truce news is coming down the pike, is it right to be negative on equities, thinking this recent selloff continues? According to the Stock Traders Almanac, the 3rd year of a presidential cycle has been bullish for DJIA on every occasion since the 1930's over 80 years ago. But given the recent ineffectiveness in Seasonality thus far for 2018, can this be trusted with indices seemingly breaking down left and right?




Technically speaking markets have shown some near-term damage in trend while weekly and monthly momentum have turned down sharply and have been bearish for most of this year, which began in January on the 14 day plunge from 1/26 into 2/9. Sector rotation started to give even more clues as of June, when Technology peaked. However, Tech has suddenly started to show some minor evidence of strengthening in the last week, just while Volume has begun to wane a bit in its bearishness- Far less volume in down stocks vs Up and breadth has begun to stabilize. Sentiment meanwhile has continued to get more and more negative, with nearly a 20% inverted ratio between bears to bulls in AAII polls. Thus, at a time when many unanimously expect a breakdown, it's worth looking for relative bright spots and expecting at least a minor bounce in the week ahead into end of year. While it's important that SPX get back up above 2687 initially and then 2800 as the larger "line in the sand" This next few days should speak volumes as to how the markets are able to stabilize. Under 2550 wouldn't be expected right away in this scenario, and likely could lead prices down to 2400-50 before finding support. For now, a rally back to test and exceed 2687 looks more likely for these next couple weeks.




Technical Longs to Favor over the next 2 weeks: UUP, EUO, TWTR, PFE, ETSY, CIEN, VRSN, LLY, KMB, TNDM, D, AEE, EVRG, PEG, CHD, PG, CQQQ




SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:




Short-term (3-5 days): Bullish- Expecting that stocks stabilize and turn higher for a bounce as momentum has begun to reflect some signs of divergence in the groups that broke down last week - Transports, Small caps, while Technology has begun to show some evidence of strengthening a bit relatively. (While many indices fell to new lows, the NASDAQ held up. Breadth and momentum seem to have waned in their negativity compared to mid-October, while sentiment has continued to get worse ahead of this week's FOMC. Overall, an oversold bounce looks near and one should watch both Technology and Financials for signs in this regard.




Intermediate-term (3-5 months)-  Bullish- SPX has gotten down to, but not UNDER the key 2600 level (Last Friday's undercut by 1 point doesn't constitute a larger breakdown ) which is holding the larger trend intact for the index at a time when sentiment is growing increasingly more bearish. It's thought that a bottoming out in Yields should help stocks also turn back higher, in the weeks ahead, and that while 2600 could be violated by a small amount in upcoming days, markets are growing too negative sentiment wise to produce any long-lasting breakdown during a seasonally bullish time. However, seasonality has been tough to include as a reason to buy, as this has largely not worked for most of 2018. Charts have indeed been getting worse structurally, and momentum has turned negative on a weekly and monthly basis. Yet, we're facing the most positive period cyclically within the four year cycle and it's thought that the next 3-5 months likely could produce a rally out of this "mess" before any larger correction gets underway. So while near-term structure along with weekly momentum are indeed negatives, the larger patterns still seem ok to buy into, thinking any sort of larger rollover likely takes some time. While negative momentum divergence is indeed important, one might look at rallies into next Spring as a time to potentially turn bearish on an intermediate-term basis. For now, indices are under their 10 month moving averages, yet these averages have not yet rolled over and sentiment has gotten more pessimistic. We'll utilize any further weakness into mid-December to trim shorts and start favoring longs, but until proper stabilization starts in groups like Technology, it's right to stick with the Defensive groups for now while keeping a keen eye on the larger index structure.

10 Charts to review- Index, Absolute & Relative, & sector charts

charts.gif

NASDAQ 100 has begun to hold up relatively better in the last week- While sentiment has gotten worse overall with many indices like DJ Transports and/or the Russell selling off sharply back to new monthly lows, the NASDAQ has begun to hold up relatively better, which is thought to be a minor positive, given its ability to lead the market. The daily chart shows the pattern of a low, lower low and now higher low in the last couple months, while breadth and momentum bottomed out in October. While a move back over 7100 is truly necessary to allow for larger technical pattern improvement, the start of momentum getting "less bad" looks like an important and positive technical development which should lead to an upcoming bounce in Technology (20% of SPX, the largest sector)

sector.gif

NASDAQ v SPX bottomed out and turned sharply higher vs SPX in the last couple weeks, which is exactly what many would not expect to see if the market were crashing. While SPX did technically finish down under 2600 on a close last Friday, the outperformance in NASDAQ to SPX has helped this relative chart show evidence of trying to break out in the last few days. This is a small shift that suggests that a relief rally is clear and puts the comments above into some much needed perspective

perspective.gif

DJ Transports broke down under key support but signs of near-term exhaustion are present- Watch for possible bounce Monday-Wednesday- The DJ Transportation Avg was one of the calamaties of last week's equity selling with prices pulling down to the lowest levels in over a year. This violated a large potential topping pattern as well as the two year uptrend from 2016. Until this can be recouped, this is thought to be an area to avoid, particularly the Airlines which have begun to roll over sharply again in recent days. While the formation is quite bearish, if there's any positive to note, it's that momentum has made a higher low into this recent selloff and Demark Exhaustion is due today, Monday 12/17/18 and should be perfected by Monday's close while also showing on 60 and 120 minute charts on TRAN. Thus, there remains a chance for this group to try to stabilize on a 2-3 day basis just at a time when everyone's steering clear given the breakdown. However, for now, the price break takes priority, and its a must to wait for the reversal back over 9758 before attempting to weigh in on this pattern as being a false breakdown.

breakdown.gif

Russell 2k vs QQQ- Small caps still look to move lower and should be avoided- The Russell 2k broke down under the lows vs QQQ and reflects this group still under quite a bit of pressure. Thus for those seeking to buy dips in Small-caps given the recent underperformance expecting mean reversion, this looks premature, and large-caps remain the way to position on longs in the days/weeks ahead. Note, Small cap deterioration doesn't necessarily have to carry bearish implications on the markets overall, as most of 2017 was marked by Small cap underperformance. Yet it is thought to be more negative than positive in the bigger scheme of things.

things.gif

Discretionary breaking 2 year trends vs Staples- Equal-weighted Consumer Discretionary vs Equal-weighted Consumer Staples- Discretionary has definitely begun to show more weakness relative to Staples in recent months, and this breakdown of the trend from 2016 is considered bearish relatively for this sector compared to Staples in the near-term. While a bounce can happen in Equities at any time, this breakdown of the relative charts suggest that the Defensive stance remains the right one for the immediate future, and even on bounces, one would favor Staples in the months ahead.

ahead.gif

EZU v SPY- Gradual bottoming process looks to have begun When eyeing Europe vs the US, we're beginning to see the makings of some slowdown in this recent pullback. The Ishares MSCI Eurozone ETF (EZU) has begun to show some mild improvement in momentum in the last month, just at a time when Draghi announced the end of QE. TD Sequential signals on this ratio chart of EZU v SPY have signaled downward exhaustion on weekly charts for the first time in over a year. Thus. at a time when Europe has begun to slow, this might turn out to be a better near-term risk/reward than the US. So, despite the bearish trends in EZU, it's worth covering shorts in EZU and watching this carefully for more evidence of strengthening in the days/weeks ahead.

weeks ahead.gif

Credit spreads have started to widen more meaningfully than we've seen in recent years when looking at ratios of JNK to LQD, the High Yield ETF by Barclays relative to the Investment grade. This is a negative development which suggests the Defensive stance shown with Equities is likely the right one in the months ahead, and that any bounce likely could prove to be a selling opportunity.

opportunitu.gif

Equal-weighted Technology has begun to show some evidence of strengthening in the last few weeks, despite broader markets having accelerated the recent selloff. This ratio of SPXEWIN to S&P 500 Information Technology index has now arguably exceeded the downtrend which has been in place since this past June as a result of last week's Strength. While markets were down, Technology as a sector showed some good relative strength, and this equal-weighted basket of Tech seems to be giving some signals that the damage likely is overdone in the near-term.

near-term.gif

US Dollar index looks to have made a meaningful breakout of the triangle pattern that's been in place for most of November. While the Dollar overall has gotten overbought and sentiment has begun to get much more bullish on the Dollar, last week's move likely helps this trend accelerate up into year-end/early January before any peak. Thus, Emerging markets, and commodities likely underperform in this scenario and should be avoided for now. Next year when the Dollar makes a more meaningful peak, this should have bullish implications for commodities, but for now is still early.

early.gif

Financials also signaled a few signs of optimism this past week technically when the Equal-weighted Financials ETF held up much better than the regular XLF which fell down to under 24.30. Counter-trend signs of exhaustion are present and will grow more plentiful in number in the next few weeks, which seems to suggest that Financials might be near a turn back higher, just a time when most have given up on this sector. Overall, groups like Broker Dealers have seen some good strength vs the banks over the last couple weeks (IAI v KBE) while Insurance strength has also been notable (Defensive trade) So while absolute patterns still look to be very much under pressure, this group should be watched for evidence of trying to bottom out which might coincide with Treasury yields also lifting into year-end.

5 Top Defensive stocks to consider, technically

December 10, 2018

Mark Newton CMT, Newton Advisors, LLC

Contact: info@newtonadvisor.com



S&P 500 Cash Index

Support: 2600-2, 2583-5, 2564-5, 2513-5

Resistance: 2708-9, 2731, 2800, 2814-6

Summary:  The Volatility continues: Stocks reversed the prior week's rally violently over the last few days, and now have reached the bottom of the recent trading consolidation that's been in place for the past few months, with 2600 being seen as a very important area. The bond rally has continued has continued as well, while the US Dollar has largely stalled out in its recent advance. Overall, it's important to highlight the following, in no uncertain terms. Patterns in Equity indices have gotten worse, and now indices lie on the brink of a potential larger breakdown at a time when many have become very frustrated at seeing all this "Holiday Red" on their screens. Of course, as we're all aware the average stock is down much more than the indexes reflect, but seeing a larger breakdown in the indices at this point would confirm that stocks have definitely started a larger correction that should eventually lead to a bear market. However, bull markets take time to end, and after nine years typically do not go from high to low right away, particularly when many media panelists are now all but convinced that the economy is slowing and the end to the economic boom is upon us. This shift in sentiment alone suggests that having a bearish opinion for anything longer than 3-5 weeks is likely not the smart choice, and the bullish month of December can't be written off just yet. Yet, when many popular names like AAPL have lost more than 20% in recent months and sentiment has started labeling this a "trade war stock" with multiple downgrades, this is normally the time to consider looking for lows in stocks like this, not selling following the 20% loss. Yet there remains a huge focus on Technology in general it seems, despite this sector being out of favor for some time now, and everyone is still searching for the potential "Bottom" in Facebook and Apple. This week merits a shift in focus to stocks that are actually showing decent strength- The Defensives. While Utes or REITS might seem "boring" and not as sexy as owning a Facebook, or Apple, many of these stocks are acting just fine, and seem like a logical area to favor during times of heightened volatility. Below we see the SPX chart and have highlighted this key 2600 level. Unfortunately, this area has become so prominent that it could very well be prone to whipsaws as many are placing stops at 2600, for understandable reasons. Bottom line, despite this being an area of focus, it's right to adhere to this pattern and expect that any violation would be a bearish development.

development.gif



Overview:  After the worst week in December in over 30 years, -3.89% SPX, everyone is scratching their head as to how this kind of selling is taking place with good earnings, a robust economy (though one that's being increasingly questioned) and what's widely been seen as a thaw in the recent Trade turmoil. Investors are searching everywhere for narratives as to the "why", with everything from the Mueller investigation, to a hawkish FOMC intent on ratcheting up rates when inflation hasn't reached their target, with most in unanimous agreement that the trade policies have served as a debilitating threat, and despite efforts to dial back and negotiate now, many believe the damage has been done with regards to perception. While my Technical reports take a 100% technical take on markets, it's important to hear and see what investors feel is the "why" for sentiment purposes and gauge how frustrated, apathetic, or fearful people have become. If anything, these last few weeks have served as a sharp dose of reality as to how little the macro factors typically are in "causing" market movement and why stocks often can move in a very different direction than what earnings suggest. Many blame Trade policy for the losses, but yet our recent near 4% decline this past week occurred in an environment that was thought to be widely better than previous weeks, and the market peaked out in mid-September, with June proving to be the top for Technology. Thus it often seems to revolve around cycles and sentiment as to why stocks move, more than a group of "in the know" investors all selling at the top and buying at the bottom. Despite algorithmic systems in place to trade "News" when looking back, most of this is short-term only and has no real cause as the larger direction in most trends. Bottom line, following a 9 year bull run, this kind of volatility is certainly new to many people, but it's important to measure sentiment which is starting to get very negative at a time when market indices arguably have not broken down sufficiently to think a new bear has begun.




Interestingly enough, the key area to watch might be interest rates in the days ahead as the breakdown in stocks directly followed the break in the Yield curve, as US Long rates fell off coinciding with the breakdown in USDCNH (Offshore Chinese Yuan) Given that bearish sentiment has now been cut in half for Treasuries and yields are down near important trendline support at 2.80%, (with Demark exhaustion a few days away), it's likely in my opinion that yields stabilize here after five straight down weeks. The bond market also is readying itself for nearly $78 billion in supply this week as the Treasury auctions 3 and 6 month bills along with 3, 10 and 30 year bonds all this week. Given that stocks and bond yields moved in tandem from early October except for a brief period a couple weeks ago (that ultimately suggested that the bond move likely was the right one, not the stock rally, and stocks reversed to promptly follow bond yields) than any bottoming out in bond yields this coming week that leads Treasuries back lower (yields higher) could very well allow Financials to follow suit and provide some tailwind for an Equity bounce at a time when many least expect it, and/or have written off the year.




Until then, timing the market is difficult and the better solution seems to be sitting it out in Defensive areas until more stabilization occurs. Groups like Utilities, REITS and Staples have all outperformed of late and many charts in this group look far better than trying to buy dips in stocks like AAPL with deep downtrends (Though it's human nature to try to buy dips, or get something "on sale" which many deem to be a good long-term buy and hold when it gets cut by 20%.) Relative and absolute trends in many of these Defensive groups remain in good shape and are better technically than groups like Technology and/or Financials. With that being said, let's take a look at some of these key sector charts and then five stocks which look like good Technical bets during this time of extreme volatlity.





SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:




Short-term (3-5 days): Bearish- Expect a possible early week break of 2600 but which doesn't undercut 2550 and should allow for stabilization sometime this week and a move back up over 2600, as opposed to a crash. (Sunday evening, we're seeing futures down 24 points to just over October lows, on a closing basis the lowest close since April) Bottom line- Trends are near-term negative from 12/3 and look to test and potentially break 2600. Any break of 2600 that then recoups it would allow for a rally to commence. As last week's note said, movement under 2680 puts a defensive stance back on the front burner. While the daily notes recommended a defensive tone on the break of 2767 with a move down to 2722-5 likely, S&P now sits near a very important 2600 level that everyone seems to be watching carefully. When levels like this become something of interest to the media, they can often serve to offer whipsaw potential, as violations run stops before a sudden about-face.




Intermediate-term (3-5 months)-  Bullish- SPX has gotten down to, but not UNDER the key 2600 level which is holding the larger trend intact for the index at a time when sentiment is growing increasingly more bearish. It's thought that a bottoming out in Yields should help stocks also turn back higher, in the weeks ahead, and that while 2600 could be violated by a small amount in upcoming days, markets are growing too negative sentiment wise to produce any long-lasting breakdown during a seasonally bullish time. However, seasonality has been tough to include as a reason to buy, as this has largely not worked for most of 2018. Charts have indeed been getting worse structurally, and momentum has turned negative on a weekly and monthly basis. Yet, we're facing the most positive period cyclically within the four year cycle and it's thought that the next 3-5 months likely could produce a rally out of this "mess" before any larger correction gets underway. So while near-term structure along with weekly momentum are indeed negatives, the larger patterns still seem ok to buy into, thinking any sort of larger rollover likely takes some time. While negative momentum divergence is indeed important, one might look at rallies into next Spring as a time to potentially turn bearish on an intermediate-term basis. For now, indices are under their 10 month moving averages, yet these averages have not yet rolled over and sentiment has gotten more pessimistic. We'll utilize any further weakness into mid-December to trim shorts and start favoring longs, but until proper stabilization starts in groups like Technology, it's right to stick with the Defensive groups for now while keeping a keen eye on the larger index structure.


10 Charts to review- 5 Index/Sector & 5 technically attractive risk/rewards for Longs

SPX daily chart has gotten worse in the last week technically as the second rally from late October has retraced all the way back down to recent lows. Weve now seen three separate 7% pullbacks from mid-October with Thus, what was once seen as a recovery effort off the lows is increasingly taking shape as a consolidation pattern that might lead to a breakdown. Yet, this 2600 level might prove more difficult to "break and hold" as many investors are now familiar with this 2600 level. Overall, the momentum and trend simply don't suggest buying dips here is all that prudent just yet before more proof of stabilization. Near-term, it appears more likely that a minor break can happen, but if fear starts to escalate, this should prove buyable, and any move back up above 2600 would kick off the Santa rally. Near-term, breaks of 2600 would lead quickly down to 2583, 2564 or even 2513 before finding support, and the next week has the potential to still be negative, but given Equity Put/call readings hitting the highest level since January, a low should be right around the corner. So one should be increasingly looking for lows, from a trading perspective.

perspective.gif

UTES Bullish- Buy XLU at 56.46 for a move up to 59-60- The Utilities sector Sector SPDR ETF (XLU) has just made new weekly all-time highs as of last week's close of $56.46, above the prior peak from late 2017 of $56.41. Weekly charts depict this ongoing trend channel higher and it's likely that prices push up towards the highs of this channel, with targets near $59-$60 before a stalling out and reversal back lower. Near-term, Utilities look to be the best of the Defensive sectors, and should be favored given the recent Treasury rally along with broader market volatility.

volatility.gif

DJ Utilities has broken out of a downtrend from 2016 vs SPX in relative terms as well as having recovered prior lows broken in relative terms from last year. This is constructive towards thinking additional outperformance happens, and this group should be favored for relative strength by those seeking a safe-haven play and exiting Technology. The Utilities have turned bullish near-term on both an absolute and relative basis.

basis.gif

Consumer Staples vs. SPX (Relative chart) Bullish for further outperformance- Similar to Utilities, we've also seen strength in the Staples group lately, and weekly charts of XLP to SPY have broken out in a very similar fashion to what's happened to XLU. This bodes well for strength in this group and longs should be favored for the Staples, expecting outperformance in the near-term. Charts of stocks like CHD and PG show these to be a couple to consider for those looking for longs within this group.

group.gif

REITS have shown near-term relative outperformance vs SPX, but prices require some "work" to do to join in absolute terms. As weekly charts show above, the S&P 500 Real Estate ETF VNQ has pushed higher in rebounding to test an area that's thought to be important on weekly charts which lines up with $82 up to $84.50 on the charts based on two different trends. While this defensive group has outperformed with rates dropping lately and still looks to perform relatively better, this would begin to look much more attractive if/when prices get over $85.55, which would exceed the late August intra-week highs. Such a move would suggest this group could start to show intermediate-term outperformance after several lackluster years. Bottom line, the key takeaway above is that prices are up to resistance and for this group at the time, likely cause a bit more congestion than what's happening in the Utilities, or in Staples, which are preferred.



5 TOP DEFENSIVE STOCKS TO CONSIDER:

consider.gif

Ameren (AEE- $70.42) Bullish, with further gains up to $80 expected before any meaningful slowdown. The stock has consolidated for nearly a month following its breakout in early November, and prices have pushed up to the highs of this pattern in recent days. This bodes well for a breakout and longs are recommended, looking to add on a daily close over 71 for movement initially up to $75 and then $80 with breaks below $67.90 being used as support. Overall, this stock remains one of the better Utilities in performance, turning in gains of 19.38% YTD thus far, the 4th best of all 29 companies that make up the S&P 500 Utilities index. Given the long-term breakout shown above coupled with the near-term ability of AEE to accelerate in more parabolic fashion since early November, this should be favored for additional outperformance in the days/weeks ahead.

ahead.gif

Evergy (EVRG- $60.31) Bullish- The base breakout of this Integrated Utility back in November allowed prices to exceed the entire base going back since late 2016. This bodes well for additional gains to the high $60's in the short run, with intermediate-term projections allowing this to run up to over $70. Risk is very well defined as one would exit longs on any break back down under $58 which would postpone the rally. Near-term though, the ability of this to have cleared this longer-term base is seen as quite positive technically at a time when the group also is breaking out. Thus, this price structure makes EVRG one of the top Utilities to consider technically and one should consider overweighting for further gains.

gains.gif

Extra Space Storage (EXR- $98.70) Bullish with targets at $106. Trends and momentum have turned sharply positive in EXR after a quick 15% rally in the last two months to within striking distance of former highs. Neither daily, nor weekly signs of exhaustion are in place, so considering longs in this under $100 with targets up near $106-$108 make sense as the REITS have been outperforming the broader market of late. While Equities in general have been shaky, REITS like EXR have been able to push higher, and EXR should be able to reach the area of the upper border of this channel, at levels above last Summer highs. Overall, longs are favored, looking to buy dips at $96.50-$98 for a push higher in the weeks and months ahead.

s ahead.gif

Procter and Gamble (PG- $92.45) Intermediate-term bullish based on extent of recent rise- Buy on dips after stallout and await move back over 95- PG's recent push to test all-time highs keeps the intermediate-term structure still very much intact, and longs can be considered, looking to add above $95 on a weekly close for a technical target at $110. PG has formed a large consolidation triangle pattern since 2014 and now is testing similar levels that were hit back in December 2014, four years ago. Overall, while this stock has stalled out in the last couple weeks, the attractiveness lies in the intermediate-term structure. Longs should be considered at current levels in small size, looking to add on any pullback to $89-$91 for a move up to $110. Overall, this "safe" stock looks right to add to the portfolio given its recent resilience and ability to push higher to test former highs. Any gains above $95 would warrant adding.

adding.gif

Church & Dwight (CHD- $66.81) Bullish & further upside likely given recent resilience following breakout- CHD remains technically bullish and is considered one of the top technical choices in all of Consumer Staples. This stock was written up in this report a few weeks ago, but deserves further mention for its resilience during times of market duress. The last four weeks have failed to show any real pullback given Equity declines. This basing which has happened since mid-November bodes well for this to turn higher up to $75 near-term, with additional targets up near $80. Momentum remains positively sloped on weekly charts while not too overbought given recent consolidation. Stops on weekly closes under $64 would protect any drawdown from extended levels, yet this still looks to power higher given the two-year base breakout which accelerated further in early November. No counter-trend signs of exhaustion are present and CHD remains the second best performer in all of Consumer Staples Index (S5CONS-Bloomberg) with YTD returns of $33.17% with more expected in the days/weeks ahead.


Futures spike to prior Nov highs with Trade war Truce

December 3, 2018

Mark Newton CMT, Newton Advisors, LLC

Contact: info@newtonadvisor.com


S&P 500 Cash Index

Support: 2631-3, 2622, 2603

Resistance: 2812-4

Summary:  Bullish seasonality looks ready to get underway as the G-20 meeting successfully exceeded expectations and Futures have spiked overnight nearly 2% to levels near prior highs in S&P. Whether or not a true reduction in tariffs is possible next year is still difficult to say, but with just four weeks left in 2018, we've seen some improvement in technical trends along with a reduction in uncertainty at a time when sentiment had gotten understandably subdued. The near-term trend in both SPX and NDX changed to bullish last week, and while the negative slope in weekly and monthly momentum present concerns heading into next year, for now, it's thought that Equities likely can rally further given the setup heading into this weekend. Sectors like Financials and Healthcare had been showing steady strength lately, but It was the stabilization in Technology that is truly important for markets given the 20% SPX weighting. Additionally, the Industrials strength (while Transportation dominated) has helped this sector also turn higher, and is a definite near-term positive heading into the final month of the year. Overall, it looks right to favor rallies in the weeks ahead, while scrutinizing the breadth and participation in this rally carefully, as next year could bring about more volatility. The chart below shows the S&P progress in exceeding trendline resistance ahead of this past weekend's G-20 summit. This bullish breakout happened also in NDX, CCMP and should be a positive for the indices themselves. Given that nearly 50% of the market had declined nearly 20% from 52-week highs, it's more difficult to have confidence that the average stock can make as much progress. Overall, given that expectations were low but hopeful heading into the weekend, the sign of a trade truce goes beyond the outcome thought likely and should bring about an early week rally (As of Sunday evening, futures have surged. higher by nearly 2%, and while overbought on intra-day charts, such a move is quite positive if it holds on Monday's close, and bodes well for further strength.

Overview:  Most of the non-technical reasons for concern heading into December look to have thawed at least temporarily after this weekend. Whether one had concerns on a Fed set to hike too quickly, or an escalation in the Trade war, both of these look to have been reduced in the last week. Prices heading into Monday's open have spiked higher ot the tune of nearly 2% as of 11pm Sunday evening, and the ability to hold these gains is a real positive for December in all likelihood. Technically of course we had seen some evidence of stabilization in breadth and momentum and some improvement in both, with MACD having turned positive on last week's rally. SPX managed to log its best weekly gain in over six years, higher by nearly 5% or more than 100 points from levels seen just after Thanksgiving. While there are some concerns about the quality of last week's rally, despite the impressive breadth, as it appeared overly large-cap dominated (Equal-weighted SPX lost ground vs the SPX) yet the improvement in structure combined with momentum at a seasonally bullish time when sentiment is under pressure could prove to be the perfect recipe for a rally in the weeks ahead. Sunday's rally pre-market, if holds, would certainly be the catalyst in this regard.



Heading into December, we find leading sectors like Transportation starting to turn higher aggressively, fueled by both Airlines and certain Rail stocks, making sectors like the Industrials ones to favor selectively in the weeks ahead. This group has been a notable underperformer in recent months, while the tariff concerns have taken a toll on some of the multi-national Industrials, we've also seen ongoing deterioration in GE and the recent weakness in UTX after its split-up plans have finally come to fruition. However the strength in many of the Airlines coinciding with Oil's weakness is important to highlight, and the lack of real damage to key Rail stocks like CSX and UNP.



Overall, it's thought that the Tariff truce should now help many of the stocks that were hurt by this announcement in recent months and stocks like CAT and DE which have been hard hit have shown evidence of trying to bottom out of late. The XLI itself looked to have made an Elliott-style 5 waves down into late October, but now has begun what appears to be a robust three-wave ABC pattern off those lows, with last week jumpstarting what's thought to be the third leg of this pattern. Tus, a push up above November highs looks probable for XLI and one that could take the ETF up to 75 from its current $72.54 close last Friday. Some charts on the sector, from an absolute and relative basis are shown below, along with five of my most attractive Industrials stocks to own heading into December from a risk/reward perspective.




SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:

Short-term (3-5 days): Bullish- Last week's near 5% surge helped to exceed the downtrend from early October, something that was thought to be essential before weighing in that this rally could continue. Stocks bottomed and rallied during a time of heightened tension which took a toll on sentiment, yet now that the Fed is sounding more dovish while the Trade war is back on the back burner, Stocks likely can benefit during this seasonally positive time. Stock futures heading into Monday have spiked dramatically, so the ability of this to hold during Monday's session is thought to be a real positive. The first key area of concern was exceeded last week- 2750, so Futures have followed through higher to the next big area of concern, or 2810-5. While it would give more conviction to see Small and mid-caps participate, the fact that Technology seems to have stabilized , while Financials, Healthcare and Discretionary have surged back and Industrials is pushing higher is a definite positive in the short run. Most of these points suggest stocks likely are ok in the short run despite the uncertainty and negative weekly/monthly momentum. Movement back under 2680 would be a defensive stance back on the front burner. For now, rallies up to near 2815 have occurred as of Sunday evening and any ability to hold these gains is certainly positive for the prospects of further gains for December.



Intermediate-term (3-5 months)-  Bullish- Indices look to have made trading lows in October and despite the downturn in momentum this pullback caused, have failed to show the kind of structural weakness that would suggest a further drawdown is necessary and/or likely in December. While negative momentum divergence is indeed important, one might look at rallies into next Spring as a time to potentially turn bearish on an intermediate-term basis. To have any kind of near-term bearish stance, we'd need to see market indices show more signs of trend damage, and move in unison UNDER 2018 lows which would be a larger signal. Key concerns involve not just momentum weakness, but what looks to be a real change in leadership and Technology accounting for 20% of SPX has rolled over in a very bearish manner. However, given the seasonally bullish period underway during this mid-term election year, it's right to initially use near-term weakness to buy and then see the extent to which rallies can attempt to carry prices back higher. Watching participation closely will be key in Q4. For now, trends in both Financials and Healthcare have begun to show outperformance, so this alone makes it still a bit premature to pull the plug on the rally in the indices to recoup much of what's been lost since September. However, the average stock might face difficulty in regaining all-time highs. Until trends from 2016 are broken in all major indices and SPX, NASDAQ and DJIA close down under their respective 10 month moving averages and see these averages start to rollover, the first decline like we've seen is typically one to buy into given a lack of long-term trend damage.  


10 Charts to review- 5 Index/Sector & 5 technically attractive risk/rewards for Longs

longs.gif

XLI-Industrials Select SPDR ETF- Near-term Bullish -Last week's ability to claw back within striking distance of former highs bodes well for this group to begin to show better performance in the month of December, and a challenge and move back over $75 looks likely. While the move lower from Fall highs looks to have played out in "five waves" lower, (which could lead to additional intermediate-term weakness after this bounce is complete, the near-term picture looks bright for a further rally. Given the pickup in Transports by means of the Airlines and Rails last week, further outperformance is likely out of XLI over the next few weeks and should rally back to $75.


$75.gif

Equal-weighted Industrials vs S&P 500 Industrials Index- Near-term Downturn after challenging highs- When viewed in Equal-weighted terms, last week's progress was actually not too constructive for the group, which mirrored what occurred in the SPX. On an equal-weighted basis, Industrials fell, and might see additional losses in the weeks ahead. This bodes well for diversification and holding off on buying dips too aggressively in stocks trending down sharply, like GE. For now, any pullback in the days/weeks ahead should be buyable, but for now an added layer of selectivity looks prudent.



prudent.gif

DJ Transportation Avg (TRAN) Last week's bullish breakout of two prior highs should allow for further gains, with targets up near 11200. Daily TRAN charts show prices having gotten up above two prior highs and bodes well for prices to show further gains in early December. Overall, it's right to be bullish, technically and look to use any minor pullback to buy.


buy.png

XAL- NYSE Arca Airline index breakout worth following near-term. Airlines look to show further strength in the days/weeks ahead, and given the WTI Crude washout of late, Airlines have responded quite positively, with XAL exceeding the area of trendline resistance which can help this group start to gain traction. While Crude looks to rise sharply early this week (Potential 5% gains to start the first week of December, it might take some time before seeing a large move higher in Crude. One should favor some of the stronger names, like UAL, DAL vs the weaker, and expect that these likely can still outperform.



outperform.png

S&P 500 Rails index- Rails have moved higher sharply higher also in the last couple weeks, and prices now sit near prior highs from early November, a development that bodes well for further gains in this sector. While many prefer CSX, stocks like UNP look more attractive for gains from a risk/reward standpoint. Near-term, it's tough to exclude any stocks here if Stocks are set to move higher aggressively, For now, prices have spiked but where indices close is of utmost importance.

importance.gif

Waste Management (WM- $93.75) Bullish, with near-term targets at $100- Last week's rally managed to exceed highs of the last couple months which also has brought this stock back to new all-time high territory. Yet the degree to which consolidation has taken place for most of this year makes this particularly attractive from a risk/reward basis as it lies less than 2% from highs achieved back in January. Thus this breakout has occurred on a pattern that's literally been ongoing for most of 2018 and should provide some above average gains in the weeks and months to come. Stops can be placed near $90 which if broken, would temporarily derail the rally. At present though, this pattern looks quite attractive for further gains, so longs are recommended with the intention of using any minor weakness to add.

add.gif

Union Pacific (UNP- $153.78) Bullish on the breakout above November highs which should allow for immediate follow-through to technical targets at $165 which represents September highs. This UNP pattern resembles the formation present in TRAN which has just begun to turn higher after consolidating from early October. Whether or not this pattern turns out to be an ABC type corrective bounce, or the start of a wave 3 higher, the fact that prices closed above prior highs is quite constructive and bodes well for follow-through in the coming weeks.

weeks.gif

Ingersoll Rand (IR- $103.52) Mildly bullish near-term, which would turn more positive on a breakout of November highs at $105.18 which looks forthcoming in the days/weeks ahead. IR has been consolidating gains since early October, but has formed a Cup and Handle pattern in the last two months that favors owning the stock at current levels for an upcoming move back to new highs. Momentum has lessened in the last couple months on this churning of late, creating what's thought to be an excellent risk/reward for buying ahead of the upcoming move. Positioning long at current levels targets $110-$115 while downside should be capped at $99.64, an area that's a stop to current longs. Technically speaking, the first daily close up above $105.18 should constitute a chance to add to longs. On an intermediate-term basis, IR has been overbought since last year, but yet has not yet shown any real trend deterioration that warrants any concern.

concern.gif

United Continental Holdings, Inc (UAL-$96.70) Bullish, with this recent XAL breakout helping leaders like UAL to extend gains in a fashion that should allow additional outperformance to continue. Last week's breakout in the Transports was largely led by the Airlines which have shown some good relative strength with WTI Crude having pulled back sharply. UAL has been the top performing stock of any of the 20 members in the DJ Transportation Avg in the last 3 months, with gains of 10.29% YTD. The recent rally back above $90 was constructive in that it exceeded the highs of a giant consolidation pattern that had been ongoing for the stock over the last three years. While overbought on a monthly basis and beginning to show some negative momentum divergence, this stock is likely to show further strength in the month of December with near-term targets at $100, and then $105 before any slowdown. Minor weakness in the next week should prove buyable technically with only a pullback under $91.65 preventing this from climbing higher into year-end.

year-end.gif

FedEx Corp (FDX- $229.00) Near-term bullish for a move to 245-250, but doubtful this gets back above November highs right away. The pattern in FDX has improved as of late last week with the ability of prices to have pushed up over $225 which effectively broke out of this near-term triangle. While the longer-term pattern is largely neutral and unconvincing since January's peak, the short-term prognosis looks attractive given the recent improvement in momentum and ability to turn back higher over $225. Movement up to $240-$250 looks likely in the weeks ahead as the Industrials complex starts to improve. If in the event this can get back over $259.25 from mid-September, that would improve its intermediate-term chances. For now, FDX is attractive technically for an above-average bounce into year end, and is likely to play catchup. Longs encouraged here technically, looking to buy any dips though with stops at $222.

5 Key charts to review, along with 5 technically attractive Risk/reward longs

November 26, 2018

Mark Newton CMT, Newton Advisors, LLC

Contact: info@newtonadvisor.com



S&P 500 Cash Index

Support: 2631-3, 2622, 2603, 2553-5, 2532-4

Resistance: 2670-2, 2681-2, 2700-2, 2744-6, 2812-4

Summary:  US Equities have pulled back to within striking distance of early November lows, with NASDAQ now within striking distance of 2018 lows after the Thanksgiving Holiday shortened week failed to produce even a single day of gains. Near-term, momentum remains quite weak, but not as oversold as in mid-October while Technology has accounted for the bulk of recent losses. Bonds, commodities and cryptocurrencies have all declined in recent weeks, failing to provide any type of safe haven while fear has been slowly but surely rising as investors have scratched their heads at the recent weakness during a seasonally strong period. Overall, the combination of positive momentum divergence, trend exhaustion and sector strength in Financials, Healthcare likely postpone any type of larger decline for now that breaks 2018 lows. Yet, prices can ill-afford to show much more weakness and the next two weeks are important for Equities to stabilize and start to bounce. Breaking 2600 in SPX would be a concern and particularly under February 2018 lows of 2532 would be worrisome for a larger gap-down lower that causes fear to literally jump off the charts. At present, it's thought that many of the US internet Technology "FAANG" stocks are very close to support, as is Technology as a whole, and this should be a factor that causes the stabilization in stocks after recent weakness looks to be nearing support. Weekly charts below of XLK show counter-trend Demark weekly exhaustion now present after seven consecutive weekly closes which have closed under the close from four weeks ago. This should be within 1-2 weeks of bottoming near-term, and XLK lies just fractionally above its 38.2% Fibonacci level of the entire rally from 2016. Any further weakness this week should be buyable in XLK and bring about at least a decent trading low. However, the area at 61.50-63 looks like a better zone for longs than $64+, so patience is required into early December.

December.gif


Overview:  Most of the positives mentioned last week are still very much in place, and these are thought to be reasons why it's right to buy into this decline as November comes to a close, vs thinking this move extends down much further into December. Specifically, the relative strength in both Healthcare and Financials are impressive at a time when US equities have been weak, and the combined 29% of SPX having broken out is an important factor to lean on as Technology gets down to more meaningful support to buy in the next 1-2 weeks. This latter point is going to be quite critical towards making the case for Equities to rally, and for now remains trending down and has been a negative.

Overall, heading into this coming week we've seen a minor bounce in overnight trading heading into the final week of November. Yet, it's still a bit premature to think this can lead to a meaningful rally as the trend remains very much negative with regards to both price and momentum. The key positives revolve around momentum holding up at higher levels, breadth which is less bad, and larger structure still very much intact. As a negative, the fact that so many stocks are down a meaningful amount from their 52-week highs is a definite negative at a time when weekly and monthly momentum have rolled over, making for a very tough market. Even if equities were to rally a bit into December, this likely would not be sufficient to turn momentum back to positive and we'd see a very selective rally. To avoid rehashing most of these arguments which remain in place, it makes sense to list last week's positives and negative for review. Some important charts then are listed below along with 5 stocks which are attractive for gains into end of year, three from a trend following perspective: LLY, CHD, and AJG, while two from a near-term counter-trend basis: AMZN and TEAM.

Overall, the following issues have improved in recent weeks



1) Breadth bottomed in late October and has been rising ever since, though Advance/Decline remains well off highs reached in late August

2) Last week's Monday-Wednesday decline barely registered -2/1 negative breadth, despite a very volatile time, which is thought to be a larger positive

3) Momentum has diverged positively, also a bullish sign with RSI bottoming on October 11 and making a series of higher lows since that time


4) DJIA, NDX and SPX have all held trendline support from early 2016, with Ichimoku Cloud support on daily charts just below trendlines also serving as important support


5) Sentiment has gotten worse, so from a contrarian standpoint, fear has been on the rise, with most sentiment polls like AAII inverting to show more bears than Bulls, while the Equity Put/call ratio has been rising steadily, though not yet to last year's high levels


6) Patterns seem to be suggesting a possible reversal formation, which would be confirmed over November peaks at 2813-SPX.


What's still a concern:

1) Technology remains an underperformer, & has been the second worst sector over the last 1 and 3 month periods. Given its 20% weighting in SPX, we'll need to see Tech stabilize and begin to turn higher to have any conviction in a bounce.


2) Weekly and monthly momentum gauges like MACD have rolled over to negative territory with MACD crossing the signal line, making a bearish crossover. This is a concern with SPX prices under its 10 month average


3) Nearly 50% of all SPX stocks (47% as of Oct 31) were down over 20% from their 52-week highs making this appear like a very big stealth bear market given indices remain down "only" around 7% off highs.


4) We still arguably really haven't seen the rampant capitulation/washout that was thought to be necessary to drive a larger rally. While the ARMS index did get up above 1.75, we still haven't seen near the 3% readings like earlier in the year




SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:


Short-term (3-5 days): Bearish, looking to buy dips at SPX 2600, and under near 2550 with NASDAQ likely holding 2018 lows. Use early rally into Monday's open to sell near 2670-80. Overall, still difficult to have a lot of conviction that stocks need to bottom early in the week, but there are some key cycle dates pinpointing 11/25-6 which might result in an early week bounce that fails and then pulls back into 11/30. Charts of Technology, -XLK, and NDX, CCMP are still premature to bottom, Demark wise- Thus on any bounce in these, it's still likely that lows are revisited later in the week before any larger bottom and a trading low materializes either late in the week, or next week. For now, it's right to maintain a defensive posture, looking to buy SPX at 2532-50 area, while utilizing any bounce to 2680-2700 to sell.


Intermediate-term (3-5 months)-  Bullish- First big pullback of this entire bull market that likely has some importance in creating the kind of momentum deterioration that could bring about the larger bear market still should take some time and for now, still a bit early to think its upon us. Thus, indices should be within a couple weeks of trading lows and one should look at rallies into next Spring as a time to potentially turn bearish on an intermediate-term basis. Over the last few weeks, while momentum began to turn lower given the extent of October's drawdown providing weekly and monthly negative momentum divergence, indices like SPX, DJIA, NDX have still managed to hold longer-term areas of trendline support. We'll need to see market indices show more signs of trend damage, and move in unison UNDER 2018 lows which would be a larger signal. Key concerns involve not just momentum weakness, but what looks to be a real change in leadership and Technology accounting for 20% of SPX has rolled over in a very bearish manner. However, given the seasonally bullish period underway during this mid-term election year, it's right to initially use near-term weakness to buy and then see the extent to which rallies can attempt to carry prices back higher. Watching participation closely will be key in Q4. For now, trends in both Financials and Healthcare have begun to show outperformance, so this alone makes it still a bit premature to pull the plug on the rally in the indices to recoup much of what's been lost since September. However, the average stock might face difficulty in regaining all-time highs. Until trends from 2016 are broken in all major indices and SPX, NASDAQ and DJIA close down under their respective 10 month moving averages and see these averages start to rollover, the first decline like we've seen is typically one to buy into given a lack of long-term trend damage.  


10 Charts to review- 5 Index/Sector & 5 technically attractive risk/rewards for Longs

Longs.gif

SPX-Weekly- Short-term Bearish, but expect that 2018 lows hold into early December & broader trend can still rally out of this before a larger breakdown. Trend has formed what could be considered a Head and Shoulders pattern starting from the January 2018 peak. The recent rally from late October looks to have failed and now prices have pulled back last week to the first real test of this pattern, just above 2600. Note that despite the break of the two-year uptrend from 2016, there remains Ichimoku Cloud support right near this 2600 area and even a break below likely should find support near Feb/April 2018 lows between 2532-50. Thus, it looks unlikely at present, when considering that XLK is within 2 weeks of Demark exhaustion, that prices crash, heading into December. It's thought that while the near-term trend remains weak, that 2018 lows hold for now and produce stabilization and an upcoming bounce. Look to buy dips at 2600 and then under near 2532-50.

2532-50.gif

Financials v SPX- (XLF/SPX) Bullish, and a sector to overweight- One of the more interesting developments in recent weeks concerns the extent to which Financials have begun to turn back higher. This weekly chart shows this relative breakout in XLF/SPX above a downtrend that's held Financials lower nearly the entire year. This mimics a similar move that Healthcare made this past Summer. Thus with Financials and Healthcare both outperforming, representing nearly 30% of SPX, it won't take much before this market should begin to hold and turn higher and much of that will depend on Technology. For now, Financials should be overweighted and considered as a sector to favor given this recent trend breakout.

breakout.gif

Crude Oil (WTI) Near-term very bearish and selloff could last another 2-3 weeks before any stabilization and relief. Trends have just been broken from 2016 as of last week and prices have undercut the 50% retracement of the entire rally from 2016 lows. It's thought that the mid-40's offer some attractive support to consider buying Crude for a bounce, and that also applies to OIH, XOP on further weakness. However, given the extent of the damage done, it's arguable that any Saudi cuts will be sufficient to offset the ongoing increase in US production and Permian bottlenecks that many estimate could be in place until late 2019. Overall look to buy WTI between $45-$47.50 into end of November and/or the first two weeks of December, but one should be tactical in owning and utilize sharp bounces to consider selling given the extent of the current downtrend.

DXY- US Dollar rally ongoing and likely extends back to new monthly highs before any peak in price. While many anticipate a growth slowdown could bring about a Dollar reversal, which does seem likely technically and cyclically, for now there are little signs that any peak in price is underway. Demark-wise there's a good likelihood that prices can still extend higher to finish out November on a high note and could move higher into early December before stalling. Thus a rally up to 98-98-98.50 seems likely before any peak in price. Near-term this could be detrimental to Emerging markets and to commodities. China has already begun to turn higher, despite the Dollar strength, and once USD turns back lower in December/January this should be a real positive for China. For now, the near-term trends remain positive for the US Dollar and should lead to additional strength.

strength.gif

China's Yuan - Declines possible into early December, but should prove limited before a larger rally begins. The Yuan has been the topic of much discussion given the ongoing tariffs and possibility of negotiation between US/China . Near-term charts of the offshore Yuan (not too much different than CNY) show prices hovering near prior highs in USDCNH which could prohibit this from getting too meaningfully up above 7. Thus, even in the event that negotiations fail near-term, there still should be some effort in coming together that causes Reminbi to begin to rally by December into next year and not decline too much further. Technical counter-trend exhaustion signals on weekly and monthly charts of USDCNH show this Yuan decline to have nearly run its course. Momentum has begun to wane on USDCNH and we've neared a time when this likely starts to trend back higher, technically. Specifically based on Demark exhaustion, it would be ideal to see a final pullback in Yuan w/ US Dollar getting up fractionally to 7 -7.20 before peaking out and turning back lower next month. Thus, heading into this weekend, it might be premature to think both sides come to agreement in a way that allows the Yuan to appreciate. Yet, technically, most weekly and monthly charts show this to be right around the corner.

corner.gif

Amazon (AMZN- $1502.06) The decline from $2000+ looks nearly complete and it looks wise to consider buying dips in small size, awaiting a reversal higher to add in a move that could allow for a complete retest of former highs before rolling back over. Weekly charts show TD Buy Setups being complete this week most likely, above TDST support, a development that likely causes this decline to be complete and turn back higher. Additionally we see that longer-term trendline support intersects just a bit lower and should provide some support on declines that allows for price to hold and start to turn higher. Overall, while the decline looks very much ongoing, we're getting to an attractive area in price and time to consider buying dips on this pullback for a good bounce in AMZN, based on the combination of structural support combined with counter-trend exhaustion. Movement back to 1750-1800 can't be ruled out into early next year, technically. Above should lead to a full retest, which would allow weekly momentum to show the kind of negative divergence that has led to peaks in AMZN in the past. For now this is a pullback not unlike what it's experienced in the past.

past.gif

Eli Lilly (LLY- $112.87) Bullish and move to test $120 looks likely before any peak.Rally has just exceeded former all-time highs from 2000, having shown little to no signs of giving way and joining other stocks in this recent drawdown. Technically this seems premature given the lack of counter-trend exhaustion, and should allow for LLY to move higher to $120-$125 before any type of peak gets underway. While many will avoid this stock due to the extreme nature of the recent rally, it's proper to put the former all-time high into this picture for perspective, and just getting over this level should allow this move to continue a bit longer.

longer.gif

Church and Dwight (CHD- $65.94) Bullish, and movement up to 70 likely. CHD is yet another example of a stock which has shown very little evidence of being affected by the recent stock market turbulence. Last Friday's success in getting above the minor downtrend should pave the way for this to push up to test and exceed recent highs, which can allow for a move up to $70-72 without too much trouble. Movement down under $64 on a daily close would stop out any longs, and/or necessitate hedging.

Arthur J Gallagher (AJG- $76.67) - Last week's pullback has occurred within this ongoing uptrend and should lead to a buying opportunity for a move higher. AJG has doubled since January 2016 and still shows little to no evidence of having peaked out. Given some of the turbulence that's affected many stocks, this looks ideal to buy dips after three down days which has taken the stock right back down to the pivot area of its breakout above last September highs. While daily and weekly momentum have neared overbought status, weekly momentum is positively sloped and should allow AJG to turn higher towards the mid-80's.

Atlassian Corp PLC (TEAM- $73.20) TEAM is attractive technically given its pullback to trendline support which has held on a weekly basis since last Fall. During this time the stock has more than tripled, and the recent pullback represents its first real decline since this advance last year got underway. Overall, TEAM has averaged greater than 25% EPS growth over the last six quarters, with the recent EPS showing being more than 54%. Its pullback has hit the 50% retracement of the advance since last year as well as being at the Fibonacci related 38.2% area of its advance from 2016. Thus, this looks like an ideal area to buy dips on this pullback, right at a time when TEAM has hit the larger trendline from last year. Rallies back to the low to mid-90s look likely, while a weekly close under 66.80 would take this initially to the low $60's before stabilizing and moving higher.

10 of the top technical Retailing stocks to favor

November 19, 2018

Mark Newton CMT, Newton Advisors, LLC

Contact: info@newtonadvisor.com



S&P 500 Cash Index

Support: 2709-11, 2684-5, 2661, 2633-5

Resistance: 2814, 2825, 2852, 2861

Summary:  US Equity indexes look to be trying to bottom out near-term with three distinct lows having been formed since mid-October, with the most recent occurring last week before the late surge to narrow this past week's loss to just -1.6%. While the intermediate-term momentum is certainly negative and growing more so given the lack of sharp rally back to highs, the near-term picture shows signs of stabilization on better breadth and momentum. Both the US Dollar and US Treasury yields retreated last week while Gold and WTI Crude oil attempted to rally off recent lows. Europe meanwhile, turned back lower last week after a failed test of 3300 and remains in worse shape than the US. China, meanwhile, rose last week, and is largely unchanged over the last few months and looks to be definitely attempting to turn higher, along with Emerging markets. Meanwhile, markets enter another shortened holiday week with sentiment understandably subdued, as many continue to be perplexed at falling equity prices during a time of good earnings and economic strength. However, it's right to realize that seasonal studies have largely proved to be a disappointment all year, failing during both bearish and now bullish periods thus far. Overall, it looks right to make the case for a bounce in Stocks during in the weeks ahead, but to remain quite selective in what to own. Failure to move up sharply to exceed November highs in the next couple weeks would cast some doubt that December would prove all that bullish and might have its own difficulty in producing gains. At present, it's right to be a bit more optimistic that stocks can stabilize and bounce, while getting a bit more concerned at the extent of the damage on intermediate-term charts and watching closely in the weeks ahead. Below we see a daily SPX chart, which has carved out what potentially could turn out to be a reverse Head and Shoulders pattern. As we know, it's imperative that prices get above the highs of this pattern (2815-SPX) but if/when this occurs, this would be a very constructive development. Stops on trading longs should be placed at 2670 with the mindset of early week dips likely to be buying opportunities unless that 2670 level is breached.

breached.gif



Overview:  The skittishness of stocks during Q4 has shaken sentiment quite a bit in recent weeks with S&P having lost over 100 points or ~4% in five days' time into last Wednesday before a minor bounce unfolded. Most investors have been inundated with statistics discussing how bullish 4th quarter seasonality has been for stocks, as well as mid-term Election year stats discussing why the next 12 months strongly favor stocks. Yet Q4 has started off with a bang, dropping over 6% into last Friday's close with a mere six weeks of trading left in 2018. This doesn't give much comfort, and increasingly investors are coming to terms with the fact that they don't really know WHAT"s going on with stocks, as earnings, nor the bullish economic recovery have coincided with rallies ( Powell & Co still favored by more than 65% to hike rates in December) Yet it's worth reiterating that many warning signs were present back in September, such as waning breadth and momentum, poor participation , exuberant sentiment given stocks resilience during tariff and trade war rhetoric. Largely though, it was yields spiking on October 3 which directly coincided with the trend violation in many indexes, and this set off a big pullback that increasingly seems to have put many investors in Trump's corner with thinking that Powell now might be hiking too quickly.




Overall, the following issues have improved in recent weeks, and are thought to be technical positives- It makes sense to "bullet" these points for emphasis:




1) Breadth bottomed in late October and has been rising ever since, though Advance/Decline remains well off highs reached in late August




2) Last week's Monday-Wednesday decline barely registered -2/1 negative breadth, despite a very volatile time, which is thought to be a larger positive




3) Momentum has diverged positively, also a bullish sign with RSI bottoming on October 11 and making a series of higher lows since that time




4) DJIA, NDX and SPX have all held trendline support from early 2016, with Ichimoku Cloud support on daily charts just below trendlines also serving as important support




5) Sentiment has gotten worse, so from a contrarian standpoint, fear has been on the rise, with most sentiment polls like AAII inverting to show more bears than Bulls, while the Equity Put/call ratio has been rising steadily, though not yet to last year's high levels




6) Patterns seem to be suggesting a possible reversal formation, which would be confirmed over November peaks at 2813-SPX.




What's still a concern:

1) Technology remains an underperformer, & has been the second worst sector over the last 1 and 3 month periods. Given its 20% weighting in SPX, we'll need to see Tech stabilize and begin to turn higher to have any conviction in a bounce.




2) Weekly and monthly momentum gauges like MACD have rolled over to negative territory with MACD crossing the signal line, making a bearish crossover. This is a concern with SPX prices under its 10 month average




3) Nearly 50% of all SPX stocks (47% as of Oct 31) were down over 20% from their 52-week highs making this appear like a very big stealth bear market given indices remain down "only" around 7% off highs.




4) We still arguably really haven't seen the rampant capitulation/washout that was thought to be necessary to drive a larger rally. While the ARMS index did get up above 1.75, we still haven't seen near the 3% readings like earlier in the year





SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:




Short-term (3-5 days):  Expecting rally in S&P after the last couple days of stabilization which directly followed a market pullback , but which did so on far less bearish breadth and momentum. Overall, the degree to which markets held last week and did not fall materially before making a decent bounce Thursday and Friday is worth mentioning (despite being down on the week) and it looks right to consider at least a temporary pause in the selling from where a rally could take S&P back up to November highs.





Intermediate-term (3-5 months)-  Bullish- While momentum began to turn lower given the extent of October's drawdown, and there is ample evidence of negative momentum divergence, indices like SPX, DJIA, NDX have still managed to hold longer-term areas of trendline support. We'll need to see market indices show more signs of trend damage, which for now, has proven to be short-term only.  Key concerns involve not just momentum weakness, but what looks to be a real change in leadership and Technology accounting for 20% of SPX has rolled over in a very bearish manner. However, given the seasonally bullish period underway during this mid-term election year, it's right to initially use near-term weakness to buy and then see the extent to which rallies can attempt to carry prices back higher. Watching participation closely will be key in Q4. Until trends from 2016 are broken in all major indices and SPX, NASDAQ and DJIA close down under their respective 10 month moving averages and see these averages start to rollover, the first decline is typically one to buy into given a lack of long-term trend damage.

  

10 Technically attractive Retailing stocks to consider- While Retailing has underperformed thus far in November, atypical for this group ahead of Black Friday, charts suggest the Retailing stocks are closing in on support to buy. Below are 10 that are favorable technically. I'll write some brief comments and give targets and stops, but the charts tend to sell themselves.

themselves.gif

ETSY (ETSY-$47.26) ETSY an attractive risk/reward in the E-commerce space after pulling back nearly 13% in the last six sessions after its breakout attempt above September highs. This pullback has nearly filled the gap from early November and creates a technically appealing level to buy dips, expecting a move back to test and exceed recent highs. Near-term resistance lies initially near $55 while over should drive this to $60 and above. Stops are placed below 11/6 highs of $42.48 , expecting this area causes some definite support on any further weakness and is a make-or-break for longs.

longs.gif

Five Below (FIVE- $119.94) FIVE looks good to buy here technically following the minor break above its downtrend from the last couple months. The stock has consistently enjoyed above-average performance since breaking out last year and managed to double in price between May and September of this year before consolidating. This pullback very well could be complete, however, given the stock's move back over this downtrend and any rally back over 125 should help this get back up to 136 near prior highs from September. While rallies are expected given the last week of consolidation above this downtrend, any move back under $117 would serve as an initial stop for longs, causing a pullback to $110 before this stabilized.

stabilized.gif

Kohl's (KSS- $72.49) Monthly charts shed some light as to the long-term bullish base in the making for KSS, which has sold off in the last week back down to the low $70's after trying to make a multi-year breakout, which proved very short-lived. The stock fell more than 10% from 11/8 as Department stores were very hard hit. Yet at current levels the stock has a lot of appeal given that it's sitting right near former lows from October. this level also lines up with prior July lows and should offer an attractive risk/reward opportunity to buy with movement back up towards the highs anticipated in the weeks/months ahead. However, the real bullish sign involves this getting back up above former highs to new all-time highs. This would surpass the trend going back since 2007 which has already been tested twice before. The act of getting back above $83 warrants buying more KSS for a move that should carry the stock up to at least $90. For now, this level has held, but it has special appeal given the long term structure which eventually should be broken

broken.gif

Ollie's Bargain Outlet Holdings Inc (OLLI- $90.70) OLLI consolidation in the last two months looks attractive to buy into as part of a wave-four pattern that normally should lead back to new highs before any meaningful peak. The stock is still at similar levels hit back in September, but has enjoyed a very sharp move higher in August that is keeping momentum still quite positive, despite the slowdown. Technically this looks attractive here at $90 with stops on any move under $85 on a weekly close and targets initially up near $100.

$100.gif

Casey's General Stores, Inc (CASY- $128.44) Bullish given the breakout of the two-year consolidation which had held this stock largely range-bound following the big run-up since 2009 which saw CASY rally nearly six-fold before a necessary two-year period of churning to alleviate overbought conditions. The consolidation since September following the breakout has helped to lessen the overbought state and momentum remains positive and should allow for a push up to test $136. Meanwhile, movement back under $120 would result in a bit more pullback before this can rally and would postpone the immediate advance. So, risk seems to be very well measured, and warrants a long stance, despite the move up from $90 earlier in the year.

year.gif

Shoe Carnival (SCVL- $39.87) Bullish and last week's late rally helped to keep the upsloping positive structure intact. SCVL has shown nearly a three-fold advance since last Summer and its churning since September is considered positive to buy into technically with expectations of a move back to new highs. The rally in late August was considered particularly positive given the breakout of the consolidation trend which had been going since 2014, so while this lifted from $32 to $45 before pulling back, SCVL still isn't materially above where this broke out given the duration of the prior base. So, SCVL should continue to exhibit attractive structure and a push higher up to $45 and over is likely In the event this does get under $36 for whatever reason, this would postpone the rally.


rally.gif

Advance Auto Parts (AAP- $179.21) AAP made a very good technical move with its ability to exceed the long-term trend from late 2015 which occurred a few months ago. This resulted in acceleration back up over $175 and sets the stage for an upcoming test of $201 from late 2015. Momentum remains positively sloped and overbought, but yet no meaningful resistance comes into play before former highs. Thus, it's right to consider the recent breakout as something to buy into for a move back higher in the weeks ahead.


ahead.gif

Dollar General (DG- $111.42) Dollar general's pullback last week should provide an attractive entry for gains back to new highs in the weeks and/or months ahead. This stock has had an increasingly more bullish chart structure of a giant base which broke out, consolidated and now looks to be headed higher again. Last week's pullback likely won't get back down under $107 and is likely to provide a decent risk/reward opportunity for gains up to $120.

$120.gif

Ross Stores (ROST- $95.28) Ross Stores got caught up with the selling which affected most Department stores last week, with severe selloffs that has now taken this stock back down to former lows within this uptrend. Thus after doubling in price since last year, ROST has retreated down to within 5% of a level of good level of intermediate trendline support. One can buy from $95 down to $92 on any further weakness, anticipating a bounce back up to the high $90s and ultimately back over $100. At present, this might require a few days of churning, but should be near an area where this bottoms and makes a decent bounce .


bounce.gif

Crocs Inc. (CROX- $27.32) CROX has accelerated very sharply in recent weeks, but remains attractive near-term, and should be able to get to prior highs in the low $30's before any material stalling out. While some might avoid this based on the degree of near-term overbought conditions, the momentum has gained ground so quickly that near-term pullbacks are likely to prove short-lived and allow for a meaningful bounce back to new highs. Note, CROX began to accelerate just as the long-term trend was exceeded, which started near the beginning of this year. While upside could be limited to $32, this still lies a good $5 above current levels, making for an attractive stock to buy small at current levels and look to buy any weakness.

10 of the most important charts to watch

November 12, 2018

Mark Newton CMT, Newton Advisors, LLC

Contact: info@newtonadvisor.com


S&P 500 Cash Index

Support: 2744, 2734-5, 2709-11, 2684-5, 2661, 2633-5

Resistance: 2814, 2825, 2852, 2861

Summary:  Equity trend near-term positive from 10/29 and the selling from late last week wasn't sufficient to turn the trend back lower. While the intermediate-term Weekly and monthly momentum have turned down sharply over the last month, (which is a concern towards thinking an end of year rally will be "smooth sailing" ) it's still necessary to see movement down under 2744 to argue for a decline that could test and/or break 2709-11 (the 50% area of this recent bounce from late October. Meanwhile the Dollar index looks to be turning back higher and is a more high conviction long right here than Equities between now and the end of November. Crude oil looks to be on the verge of turning back higher for a bounce while precious metals might underperform along with Emerging markets in the near-term given Dollar strength. Yields, meanwhile, have shown some signs of stalling out on their recent uptrend after having tested prior highs, and could consolidate recent gains in the weeks ahead. The chart below shows the % of stocks above their 10 and 50-day moving average (m.a.) which has risen to near-term stretched levels on the upside nearly as quickly as they reached oversold levels. As of 11/8/18, there were over 90% of all stocks above their 10-day m.a., a positive, but extreme level. This gives some caution as to the degree of further gains that can happen near-term without more consolidation given the extent of the move (200 S&P points in 7 days) but the % above 50-day only at 46% shows the extent of the intermediate-term damage that's been done. Even with a sharp rally as we've seen, less than half of all stocks are above their 50-day m.a. Thus this goes a long way towards showing how much more rally needs to happen before stocks are on better footing, regardless of the longer-term uptrends in place.

place.jpg

Overview:  It's tough to have a lot of conviction heading into this week after the last couple days of selling which has arguably gotten down to critical make-or-break support from the minor uptrend from 10/29. As discussed late last week, 2763-5 had some real importance and managed to hold on as support for SPX Futures on Friday before the oversold bounce. Despite the late week selling, US Equities did enjoy more than a 2% rally last week thanks to Wednesday's sharp gains, with the DJIA nearly gaining 3%. But the late week selling should serve as a reality check to think that "investors are now comforted" with the mid-term elections being over and that rallies are a foregone conclusion into end of year. Sector-wise, we've seen some evidence of both Financials and Industrials stalling out after their recent bounces. Meanwhile, Technology was a big underperformer last week, and XLK now sits near key make-or-break support. AAPL for one, remains trending lower, a stock that has huge implications for the market given its weightings in various indices and ETF's. So while the NASDAQ has indeed broken down technically vs the S&P in relative terms over the last week, we'll need to see that happen in NASDAQ and XLK to have conviction that another deep retest is looming.

Given the recent uptick in volatility, investors are slowly but surely going to grips with the fact that the easy buy and hold mantra for Q4 very well might prove to be not as successful. Most are grappling with what the narrative is for why stocks have been weak during this seasonally bullish time. After all, it's tough pointing to earnings, and most are fingering the Tariff escalation of late along with the FOMC hiking rates, with many anticipating a bit slowdown over the next 12 months. While Earnings certainly don't lead stock prices, the perception of slowing earnings and a slowing economy are both important for how they affect sentiment and ultimately how this will affect stock prices. For now, uptrends are intact while sentiment is growing more negative into a seasonally bullish time. Ultimately this likely means that drawdowns in the next couple weeks prove short-lived and that stocks can still rally out of this and build upon last week's advance.


Technically, trendwise US Stock indices remain in good shape. However ,the decline in momentum this year seems to be the important "shot across the bow" that bears watching carefully in the weeks and months ahead. The Dollar meanwhile appears likely to trend up over the next couple weeks and could prove temporarily frustrating for both the EM space and commodities. Overall, it's important to watch trend, sentiment and breadth, momentum carefully over the next few weeks to have a better gauge as to what might be in store. Below i'll list what I believe to be 5 attractive risk/reward longs and five attractive risk/reward shorts for the next 2-3 weeks with targets and stops.



10 Technically attractive Long/short candidates from this past week

Many of the stocks below have been mentioned in reports in the last 1-2 weeks. However, these remain attractive ideas, so they're worth reiterating along with providing targets and stops.



Long

1) ZTS- 95.27 Zoetis

2) PFE- 44.28 Pfizer

3) PG- $92.41 Proctor & Gamble

4) CRC- 27.68 California Resources

5) UUP- $25.79 Invesco DB US Dollar Index B



Short

1) AMBA- $35 Ambarella

2) RJF- $79.50 Raymond James Financial

3) WYND- $41.60 Wyndham Destinations

4) BYD- $24.95 Boyd Gaming

5) INCY- $66.03 Incyte


Former long holdings like FDS, DG, MCD are now near targets and should stallout and/or consolidate gains before additional strength can occur.



SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:


Short-term (3-5 days):  Low conviction buy for this coming week. Sticking with a bullish stance this week barring a break of 2763 which would turn trends negative and a move under 2744 argues for a test of the important 2707-11 area. Overall, the first two days of this coming week are important. The ability to hold up early week can allow for another push higher into 11/16, Friday before a minor drawdown , while Monday/Tuesday weakness argues for a decline and suggests a bullish stance is incorrect. The 50% area of this recent rally will have a lot of importance in holding and getting under 2709 on a close would be a larger negative. While bullish seasonality starts to kick in, (and might temporarily provide for a positive Thanksgiving week) its a MUST to get Technology working well again. Overall, a tentative long position to start the week makes sense but with a quick eye on the exits



Intermediate-term (3-5 months)-  Bullish- It's thought that October's pullback is likely complete, while longer-term charts have not been meaningfully affected thus far. While momentum has begun to turn lower and there is ample evidence of negative momentum divergence, broader market peaks take time. We'll need to see market indices show more signs of trend damage, as opposed to just daily charts. Key concerns involve not just momentum weakness, but what looks to be a real change in leadership and Technology accounting for 26% of SPX has rolled over in a very bearish manner. However, given the seasonally bullish period underway during this mid-term election year, it's right to initially use near-term weakness to buy and then see the extent to which rallies can attempt to carry prices back higher. Watching participation closely will be key in Q4. Until trends from 2016 are broken in all major indices and SPX, NASDAQ and DJIA close down under their respective 10 month moving averages and see these averages start to rollover, the first decline is typically one to buy into given a lack of long-term trend damage.  


10 Technically important charts for the next few weeks

weeks.gif

S&P's minor weakness last week got down to the important 2763-5, but will require more weakness to think a larger peak is in place. Near-term, charts remain bullish on this +2% rally last week with pullbacks failing to breakdown under 2755 which would be a larger negative. Sunday evening Futures trading shows a +0.40% gain, which is helping to regain nearly half of last Friday's losses. Key areas for both bulls and bears lie at 2818 on the upside and at 2763-4 as support. Breaks of either should be followed as a directional move that would have some longevity. For now, a mildly bullish stance will make sense unless 2763 is undercut. Furthermore, under 2755 in Futures and cash likely leads down to 2807-11 area.

area.gif

NASDAQ vs the SPX has begun to breakdown again which could be a concern to Technology bulls. This chart of the ratio of NASDAQ to SPX shows last week's pullback being somewhat serious and negative technically, violating the support trend of the last month. While this could hold and attempt to turn up early in the week, it can't afford to weaken anymore without expecting a larger drawdown in this relationship which would end up being a big negative towards both Technology and Biotech.

Biotech.gif

XLK - Technology lies near make-or-break support after minor pullback within its short-term uptrend. Last week brought about a more serious period of underperformance in Tech and most are wondering whether this rotation out of this group will continue given how bullish of a time seasonally stocks are trading. Daily charts show the successful breakout of this downtrend. Now prices have pulled back and are holding 69.84. Any break of this uptrend would be far more negative for Technology and likely for the broader market in the weeks ahead.

ahead.gif

Apple (AAPL) needs to be watched carefully given how large of a holding this makes up in SPX and in many Sector ETF's. Its breakdown last week after failing to hold "neckline" support followed by a failed retest argue for weakness in this stock in the near future. One can make a compelling case that 185-195 make more sense for meaningful support in AAPL than its current straddling of the $200 line. Daily charts show the break of the uptrend while the pattern from August certainly doesn't look all that appealing. Bottom line, one would look to sell into rallies until this can regain $210 at a minimum. On the downside, the area near $185 looks important

important.gif

Financials- Minor breakout in relative charts of XLF/SPX still bodes well for Financials showing some minor strength; However, the larger downtrend from February remains intact. Thus, the recent Treasury weakness with yields getting above 3.20% did in fact lead to a big snapback in Financials which has helped momentum at a time when this group desperately needed it. However, it will be difficult to label this anything more than a bounce until the larger trendline from February is exceeded. Given Financials' percentage weighting in SPX, it's still very important to watch this group very carefully

carefully.gif

Industrials could stall out given the minor peak made last week near the 50% level of the entire downtrend from mid-September. This group has now regained 50% of all the damage seen since mid-September. While a distinct positive to have recouped former lows that were broken, this area now at 73.50 looks important and might result in a stalling out before additional gains can occur. Bottom line, consolidation looks likely and under 71.71 should lead to 71, or even 70.27 before prices stabilize. Over 73.50 on an hourly close would indeed keep the rally going even further and while the less likely alternative for this week, this would lead up to 75, an area that should be attractive for profit-taking.

profit-taking.gif

Bloomberg Dollar index breakout bodes well for strength into late November The last few weeks have seen the Dollar exceed the highs of this lengthy consolidation that's been intact since this past Spring. This is constructive for the Dollar near-term and should allow for additional strength between now and December.

December.gif

Emerging market ETF (EEM) Ongoing downtrend doesn't seem complete- Playing for minor move back to new lows into late November- Emerging markets still have had a tough time showing much evidence of having bottomed out. We've seen minor rallies as part of this intermediate-term downtrend, but have not yet successfully broken out of this trend to argue for a larger rally. Demark indicators look to be potentially 3 weeks away from signaling lows that could drive a bigger bounce. For now, with the Dollar heading higher in all likelihood into mid-to-late November, a further decline in EM looks likely which then could lead to lows in price within a few weeks' time.

time.gif

Crude oil (WTI) Short-term Bottom looks likely given exhaustion and oversold conditions. Crude's chart shows prices having erased nearly 60% of the rally from last Summer just in the last five weeks' time. However, now we see exhaustion in prices based on counter-trend signals, while momentum has grown overbought on daily charts. We've heard over the weekend that the Abu Dhabi meeting brought OPEC and its allies ever closer to production cuts, and there was evidence of laying the groundwork towards cutting oil supply in 2019 which would reverse nearly a year-long expansion. Overall, a bounce in WTI Crude looks likely and should begin over the next week that could take prices back to the mid-to-high $60's.

$60's.gif

China vs US- Minor stabilization only- Larger confluence to buy in late NovemberEyeing late Nov/early Dec for a bigger low- While this relative relationship between China and the US looked to be bottoming a few weeks ago, it has not really resulted in anything more than just some minor stabilization. Rallies off the lows look to have failed thus far and Demark weekly indicators show the potential for three more weeks of underperformance which would help buy signals (TD SEQUENTIAL) line up similar to what happened at prior lows (See circle) Interestingly enough, this would also line up with a time when the US Dollar might peak out after further strength into late November. Often the best way to initiate trades is when multiple negative correlating assets begin to show similar but opposite signals.. in this case a deferred buy while the US Dollar is still early to show Sells. Thus, a bit more weakness in China looks like a real possibility and would allow for a bottom in early December for China vs US outperformance.

Near-term structure has improved with last week's rally

November 5, 2018

Contact: info@newtonadvisor.com

S&P 500 Cash Index
2698, 2684-5, 2661,  2633-5    Support
2750-5, 2775-7, 2825, 2852     Resistance


Summary:  Equities have arguably begun to trend back higher this past week after three straight 1% gains (Tuesday-Thursday) that accounted for nearly the best run in stocks in over two years.  Daily momentum has turned higher based on gauges like MACD, and SPX managed to exceed the downtrend line in place since early October as well as get back over mid-October lows which were thought to possibly offer resistance to this bounce.  These are all short-term positives technically that bode well for further equity gains.  However, the intermediate-term momentum could still pose a challenge to how sharply indices are able to rally back, as most indicators remain bearish given the extent of the pullback in October.  Meanwhile, Treasuries have also seen yields push higher (and surprisingly never really turned down all that meaningfully during the entire October Equity pullback)  Looking at currencies, the US Dollar has begun to trend higher again, having pushed up above the highs of a consolidation that's been ongoing for the past five months, while the commodity rally has sputtered out a bit in recent weeks, but still remains positive since mid-August.  Overall, this coming week brings about the US Mid-term elections, a time when equities have generally shown good strength.   This positive traction historically has not just been a short-term phenomenon, however, but has tended to last over the course of 9 -12 months, which has never been negative following a mid-term election going back since the mid-1950's.   In this case, structurally speaking, such a robust rally might turn out to be far more muted given the technical damage suffered to breadth and momentum, but yet it pays to think that seasonal strength is far more likely than seasonal weakness during this time.  Outside of the elections, earnings remain very much underway, and sanctions are due to be put back in place on Iran this week, along with the FOMC meeting, which is not anticipated to yield to any rate hikes.  Below we see a chart of the SPX cash index, showing the positives of the recent trendline breakout along with prices having regained prior lows.  Yet, just as momentum had shown some serious signs of rolling over on an intermediate-term basis, there is at least some minor evidence that a serious counter-trend rally has gotten underway.  Whether or not the average stock can make it back to new high territory is still uncertain given recent damage.  But trends have indeed turned positive near-term, and should give way to additional upside this week before any stalling out.   

stalling out.gif

Overview:  Equities have finally begun to show some evidence that a low is in place, after a very brutal October which produced declines in the amount of 2.4 trillion dollars.  In percentage terms, this amounted to over 7% for broad-based benchmarks like the Wilshire 5000, or one of the largest monthly declines in stocks since 2011.  Interestingly enough, this happened at a time when seasonals are thought to be quite positive, but yet as we're all aware, Q2 and Q3 seasonals certainly turned out much differently than market performance normally plays out.   Last week's gains though weren't just a US phenomenon, as we saw very sharp strength out of China for the second straight week, while Japan also lifted more than 5% and South Korea's Kospi added 3.4%.  Europe, meanwhile, added over 2.5% nearly across the board, proving that the global rally had less to do with US earnings or progress on tariffs and trade, and more about cycles and sentiment.   Yet, stocks did rally last week on rumors of possible negotiation and/or future agreement, as Trump indicated he and President Xi were due to meet. Overall, trends remain bullish near-term and pullbacks should be used to buy, thinking that it's likely that even further strength can happen.  Specifically, the price action in Financials, Industrials, along with recent Semiconductor strength area all near-term positives, as these sectors have regained prior lows and have shown evidence of snapping back.  Overall, its unlikely that markets move straight higher, as weekly and monthly momentum remain a concern and we've seen some very sharp deterioration since mid-September.  However, given the extent of last week's rally, it's likely to produce a "two-steps forward, one-step back" type pattern as breadth has proven better on recent strength than it did the prior week on the decline.   Bottom line, make use of weakness to buy into pullbacks in growth names, expecting that Consumer Discretionary and industrials along with Healthcare and Financials should be sectors to buy into. Technology and most growth names have shown initial evidence of bottoming, but more selectivity is needed here.  Look to short Utilities and REITS, using Consumer staples as the one defensive sector to consider long for those seeking safety.  The bond market, unfortunately, has shown little to no evidence of rallying during October to aid those wishing to seek shelter away from equities, and it doesn't look like this changes anytime soon.  For now, Staples is the one place to be within the Defensives, along with buying dips in some of the hardest hit Regional banks and Semiconductor stocks which have stabilized quite a bit. 




Recent technical developments which give some comfort that a low is in place

1)  Breadth was better on last week's rebound than the prior week of decline.  We saw a turn up in Advance/Decline and Percentage of stocks above their 10 and 50-day m.a.  The Percentage of stocks now trading above their 10-day has rallied sharply to over 70%

2) Financials, Industrials, and Semiconductor stocks have recaptured former Summer lows that were violated. (Looking at XLF, XLI, SMH as sector gauges)  This is a positive and bodes well for these sectors to outperform after a very tough October

3) Structural progress-  Uptrends were broken which have guided the downtrend for NASDAQ, SPX and DJIA since early October, while prices have regained prior lows from early October.  This is a constructive first bounce off the lows

4) Three 1% gains is a rarity, and has only happened on a few occasions in the past 10 years.  Last week's success likely means that these gains, similar to prior occasions in 2016, 2011, 2009, (which were all found at market bottoms) likely can produce further gains

5) Seasonality is very bullish during this time, not just in Q4 Oct-December but also during this stretch of the mid-term election season. As was mentioned above, this period has never been negative for stocks on a 12 month basis going back since the 1950's.

What's missing?   We still have not seen the real capitulation, despite the sharp rally last week.  Equities never showed real indication of extreme volume on the downside compared to Advance/Decline that would produce a TRIN (Arms index) reading >2   (Both February and April showed +3 TRIN)  Additionally, the Equity Put/call, while arguably elevated on a 10-day moving average basis, failed to take out early October highs even while equities were plummeting into Oct 26/29 lows.  Potentially given indices intra-day rally attempts, this prohibited the capitulation.  Additionally, whereas most near-term declines in recent years have occurred while weekly and monthly momentum were in better shape, this time around, these gauges had already been negatively diverging from January when momentum hit near record overbought levels.  The waning of Technology in June played a major role in many growth stocks falling out of favor which in turn caused the market to fail to show any real breadth surge on the market move back to near record highs into September/early October before peaking.  The subsequent downturn caused a much larger decline in momentum given the near sideways movement since July.  While intermediate-term trends are intact, the situation with momentum is not in great shape.  Failure to rally sharply in November/December in broad-based fashion gives rise to concern of the broader market beginning to peak out next year (Or that September's highs is part of an intermediate-term top in the making for US indices.)  For now, much depends on equities rallying back sharply in the remaining eight weeks of the year.  We'll be watching closely.  For now a bullish stance given the positives since late October seems correct. 


SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:

Short-term (3-5 days):  Mildly bullish this week, with any early week drawdown likely proving minor and buyable technically.   The last week of gains for Equities occurred at a volume and breadth which was better than the prior week's selloff and prices largely did not violate meaningful support to think that trends were turning lower on intermediate-term timeframes.  The move above 2707 turned trends bullish, so any pullback early this coming week likely should hold 2707 initially and then 2685.  Above 2756 should allow for a test of 2775 which has more significance.  The real issue technically with having too much confidence just yet has to do with the level that momentum has turned lower on a weekly and monthly timeframe.  This needs to be resolved before expecting too much of a rapid gain.  


Intermediate-term (3-5 months)-  Bullish-  It's thought that October's pullback is likely complete, while longer-term charts have not been meaningfully affected thus far.  While momentum has begun to turn lower and there is ample evidence of negative momentum divergence, broader market peaks take time.  We'll need to see market indices show more signs of trend damage, as opposed to just daily charts.   Key concerns involve not just momentum weakness, but what looks to be a real change in leadership and Technology accounting for 26% of SPX has rolled over in a very bearish manner.  However, given the seasonally bullish period underway during this mid-term election year, it's right to initially use near-term weakness to buy and then see the extent to which rallies can attempt to carry prices back higher.  Watching participation closely will be key in Q4.  Until trends from 2016 are  broken in all major indices and SPX, NASDAQ and DJIA close down under their respective 10 month moving averages and see these averages start to rollover, the first decline is typically one to buy into given a lack of long-term trend damage.   


10 Technically attractive Stocks to Consider

consider.gif

Coca Cola European Partners PLC (CCE- $45.83) CCE is quite attractive technically and is considered a top choices to take advantage of the so-called "Safe Trade" during volatile times.  Technically this looks to be preferred over KO in the short run given the stock's push back above 2017 highs as of last month.  The recent symmetrical triangle was broken, allowing for prices to push higher to test $46 in what appears to be the early stages of a two-month pattern breakout.   Overall, movement up to the high $40's looks likely and CCE is favored for technical longs.  Pullbacks to $44.50-$45 would make this more attractive, while a move back under $42.50 would postpone the move.  Bottom line, this pattern from 2017 resembles a larger Cup and handle pattern that is on the verge of producing a larger breakout and is favorable for longs in the weeks ahead.  

ahead.gif

Dollar General (DG- $112.32) DG has gained in technical attractiveness in recent months after the stock ran higher earlier this year above 2016 highs, and has subsequently formed two additional bases which lie above the previous base.  This act of breaking out above a former high and then consolidating before breaking out again, each time making a smaller and smaller base, adds to DG's appeal as it starts to turn higher yet again.  The stock's move above $112 has helped it to achieve a new plateau, with targets initially found near $120.  While its near-term price action last week stalled out a bit once reaching former highs, DG still managed to achieve a new weekly closing high.  Overall, this looks to be precisely the kind of pattern which keeps this stock technically attractive while not becoming too overbought.  Longs are recommended, while looking to utilize any pullback to buy dips, with stops on longs found at $104.87.  

104.87.gif

Ross Stores Inc (ROST- $100.03) Bullish-The doubling from last year's lows still hasn't resulted in meaningful upside exhaustion and ROST still looks attractive to make further gains in the weeks ahead, with targets initially found near $110. ROST has consistently shown attractive technical structure and the breakout late last year above $70 resulted in a very sharp acceleration higher, beginning a new rate of ascent for this stock.  No real evidence of any trend waning or technical deterioration of any kind has happened in the last 12 months and the Equity selloff in October had little to no effect on this name.  Overall, longs are attractive, looking to buy minor dips for a push higher to $105 and ultimately $110 before any weekly exhaustion arrives.  
 

arrives.gif

Ollie's Bargain Outlet Holdings Inc (OLLI- $92.73) Bullish, with last week's advance to new multi-week highs likely leading the charge back to test September highs and get over this level in the weeks ahead.  OLLI has shown ongoing signs of momentum acceleration in recent months, with its already steep uptrend growing even more parabolic since this past Summer.  The recent consolidation from highs saw little to no damage done before this turned back higher last week.  Near-term targets lie at $97.61, and above helps this set sights on $100 in short order.  Only a move back under $87 would change this view, and put off the move back higher.  For now, OLLI has little to no evidence of any weekly exhaustion, and its minor consolidation since September has helped to alleviate its overbought status on weekly charts.  Movement back higher looks likely, and OLLI should be preferred for technical longs. 

longs.gif

Shoe Carnival (SCVL- $40.80) The consolidation of the breakout of SCVL's four-year base makes this particularly attractive to buy dips with targets in the high $40's in the weeks ahead.   SCVL had nearly tripled in price from last year before giving back nearly 20% from its highs into early October.  The act of climbing back to recover more than 50% of the damage done from September should put this within striking distance of former highs.  Overall, SCVL is bullish to consider technically and would be more attractive on minor early week pullbacks.  Initial resistance should come in at $45, but over this should help propel this stock to the upper $40's.   Only a violation of $36 would postpone this move.  The fact that SCVL broke out on nearly 10x average volume and has settled down substantially on this pullback from the highs is thought to add to the conviction for longs. 
 

for longs.gif

Zoetis Inc. (ZTS- $92.77)  ZTS is quite bullish given its breakout and pullback of the recent base which had been intact in recent months.  This tight consolidation followed a lengthy uptrend from 2017, and following the high volume breakout last week (4.2mm shares) ZTS pulled back on far less volume (2.6mm)  This should set the tone for gains up to near $100 which are possible in the weeks/months ahead.  Given that ZTS had broken out of a trend which had lasted for the last couple months on nearly double the average volume of the last 60 days, the pullback back down to its pivot should be buyable, and makes this attractive from a risk/reward perspective.   Stops on longs lie at $87.75, which can't be violated without postponing the move back higher to $100. 

 

100.gif

FactSet Research Systems Inc (FDS- $223.51) FDS recent pullback looks to have held where it needed to, and has now begun to turn higher.  This past week's rally managed to break the downtrend from early September and finished above the highs from mid-October.  Both of these are positive developments that bode well for FDS to continue higher to likely challenge the former September peak made near $235.  Given that FDS made two formidable highs earlier in the year near $215 that were exceeded and then held on pullbacks (former resistance, now support) , the act of getting back above $220 is seen as quite positive for this stock.  One should consider FDS as a long holding, using pullbacks to buy dips for a rally back to $235 or higher.  $215 is still considered an important area for support and any breach of this would postpone the rally. 

rally.gif

IShares MSCI Brazil ETF (EWZ- $41.61) Some compelling evidence of EWZ making a comeback after the Brazilian election with prices regaining more than 60% of the selloff from early 2018.   As weekly charts show, EWZ had already exceeded the longer-term downtrend from 2008, so this year's consolidation should result in a buying opportunity for movement back to test and exceed early year highs.  While prices are not likely to reach early year highs above $46 right away without some consolidation given the extent of the move thus far, a further rally to $43.50-$44.50 looks likely before this stalls out and pulls back.  Then another rally should be able to carry this higher.  Overall, the key point to make is that intermediate-term trends changed for the better back in 2017 into 2018, and now EWZ looks to be turning back higher.  Stops on longs lie at $37.75 and should be moved higher as prices increase.   Movement back over $47.85 hit in late January would be necessary to drive a larger rally and this largely depends on the US Dollar showing far more weakness, which for now, might hold off until end of year.  However, EWZ looks well positioned to rally further in November and also should participate on a dollar downturn given the improvement in intermediate-term structure.  
 

structure.gif

Vale SA (VALE- $15.45)  The resilience of VALE closing well up off its weekly lows for the last two weeks has helped this reach the highest levels since late 2013.  While its pattern might seem choppier than an ideal technical setup, the rally back to new yearly highs in September has managed to hold these levels without much pullback since that time.  After six weeks of consolidation, it remains near its recent highs and has rallied for the last three of four sessions to close near October's intra-month highs.  Movement back over $16 is expected, which should help this turn up to $19.69, the 50% retracement level of the move down from 2011.  While a more serious downturn in the US Dollar index would serve to help stocks like VALE and other metal producers to rally in a much stronger fashion, this seems to be right around the corner.  Recent dollar strength has not held VALE lower, but this has managed to rally despite these cross-currents and remains technically attractive.   Overall, this looks like an excellent technical risk/reward and one to favor for diversification during volatile times. 
 

times.gif

Casey's General Stores Inc.  (CASY- $127.88)  CASY looks quite attractive technically given the recent resilience in rallying back to test highs that were made right near $130 in September.  This level retested the former highs, and also lines up with highs going back since late 2016.  Movement up above $130.78 which was the highs in September looks likely and should drive this higher to near $137 which was hit in mid-2016.  Momentum has consolidated after having hit overbought levels back in September, so is relatively more appealing while price has begun to turn higher to test this area again which has already been hit twice before.  Technically, it's likely that this turns up to new highs for 2018 on this current rally, and longs are recommended, looking to buy dips.  

Nightmare on Wall Street- Halloween Scare

October 29, 2018

Contact: info@newtonadvisor.com

S&P 500 Cash Index
2729-31, 2710-1, 2690-2,  2633-5    Support
2775-7, 2825, 2852, 2940               Resistance

 

Summary:  October is certainly living up to its reputation as a volatile month.  Most US indices lost nearly 4% last week alone, extending the decline to over 10% for the second time this year.  This equates to over 1.2 trillion in losses over the last week and over 3.3 trillion in value since our September peak, according to Wilshire Associates.  This selling has directly contradicted the seasonal narrative heading into Q4, which historically has shown robust gains.  Yet as we know, Q2 & 3 proved to be far more resilient than many expected, with stocks positive through the difficult months of August and September.  This success in holding up proved to be a key factor in emboldening market participants as seen by many sentiment gauges, something which in our estimation is at least as important as how many look at earnings in determining a healthy stock environment.  As many know by now, earnings don't lead stock prices, and despite a fairly healthy earnings season, stocks have all but ignored many of the positive earnings.  Many European and Asian indices took the lead in turning down, and US indices look to be simply following suit to the weakness being seen all across the globe currently.    Overall, the near-term trend remains negative for both equities and bonds currently and many stock indices are now challenging 2-year trendlines from 2016 which would give a more clear-cut picture of the intermediate-term trend.  Momentum has rolled over to bearish on a weekly and a monthly basis, but has begun to show signs of positive divergence on daily charts.  This, along with some uptick in fear, should be instrumental in putting trading lows in place for stocks in the next 1-2 weeks, with November 16th being a likely maximum time that this pullback extends before finding support.  However, the resulting bounce will need to be quite robust, with broad participation to avoid stocks turning down again to make an even larger correction.  My technicals suggest that this should be just a near-term pullback for now, but the larger deterioration in momentum is a concern for next year and even on a move back to new high territory for equity indices, the average stock likely should not get back to highs at this point.  Thus, while I'm bullish on stock indices to advance between now and next Spring, I have greater concerns that the broader market is beginning to peak out on a 3-4 year basis.   At present, insufficient damage has been done to make a call to be bearish between now and year-end, and as such, it's right to buy into any further weakness in the coming days, thinking that such a decline should finally help fear gauges start to register real capitulation and put in place a trading rally for a bounce in November.   Below we have a monthly chart of the Bloomberg world index, which has clearly started to show more technical damage than what's being shown in the US, and gives reason for concern for 2019..  The pullback has tested 2015 former highs (now support) but monthly momentum gauges like MACD have rolled over to negative.  Overall, this is showing its first real evidence of possible trend failure on this failed breakout, unless this can stop dead in its tracks today. 

today.gif


Overview:  Markets are likely to begin some form of stabilization and bottom out within the next two weeks, and could very well be in place by the end of October.   While momentum remains negatively sloped on every timeframe, uptrends are still intact on DJIA and NASDAQ going back from 2016, and important to note that most indices could suffer 20% corrections and still not break down under the uptrends from 2009.   The positives include Positive momentum divergence, the start of fear rising, extreme oversold conditions on daily charts, and bullish seasonality during this time.  The negatives concern the degree that the average stock has begun to show weakness at this stage of the stock rally.  While this began back in early February, many did not move back up to new highs, and momentum on intermediate-term charts has begun to diverge negatively for the first time in years, which historically has been one of the Keys to knowing that the bull market is on borrowed time.   In the short run, several things need to happen to truly have more confidence of a low at hand:  Fear levels, while slowly growing, should escalate more quickly to show capitulation which would be a source of comfort to those who approach sentiment from a contrarian perspective.  Demark indicators, while signaling downside exhaustion last Friday on intra-day basis, should give some type of daily signal which would be a stronger area to buy into.  Finally, it would be constructive to see some of the S&Ps' heaviest weighted sectors like Technology and Financials start to turn back higher and show more stabilization.  One can argue that both sectors are close in this regard and many are oversold.  However, the proof will come on a move back to new multi-day highs.  Semiconductors, for one, seem to continue to be a very weak sub-group within Technology, and look early to buy.  


What to look for to have real conviction that a low is in place:

1)  Better breadth on the pullback from 10/17 than from 103-10/11.  (This is confirmed, and breadth has been better on this latest downdraft, with the maximum downdraft last week occurring on -3/1 breadth, far better than the 8/1 the week prior)  

2) Equity put/call rising more rapidly now than it did in early October and nearing prior peaks.  (Still not as high as needed to have real confidence of fear being in place.  While weekly moving averages are more important than daily readings, this still hasn't reached areas near early October at 1.3 on Equity Put/call) 

3) Volume capitulation (Also early in this regard- we haven't seen TRIN readings (ARMS index) at 2 or higher yet, not to mention 3 or higher which was seen in late January and also in April)  

4) Financials and Technology should start to stabilize and turn higher.   (Early here, though Tech did relatively outperform last week and Financials are within 2-3 days of near-term exhaustion (though the weekly charts are of bigger concern on the degree of weakness)   (KRE however, can start to outperform XLF starting this coming week)

5) Seasonality,is very bullish during this time, not just in Q4 Oct-December but also during this stretch of the mid-term election season.  Technically, a few cycles suggest this pullback likely should be complete by mid-November

6) Demark signals in place on US equity indices daily charts  (this is clearly a bit early and has not yet transpired)  A drop back to new low territory Monday/Tuesday should help this line up by mid-week, giving some conviction as to a bounce

 


10 Stocks to Consider Buying Technically on Weakness over next 1-2 weeks

1) AMZN- $1642.81-  Pullback still looks to be short-term only-  Area at 1623 is a 38.2% retracement of the rally from 2017.  Under, while not expected right away would bring a maximum near 1491, or the 50% area

2. FB- $145.17- Pullback growing close to near-term support-  Buying at current levels with move to 160 likely initially and over would jump start the larger rally.  

3. YEXT- $18.18-  Looking to buy at $17-$17.50 for a move back to the low to mid-$20's

4. LLY- $106.39-  Excellent long-term structure since 1999.  Pullback in recent weeks should find support near $100 and offer a good risk/reward for gains back to and over highs

5. IIN- $41.77-  Buy $38-$40 with targets back up in the mid-$50's-  Very steep runup saw 50% retracement, and now starting to stall out

6.  VICR- $37.08-  After moving up four-fold from late last year, this stock has given back more than 60% of gains, right down to key long-term base support going back at least five years.  Buy technically with targets in the mid-$40's

7.  MCD- $173.34-  Very good pattern from January of this year as part of larger uptrend.  Buy dips technically at 170-173 if given the chance this week for a move back to 180 and above

8. VZ- $55.51-  Excellent long-term structure & gains to test 1999 highs near $62.50 likely-  Use recent pullback to buy dips, technically

9. UNH-  $258.18- Little to no real signs of any real technical damage-  Buy dips at $240-$250 if given the chance

10. BABA- $142.87- Has already given back 50% of the rally from 2015- $134-$137 stand out as important to buy dips




SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:

Short-term (3-5 days):  Mildly bearish-  Still expecting that equities likely retest lows Monday-Wednesday, but that lows should be near.   Further technical losses would represent buying opportunities this week, with 2530-50 area near February and April lows thought to be maximum area of pullback to this first decline from September.   However, any move down to 2590-2615 into early this week should be buyable and particularly one where fear starts to elevate rapidly


Intermediate-term (3-5 months)-  Bullish-  It's thought that the current pullback could be complete within 1-2 weeks while longer-term charts have not been meaningfully affected thus far.  While momentum has begun to turn lower and there is ample evidence of negative momentum divergence, broader market peaks take time.  We'll need to see market indices show more signs of trend damage, as opposed to just daily charts.   Key concerns involve not just momentum weakness, but what looks to be a real change in leadership and Technology accounting for 26% of SPX has rolled over in a very bearish manner.  However, given the seasonally bullish period underway during this mid-term election year, it's right to initially use near-term weakness to buy and then see the extent to which rallies can attempt to carry prices back higher.  Watching participation closely will be key in Q4.  Until trends from 2016 are  broken in all major indices and SPX, NASDAQ and DJIA close down under their respective 10 month moving averages and see these averages start to rollover, the first decline is typically one to buy into given a lack of long-term trend damage.   

Charts of US indices & sectors of importance

importance_.gif

S&P Daily charts suggest a trading low could be in place by this week, though much needs to happen to have conviction on any rally.  S&P Daily charts show the following:  An ongoing downtrend from 9/20 peak that made a secondary peak back on 10/3.  For now, this downtrend remains intact and has begun to reflect positive momentum divergence on this latest pullback from 10/17 highs, which lacked the strength of the initial selloff into 10/11 lows.  One can see popular momentum gauges like RSI having failed to push to new lows.  Additionally, Demark exhaustion counts remain premature on daily charts to signal lows of any magnitude but could be in place on further weakness this week back to new lows.  Interestingly enough, after nearly a 4% drop, we see that three of the last four trading days were higher by 20-50 S&P points off the lows, which has emboldened the "buy the dip" crowd, despite SPX having pushed lower.  To have any confidence in a low at hand,  S&P Futures require a move back up over prior lows, which lie at 2710-2, and ideally to exceed the ongoing downtrend from early October, intersecting near 2750.  Downside targets initially should materialize near 2590-2615, but on a real washout, one can't rule out a test of Feb/April lows near 2530-50 area.  
 

area.gif

SPX monthly charts are important to study to put the last couple weeks of pullback into perspective.  Prices have now officially breached the two-year uptrend from 2016 and RSI on monthly charts has trended down sharply to the mid-50's, while showing MACD bearish crossovers.  The negative momentum divergence is shown prominently and is a hallmark of markets which are losing steam towards the latter part of a move.  While a snapback rally looks likely on daily/weekly basis, the extent of the rollover is a particular concern on an intermediate-term basis.  This suggests that stocks likely are peaking out, and regardless if SPX makes a last ditch attempt to rally back to test or barely exceed September highs and reach 3020-60, the average stock likely will not participate and one should expect far worse participation on bounces. 

bounces.gif

Europe down to six-year Trendline support-  Most of Europe remains in far weaker shape than US, and weekly SX5E charts show prices having pulled back to important six-year trendline support near 3100.  While a period of stabilization there looks likely in the weeks ahead, any violation of 3100 would create a larger intermediate-term concern for Europe, suggesting that the recent underperformance should continue.   At present, shorts in VGK and FEZ likely can be covered on this pullback, thinking that we'll see at least some minor ability to hold support in the next 1-2 weeks and a bounce attempt.  
 

attempt.gif

High Yield seems to be finally showing some widening out in credit spreads, as per the OAS (Option Adjusted Spread) breakout above the downtrend of the last few years.  While credit had been relatively unscathed over the last few months, this breakout now shows the first material widening in credit spreads to levels worse than how 2018 began.   This breakout above the longer-term trend argues for greater widening in the weeks/months ahead, and is something to keep a close eye on for those who believe that credit weakness typically makes for a poor equity market.  Both Equities and credit look to have peaked in September, but this breakout is worth mentioning as a something which suggests the trend should continue to worsen in the weeks ahead. 
 

ahead.gif

Equity put/call never officially got to levels over early October highs, showing the degree that fear truly has not yet crept into this market on nearly a 10% equity decline in recent weeks.  Movement back above 1.35 would be meaningful, which combined with a high TRIN would signify a stronger amount of capitulation than anything seen thus far.   The recent constriction in this trend is of particular interest, and shows a good likelihood of a breakout which should allow cause fear to spike at a time when this dip likely proves buyable.  For now, more work needs to be done.  
 

Financials broke early year lows last week, with XLF closing down at the lowest levels since mid-2017.  While Regional banks look to be a few days from bottoming, this weekly chart in general remains bearish on this break, and after giving back roughly 30% of the advance since early 2016, still looks to be 3-4 weeks early towards forming any kind of true counter-trend exhaustion which would point to a strong oversold rally.  For now, this trend is bearish.  From a sub-sector perspective, KRE should be favored within  the group between now and end of year for a good likelihood of a snapback rally.  While XLF in general looks quite negative on this break, Regional banks look relatively more attractive, and recent weakness should be used to buy. 

buy.gif

Leading Sector breakdown not encouraging- Transports breakdown along with Semis a concern for leading sector tendencies-   Just in the last week, the DJ Transportation Average managed to violate the two-year trendline from 2016, similar to SPX.  Monthly momentum indicators like MACD have rolled over to negative, and could bring about selling down to the area of the last major peak in price, thinking that former resistance could now become support.  The area at 9300 should act to cushion further weakness, and unless October's drawdown is recouped would be the first real area of intermediate-term support, followed by the nine-year uptrend which intersects at much lower levels near 8000.

Rally still premature, but should be around the corner as fear starts to rise

October 22, 2018

Contact: info@newtonadvisor.com

S&P 500 Cash Index
2729-31, 2710-1, 2690-2,  2633-5    Support
2775-7, 2825, 2852, 2940                 Resistance

 

Summary:  Equities look to have begun the much awaited "retest" , which many concluded was highly likely after the first bounce off the lows.  While these pullbacks often turn out to be buying opportunities for Equities, it pays to wait for evidence of real "fear" to show up, as this was largely non-existent during the first wave of selling from early October.   Near-term, markets still show downtrends in place on daily charts as part of larger uptrends for equities, while interest rates continue to work their way higher on the long end and the Dollar has been stubbornly resilient.  Overall, It's not wrong to say that US equities definitely look to have joined some of the weakness which has been present in the last few months globally, as signs of Technology weakness coinciding with Financials drawdowns became too much for the US market to bear.  However, this didn't translate into European or Asian relative strength, as these markets also have been under pressure.  The chart below focuses on the Bloomberg World index, which broke a two-year uptrend as its pullback in the last two weeks fell to the lowest levels of 2018.  Near-term, this should lead to further selling pressure, as no real evidence of support is yet apparent.  While some might argue that seasonal strength is right to bet on as a reason to get long, it's important to mention that this worked miserably during Q2 and Q3 which historically have acted quite poor.  Stocks ability to rally through this period was seen as bullish.  So now that markets are into October and have turned down, it's difficult to cling too tightly to the opposite argument that stocks have to rise in Q4.   However, this likely will be the case heading into the final couple weeks of October given fear levels slowly but surely turning higher.  The first few days of this week however, don't seem particularly bullish just yet.  Thus some patience is still required while equities try to carve out bottoms and potentially embark on a larger retests of October lows before prices stabilize.  

stabilize.gif


Overview:  Markets have pulled back this past week, though largely in the last few days, as when looking at current prices, SPX still remains within 1 point of where it closed last week.  Volume and breadth however have been lackluster this past week, which generally is a positive sign on stock market retests of lows.   Yet, fear never really materialized during the first drawdown, and was thought to always be something that the market likely needed after giving up 5% over a 2-day span and down nearly an equal amount from mid-September highs (-5.5%-SPX )    For one, no real capitulation in volume was seen at recent lows as the TRIN registered a poor 1.4 reading, well below the 2+ or even 3+ readings seen at prior lows this year.   While there was an uptick in put volume, there surely wasn't much signs of actual fear.  Markets did register VIX backwardation which is another useful tool that often coincides with a bottoming price in Equities.   Additionally, Equity put/call ratios have been on the rise, and Total Put/call is now at the highest levels of the last couple months.   However,  in the short run, the breakdown of Technology does seem to be a broader concern, with Equal-weighted Technology having made a break of the two year uptrend from 2016.   Financials, meanwhile have been under pressure of late, going in exactly the opposite direction of long-term Treasury yields which is a source of real curiosity for many.   As we show below, however, there are now some evidence that Financials have shown the first signs of trying to stabilize after the recent washout which is considered to be a minor positive that merits watching closely and could lead to a bounce in this group into November.  For now, heading into this coming week, the shape and technical pattern don't seem too promising just yet with two straight down days, with prices having failed to make any early progress and then turned back lower.  Thus, despite the lower volume and negative breadth on this pullback, we'll need to see more out of NASDAQ and SPX to show some better evidence of stabilization before getting too bullish.   A bottoming process should be materializing over the next 1-2 weeks, as fear on the rise coinciding with intermediate-term uptrends in place is normally something to buy into.  However, on a 3-5 day basis, there remains insufficient proof and it remains right to have a defensive stance, at least early on in the week.  

Reasons for continuing a bullish intermediate-term Stance, thinking this pullback proves short-lived for now:

1) Lesser volume and better market breadth this past week   Flat breadth on Thur/Friday declines of last week vs the -8/1 of the prior week

2) Equity put/call rising more rapidly now than it did in early October and nearing prior peaks.  Formerly we argued that there was no real signs of fear. Now this seems to be changing as the early dip buying failed

3) Macro reasons for concern have materialized that are a big aid in turning sentiment negative more quickly that were absent the prior week.  Italy "Going it alone" on the deficit, and also the US pullout of the Saudi summit

4) Financials have shown their first signs of potentially bottoming on a RELATIVE basis.  Note, absolute charts remain weak and technically its still right to expect XLF to get to 26 and slightly below.  Yet, KRE seems very washed out and we've seen relative charts of XLF /SPX give counter-trend buy signals. 

5) Seasonality, as many say, is very bullish during this time, not just in Q4 Oct-December but also during this stretch of the mid-term election season.

6) Intermediate-term uptrends on SPX, NASDAQ and DJIA are intact and in far better shape than Europe. 

 



SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:

Short-term (3-5 days):  Mildly bearish- Similar to last week, we enter post October expiration week thinking that a bit more weakness is likely in store but should be close to bottoming out by end of October.  While breadth and momentum have lessened on this pullback over the last week, there's insufficient proof of markets having bottomed to justify a bullish stance in the next 3-5 days.  Equities closed right near lows of the day both on Thursday and Friday of last week, and the most likely outcome could bring about a deeper retest or even minor break of prior lows near 2710-2 before a bottom is in.  Fear seems to be on the rise, so this is a positive from the perspective of thinking that this first selloff from September is growing closer to being complete.   Ideally one would like to see Equity put/call spike over 1, while the TRIN gives a 2+ reading with much more volume on the downside than upside vs the overall Advance/Decline.  These last two factors have been noticeably absent, but seem close as both showed signs of inching higher to end last week.   Overall, any test of lows should be a chance to cover shorts and start to buy into this decline, thinking that a bottoming process has begun.   Over 2816 in SPX would be constructive, and last Wednesday's highs are an area to watch.  Similarly, movement down to 2710-2 coinciding with a further lift in fear should be something to buy into, not one to avoid stocks.  Until more definitive signs of long-term trends being broken is "front and center"  near-term weakness coinciding with long-term trends being intact should be something to buy into.

Intermediate-term (3-5 months)-  Bullish-  It's thought that the current pullback could be complete within 1-2 weeks while longer-term charts have not been meaningfully affected thus far.  While momentum has begun to turn lower and there is ample evidence of negative momentum divergence, broader market peaks take time.  We'll need to see market indices show more signs of trend damage, as opposed to just daily charts.   Key concerns involve not just momentum weakness, but what looks to be a real change in leadership and Technology accounting for 26% of SPX has rolled over in a very bearish manner.  However, given the seasonally bullish period underway during this mid-term election year, it's right to initially use near-term weakness to buy and then see the extent to which rallies can attempt to carry prices back higher.  Watching participation closely will be key in Q4.  Until trends from 2016 are  broken in all major indices and SPX, NASDAQ and DJIA close down under their respective 10 month moving averages and see these averages start to rollover, the first decline is typically one to buy into given a lack of long-term trend damage.   


10 Charts of US indices, Treasuries, FX, Sectors, both absolute and relative 

relative_.gif

NASDAQ 100 still weak technically but a test/break of 6900 would initially be buyable, but also would cast some doubt on the ability to get back to highs right away.   This daily chart of NASDAQ 100 index puts the near-term trend into perspective. The drawdown violated 7400 which was key in the short run as this turned the trend bearish.  Prices found minor support near the 2-year trend at 6900 which also happened to be an exact 50% retracement of the most recent rally from February.  The last week's gains look to have stalled and failed mid-week, followed by a down Thursday and Friday where prices closed all the way down at the lows of the session on both days. Momentum remains bearish and we haven't seen any evidence of counter-trend exhaustion that could help NASDAQ to bounce.   This doesn't give much confidence for early this week and the best case scenario calls for a further pullback that holds 6900 before bouncing.  If NASDAQ and XLK were to violate trends from 2016, this would postpone the larger rally back to highs.  Bottom line, near-term trends remain negative and a further pullback looks likely early in the week which faces a key test near former lows at 6900.  To have any real confidence a low could be in, we would need to get back up over last week's 7311 highs, but in reality, exceeding the last serious low from early September is key, at 7400.  Until then, a near-term bearish bias is prudent.

prudent.gif

SPX down to critical two-year trendline support- SPX weekly chart shows prices having pulled back to test this important uptrend from 2016 which intersects just under 2750.  Any break of the lows from two weeks ago, 2710-2 would be negative for SPX, with the next prominent area of lows which could act as support found near 2550.  Weekly momentum indicators like MACD have turned negative, and at a lower level than where SPX peaked out in January (RSI shows the same) while prices managed to eke out another 50 points higher into mid-September.  Overall, this area will be a real make-or-break for SPX for the next couple weeks.  Violating 2710 would be a structural negative, but given the uptick in fear gauges and low volume/breadth over the last week, selling might prove temporary in the short run before at least a minor bounce attempt.   The divergences are something which are worth monitoring for US equity indices going forward and the longer these persist the more negative these would be for any sort of longevity on rallies in the months ahead.  
 

ahead.gif

Treasury yields breakout still looks to extend -Treasury yields continue to show bullish trends following the recent breakout of prominent resistance and look early to fade, despite equities having turned down recently.  This positive correlation between equities and Treasuries is something relatively new, so will be important to monitor.  For now, momentum and trends remain sloping higher for yields with no discernible weekly trend exhaustion that should cause meaningful strength in Treasuries.  While sentiment remains quite bearish and yields have pressed up to near Bollinger Band resistance on daily charts, weekly charts show no real resistance and last week having rallied to extend the recent breakout.   Overall, US 10yr Yields should make further headway higher in the weeks ahead, with no meaningful resistance before 3.50%.  If the equity selloff starts to cause a flight to quality that makes yields drop under 3.12, there could be a brief pullback to 3-3.05%, but should prove short-lived and a likely good opportunity to sell Treasuries.  Yields would require a move back down under 3.00% to reverse this breakout, which looks unlikely in the short run. 
 

short run.gif

Dollar has gotten a bit more bullish in recent weeks-  The US Dollar index has failed to rollover as thought possible in recent weeks, rallying 3 out of the last 4 weeks and increasingly resilient.  Last week's weekly close in the Bloomberg Dollar index (<38% vs Euro, vs 63% in DXY)  finished at the highest levels since mid-August.  As weekly charts show, the last 2 of 3 weeks trading right near highs of the range has the potential to breakout higher, not lower, which would put a serious crimp in the commodities trade yet again.   Most had banked on Gold and the precious metals trade in general to continue the recent bounce, and a breakout in the Dollar would at least postpone any further rally by a bit.  Overall, keeping a close eye here on the Dollar makes sense for those involved in commodities and/or Emerging markets as this chart has taken on a bit more of a Bullish bent in the last two weeks.  Sentiment has begun to lift noticeably in the US Dollar, so its thought that any rally into November/December likely would be a chance to fade this move, not dissimilar from late 2016.  For now, movement above 1200 in the BBDXY should result in further upward continuation for the US Dollar.

Dollar.gif

Commodities trending higher near-term, but require a breakout above Summer highs to help the intermediate-term trend shift to bullish.  Commodities trending higher near-term, but a sustained move requires a breakout above 450 in the CCI index.   Overall, the commodity rise which was thought to occur this year really took a serious blow given the lift in the US Dollar this past Summer.  The rally above 450 in CCI index into the late Spring had all the makings of a potential breakout and commodities as a group looked to outperform stocks as an asset class.  This faded into late Summer before reasserting some momentum just in the last few weeks, regardless of the shift higher in both Treasury yields and US Dollar.  Technically speaking, it does look likely that the next 1-2 weeks of October could see further rallies in commodities.  However, if the Dollar begins to breakout, it's likely that this bounce proves short-lived and might undergo even more consolidation before turning back higher .   Overall, the commodity liftoff very well could be postponed by a few months into 2019, but should be on the verge of turning back higher on an intermediate-term basis.  Going forward, it's important to monitor this long-term base in CCI index, as its thought that the series of highs near similar levels while lows are occurring at higher and higher levels should eventually result in big move higher for this space.  Technically, one simply needs to keep a watchful eye on the 450 level. 

level.gif

 Transports breaking two-year uptrend- DJ Transportation Average looks to have officially broken the uptrend from early 2016 as of the last two weeks given the extent of the selling off mid-September highs.  This likely could bring about a quick move down to 10000 before hitting lows that were made back this past Summer ahead of any bounce.  The shape of this pattern has turned more bearish when examining the technical trend for this year in Transports.  As weekly charts show this began a pattern of churning this year with repeated failed rally attempts that resulted in deep retracements lower.  The breakout in this pattern into the Fall then failed again, turning back sharply to move back to new multi-month lows.  Unfortunately for the bulls, this has had a very detrimental effect on momentum, with MACD turning down to likely break its Signal line on monthly charts for the first time in two years.  Going forward, given the symmetry of the pattern since early this year, the ideal scenario would take the form of another few weeks of decline followed by a rally into end of year.  However, unless September highs are exceeded, this could take on the shape of a giant Head and Shoulders pattern for the first time in years.  At present, this is very much premature, but the key point on weekly charts concerns the break of this uptrend, which should give way to further October selling in this group.
 

group.gif

Tech breakdown might prohibit this group from bouncing back to lead the charge- Equal-weighted Technology has violated its two-year uptrend vs SPX in recent weeks.  Another disturbing development concerns the deterioration in Tech, as the SPXEWIT index (Bloomberg), an equal-weighted Technology index, has broken down to the lowest levels since January vs SPX in relative terms.  This violated the uptrend from winter 2016 and shows signs of falling further in the next 1-2 weeks before stabilization and a bounce attempt.  While many use XLK as a gauge for Technology, this tends to be too large-cap focused and it's more practical to look at Technology in equal-weighted terms to gain some insight as to the underlying rotation at work.  Technology peaked in June of this year, so the start of the recent pullback in Tech (given the 26% weighting in SPX) was directly responsible for causing markets to soften in recent weeks.  This rotation is important to pay attention to, as Tech has now underperformed on a 1 and 3 month basis.  This breakdown in relative performance means that Tech is unlikely to reassert itself as a leader again quickly and rebuilding will take time.  Other sectors like Healthcare look healthier to expect continued leadership, and while a bounce back in Tech likely can happen in November, its gains in all likelihood could prove to be selling opportunities for many stocks.  
 

stocks.gif

Equity Put/call Ratio starting to lift meaningfully, which should be a welcome sign for the Bulls from a contrarian perspective as concern is finally starting to grow into the start of fear.   This daily Put/call chart of the Equity Put/call has risen over .80, the highest since early October and the highest level in Put/call since February.  This was noticeably lacking in recent weeks during the equity pullback, but given the October selling during a time when many expected equities to be quite strong for Q4 has noticeably taken a toll on sentiment.  Polls such as AAII and Investors Intelligence have contracted meaningfully and now Put/call spiking should bring about an end to this first pullback in stocks likely in the next 1-2 weeks.  Ideally, the Put/call should spike up to near 1 or higher, coinciding with a final drop in stocks down to test recent lows near 2710 in SPX.  On a minor undercut, it would be proper to use any uptick in fear into late October to consider buying stocks and selling volatility, given the better relative breadth and momentum being "less bad" of late.  The Total put/call had already made its move to the highest level in months and now the Equity put/call looks to be following suit which is at least one of the necessary ingredients to putting in a trading low.  Stay tuned. 

tuned.gif

Financials look close to bottoming, but likely have one final pullback to new lows which should represent a buying opportunity from a technical counter-trend perspective.  Looking at daily charts of XLF, this group remains under pressure, but has started to show some stability near prior lows from this past Summer which is a welcome sign for Financials after recent damage.  The XLF managed to hold prior lows and bounce a bit,  helping Financials to outperform seven other groups in the last week, with positive returns in XLF of +0.76%.  The two negatives however concern the ongoing negative momentum of the last couple months, along with the wave structure from September only showing three waves down .  Most bottoms should occur with a completed five-wave decline, which opens up the possibility of a final pullback which would reach $26 in XLF, but likely not extend too much further.  This should present a buying opportunity for this group, as Financials as a whole are likely to start to trend up to join the recent spike in Treasury yields.  For now, technically, a bit more weakness looks likely, and one should be prepared to buy dips down to new lows.  Going forward, the act of regaining prior lows of this consolidation (shown above as a giant box in white) would make Financials start to strengthen more meaningfully.  Technically speaking this lies near 27.50 near the lows made into October 2.  Any move above 27.50 is bullish for XLF and should be followed. 

followed.gif

Financials showing some early signs of bottoming, but more work needs to be done-  Relative charts of Financials vs SPX shows this recent stabilization in the group, despite Regional banks having pulled back to new multi-month lows.   The pattern currently for XLF/SPX shows a completed counter-trend Buy signal based on Demark's TD Sequential indicator, which confirmed a buy on Financials late last week on the uptick in relative strength.  While it's premature to call a bottom in this group potentially given the ongoing downtrend at work, this is a healthy development for Financials and should point to an upcoming rally just as interest rates have begun to move sharply higher on the long end.  Movement back over this downtrend in relative terms to SPX (shown in white) would be a very welcome development technically for strength in Financials, which might very well start to take Technology's place, strength-wise.  So at present, an early potential buying opportunity for this group, but more work needs to be done for additional conviction