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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

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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.


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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.



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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.


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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.



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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.

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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.

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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.

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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.

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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.

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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.

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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

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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.

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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.

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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.


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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.


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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.

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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 .


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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.

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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

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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.

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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.

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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.

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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

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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

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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.

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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.

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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.

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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.

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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.   

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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

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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.  

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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.  

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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.  
 

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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. 

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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. 
 

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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. 

 

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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. 

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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.  
 

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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. 
 

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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. 

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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

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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.  
 

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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. 

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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.  
 

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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. 
 

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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. 

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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.  

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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 

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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.

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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.  
 

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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. 
 

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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.

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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. 

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 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.
 

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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.  
 

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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. 

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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. 

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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

Chinese Tech stocks nearing good support to consider- Short-term Bottoming out process looks to have begun for US

October 15, 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 remain trending down from mid-September as part of the intermediate-term uptrend from 2016 and 2009.  While the downdraft was particularly severe last week, livng up to October's reputation as a volatile month, it failed to do much damage to the long-term trends.  Thus, this is considered short-term only in nature as of now.  Momentum, however, has seen some damage as a result of the recent pullback when looking at weekly charts, with MACD crossing the signal line and turning negative.  Daily momentum meanwhile reached the lowest levels of oversold territory of the year and has started to diverge positively on hourly charts (a good signal for Bulls)  Arguably, last week's pullback never really gave the old fashioned "fear-based" BUY signal, as markets witnessed no real evidence of volume capitulation on the downside, nor outsized Equity Put/call readings.   Thus, it remains a tough market near-term to have much conviction that any low into mid-October is sustainable.   Seasonality argues for a sharp rally into most mid-term Election periods in early November.  Yet, seasonality this year has been remarkably unpredictable with better than average August and September performance while Q4 has gotten off to a much worse start than normal.  Overall, there stands a good likelihood that we haven't seen the last of the volatilty this year, and it pays to monitor the sector rotation carefully for evidence that Technology and Financials can begin to make a more sustainable comeback after recent weakness.  Bottom line,  Long-term trends are fine, but some definite signs that markets could be entering a new stage, with momentum and growth rolling over as the search for new leadership has begun.  Failure to mount a strong rally in the weeks ahead that turns down to challenge last week's lows would be a mild concern. Yet until the long-term trends are broken, this should remain a dip to buy into, as oversold conditions as part of long-term uptrends give way to opportunity near-term.  

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Overview:  Has the Market peaked for the year?  What are the risks?   I think this week's Barron's sums up my feelings perfectly with the title "The Easy part is now Over for the stock market.  I'm still of the opinion that stocks can likely make it back to new highs, even if the decline has a bit more to work out before bottoming.  Historically, the combination of near-term oversold levels coinciding with intermediate-term uptrends typically presents a compelling risk/reward to try to buy dips.  As mentioned above, however, the drop-off in weekly and monthly momentum presents a bit of a difficult scenario for how the future of this rally could play out.  This is a crucial distinction which is often lost on most market participants which hear the media claim "oversold" and think that translates into a buy signal.  Unfortunately this is often not the case, as oversold can stay oversold for quite some time, similar to how overbought conditions rarely lead to an immediate snapback.  Putting the various timeframes into perspective makes this a bit easier to get a handle on.   Looking at current markets,  it's true that momentum has gotten oversold on daily and intra-day charts.  However, weekly and monthly are nowhere near oversold  (Very different being oversold here in October 2018 than being oversold in March 2009 when all time frames were oversold)   Let's not forget that back in January, weekly and monthly momentum got to the highest overbought readings on those timeframes than we had seen in months, if not years.  Thus, rampant near-term oversold conditions now might not be a positive for stocks, if the weekly and monthly momentum start to trend down sharply.  They very likely could coincide with a breakdown which should give rise to selling opportunities in the weeks ahead.  For now, the combination of negatively sloped momentum with an ongoing uptrend tend to still favor the uptrend vs trying to be bearish when prices are down near weekly uptrend line support.  (But often this means it's necessary to rally sharply in a broad-based manner or else the bounce would be vulnerable to failing.)   Overall, let's take a moment and review the recent technical warning signs that were in place coinciding with this market decline and then a list of what's present now.

Warning Signs-  While many blamed Tariffs towards China for the decline, as earnings and economic data failed to show much disappointment, the push up in Treasury yields was the most direct technical catalyst that happened the day that stock indices broke down.  While many were shocked at the degree of the pullback last week, this type of market weakness is quite common during most years (Losing 5% over a two-day period)  But for those paying attention, there were ample signs that it was right to continue to be defensive heading into October.  Some of these warning signs (which we've discussed in the Weekly Technical Perspective for the last two months) are mentioned below, for the benefit of new subscribers and to refresh one's memory as to truly what was happening technically that could have started this.

1) Market breadth peaked in late August-  NYSE "All stocks" advance/decline along with Summation index both moved steadily lower throughout September
2) Divergences between US stocks and the rest of the world started to widen materially in August/September
3) Technology underperformance- This proved to be the true technical catalyst (25% of SPX) and peaked relatively in June and has lagged over the last few months with Semiconductor weakness particularly troublesome
4) Defensive outperformance - Looking back one month ago, Utilities had outperformed both Financials and industrials Year-to-date while showing better one-week performance vs Technology
5) Sentiment indicators like Investors Intelligence widened out to a Bull/Bear spread of +40 heading into September which largely persisted the entire month (Stock indices peaked 9/21) 
6) Stocks hitting new 52-week highs began to steadily drop off, but became particularly pronounced right before the early October part of the Decline, with stocks hitting new 52-week lows expanding to a greater number than New highs.
7) Negative momentum divergence on daily charts of SPX, DJIA, NASDAQ-  Prices had pushed back to new highs, yet momentum was lower and had failed to keep up pace
8) VIX diverged positively with the higher lows in September and early October failing to fall to new lows even as indices pushed higher
9) Demark's TD Sequential and TD Combo indicator had both signaled exhaustion signs right at the peak where stocks had topped out at 9/21, forming 9-13-9 patterns
10) Trend violation on 10/4.  While many of the factors above were in place throughout September, prices had held up in resilient fashion up until 10/4 when S&P, NASDAQ and DJIA all violated three-month uptrends from late June.  This was the first real warning sign that price was finally confirming what breadth and momentum had been suggesting for some time.  

How do things look now?   Let's take stock of where Stock indices are now and what might happen given the recent technical developments.

1) SPX, NASDAQ and DJIA have shown sufficient deterioration to bring about the most oversold conditions for 2018 thus far on Daily charts based on RSI, while Percentage of stocks >10-day moving average fell to 3%.    While this isn't enough to suggest buying, it is notable and worth keeping on top of .  Weekly and monthly obviously are nowhere near oversold.  

2) Weekly, intermediate-term uptrends are intact for SPX, DJIA and NASDAQ-  This is important, as the daily deterioration has not been sufficient thus far to violate the uptrend from 2016. 

3) Momentum has rolled over to negative on weekly charts and is showing negative divergence on both a weekly and monthly basis-  This is a larger concern, as MACD is negative  and has rolled over at a lower level than where peaks were registered back in late January.   Former market peaks in 2000 and 2007 both gave initial warning signs by flashing negative divergence as indices peaked out in these years.   (But it took the actual long-term trend break before this really was confirmed and mattered)

4) Demark exhaustion is not yet present on the downside to signal a possible low  (this is a potential factor that might limit the extent of the rally before a retest.  Of course, these signals don't necessarily "need" to occur at bottoms, but they typically do on daily charts after prolonged weakness

5) No evidence of "fear" just yet- While sentiment polls like AAII now show more Bears than bulls (which from a contrarian standpoint is a "plus", we haven't seen Equity put/call ratio spike above 1, nor has the TRIN registered readings over 2, which would be suggestive of volume capitulation on the downside.  Often near market bottoms, e see an abnormally high level of volume to the downside vs upside.  (both early February and April showed high TRIN readings)  (Meanwhile, right during the initial part of this month's decline, we saw abnormally LOW TRIN readings of .49 on 10/4, the day of the market break) while 10/8 showed .46, the lowest reading of the year) 

6) VIX Backwardation-  Normally markets will show SPOT VIX trading well above 2nd and 3rd month VIX when the Equity market is close to a bottom.  This can often persist for a period of time, but important to note when this has begun.

6)  Equal-weight Technology has broken down under two-year trendline support, indicating an important shift out of Technology, which at 25+% of the SPX, is troublesome.  Some other sectors will need to rush to take the place of Tech if this market is  going to make a bounce of any magnitude.  Financials and Industrials have been weakening lately, not strengthening, but Healthcare could be up for the task.

7) Growth has shown evidence of rolling over vs Value which began in early October.   The ratio of IVW to IVE, the Growth vs Value ETF, broke uptrend lines going back since April which looked to directly coincide with Technology rolling over in bigger fashion.

8)  Small caps and Mid-cap stocks have both been weakening meaningfully since June which is right when Technology peaked out.  Both the Russell 2000 and S&P Small-cap 600 index and Mid-Cap 400 index peaked out relatively vs SPX in June and have weakened to the lowest levels in the last two years.   This might be the start of the splintering of this rally longer-term, as historically we see Small caps and mid-caps start to weaken ahead of larger market peaks, where the Large-caps are the last group to fall. 

9) Treasury yields have officially broken out on the long end from long-term trend channels which have been in place for Bond yields since the mid-90s and have occurred globally, not just in the US.   This looks like an important development.  Whether or not Financials follows the move in Yields will be particularly significant in the months ahead. 

10) The US Dollar seems to be turning back lower which has sparked a breakout in many commodities  and should coincide with the start of a larger bounce in Emerging markets in the weeks ahead.  

This last topic is the basis for this week's writeup on the Chinese Internet names, as many have sold off sharply, irrespective to the companies fundamentals, and many are just reaching areas of support that make their stocks interesting from a risk/reward basis for buying dips.  Most of the stocks below exhibit the same pattern of having gotten very overbought, then correcting 30-50% off those highs to meaningful intermediate-term trendlines.  Near-term these are oversold, but yet one can argue the stocks have held longer-term trends and this makes them attractive to consider. 
 

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

Short-term (3-5 days):  Mildly bearish- It's thought that a bottoming process has begun, but still could allow for a minor pullback to new lows- 2690-5 area which might allow volume to show more capitulatory traits and allow Demark exhaustion to be completed before the rally gets underway.  However, the drying up in negative breadth is a positive lately, so any pullback at this point should be a chance to cut shorts and consider putting on longs in small size for a rally into the mid-term elections.  2710 is important as Thursday's low and if broken would likely allow for q quick 10-15 points before stabilizing.  Look to start adding longs and use any weakness this week to consider adding more longs, as this recent selloff likely should be nearly complete.  

Intermediate-term (3-5 months)-  Bullish-  No change-  Its thought for now that pullbacks should be buyable as no real intermediate-term weakness has occurred and momentum weakness is short-term only and has not affected the weekly charts.   If trend channels from late April are broken (2775-80 in SPX) ahd happen in NASDAQ, DJIA, while weekly momentum starts to rollover, it would be right to expect a larger correction.    (From last week:  The beginning of Q4 kicks off the most positive stretch for Equities seasonally within the four-year election cycle.  Barron's notes this past weekend that combining the fourth quarter of a mid-term election year with the first two quarters of the 3rd year of a presidential term averages 20.4% since 1950.  Mid-term Octobers also rank as top months for performance, with average gains in DJIA of 3.1% since 1950, with 12 of them being higher and five being lower since that time.   Impressive seasonal stats for sure, however, the mid-term 2nd and 3rd quarter performance certainly deviated from the traditionally sub-par performance which happens during these years, and SPX has now strung together six straight positive months.  Overall, given the monthly close at new all-time highs for US Equities, it remains difficult to be bearish on an intermediate-term view without any semblance of weakness heading into this seasonally positive time.  However, the recent breadth deterioration, Financials weakness, and momentum waning combined with bullish sentiment are real concerns to those that simply argue a bullish tune based on price alone without studying the underlying weakness.  Bottom line, it seems more likely than usual that October turns out to be far less positive than these seasonal stats suggest.  A selective stance is preferred with overweights in Energy and Healthcare, keeping alert for evidence of any downturn that might change the thinking that dips are automatically bought.  For now, price trends and seasonal factors outweigh the breadth concerns which have all been present for some time, with little to no effect.


10 Charts of China, relative and absolute and 6 key names to consider within the space

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China vs US-   When looking at relative performance of China vs US, we see that ratio charts show this relationship to be closing in on what appears to be a very good risk/reward opportunity to be long China for the first time this year.   While the breakout in 2017 helped to spark some outperformance, much of this was given back after this ratio peaked and consolidated these gains for most of this year (Indicating relative China weakness.  Now momentum has gotten oversold and we've seen the start of some positive momentum divergence just in the last couple weeks for the first time all year.  Additionally, Demark's counter-trend exhaustion indicators like TD Sequential and TD Combo are within 2-3 weeks of signaling "buys" which would help to lift this ratio chart and help it start to trend higher.  Given that many of these stocks have gotten very oversold (not just like US oversold on daily, but weekly and monthly oversold with losses greater than 20%) it seems like an opportune time to revisit China, thinking that US Dollar weakness likely helps Emerging markets and in turn, helps China to outperform relatively which could be in place by early November. 

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FXI- The Ishares China Large-cap ETF, looks poised to begin a rally of its own after recent pullbacks in price were not met by similar movement in momentum.  While the trend currently is undeniably negative, and breaking trends in the middle part of 2018 turned the trend bearish on this group technically, it looks wise to consider revisiting now given that many have gotten very oversold.  Last week's ability to finish the week well up off the lows was a positive sign.  Looking forward, regaining $43.63 would be a positive structurally, helping FXI to get back up above September highs.  Additionally, this would also break the trendline which has kept this trend bearish most of this year.  

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Developed vs Emerging markets look to be peaking-  Bodes well for EM-   Emerging markets very well could be on the verge of a larger comeback if this relative chart of Developed v Emerging is any guide.   The ratio chart of MXWO vs MXEF has shown evidence of stalling out right as prices near the highs made in the latter part of 2015.   Counter-trend exhaustion is in place, per Demark which has signaled its first weekly TD Sequential sell since this rally got underway shortly following the US Election two years ago.  Momentum got overbought, and now is gradually waning and shows RSI having dropped back down under 70 after nearly six months of overbought conditions.   This likely can pave the way for Developed markets to give way to relative weakness vs Emerging and could be bullish for China if Emerging market equities and currencies start to lift in the weeks/months ahead.  The recent rolling over in the US Dollar seems to be particularly important in coinciding with the recent lift in commodities which has occurred in the last couple weeks.  Overall, while just one small  piece of the puzzle, the combined warning signals on this ratio chart seem to favor Developed markets starting to pullback vs Emerging and could allow for a greater than normal bounce.  

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Alibaba (BABA-$147.29) Good risk reward now at trendline support after 35% drop. BABA looks poised to begin stabilizing after its recent 35% drop from highs made earlier this year.  Technically speaking we've seen the stock retrace 50% of the prior gains from mid-2016 just in the last week while also reaching levels that line up with a larger area of trendline support.  While the downtrend for BABA is very much ongoing on a weekly basis over the last six months, it's important to note that its two-year trend remains positive and the stock has just pulled back to test this area of significance, right near $135.  While a serious rebound back over the red downtrend is vital to expecting that bounces turn into an intermediate-term rally and not just a short-lived rebound, it looks right to position long in small size given this confluence of support, looking to add in the weeks ahead on any test of last week's lows near $135, expecting that the stock should be near a formidable level of near-term support which could prove important in helping this establish a good bottom.  


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Tencent Holdings Ltd. (TCEHY- $37.87) Expect stabilization within this downtrend and a bounce to come.   Similar to BABA, TCEHY has had a very tough road this year, falling nearly 43% from early year highs and giving up nearly 70% of the rally from late 2016.   Weekly trends are certainly still very much bearish, but momentum has reached oversold levels and have started to show some positive divergence for the first time in nearly seven years.  As weekly charts show, this area near where the stock bottomed last week also intersects an uptrend from early 2016 and looks to have provided support to the recent correction.  Overall, this will take some time before the trend can truly start to shift from down to up on a weekly basis, but this appears like an excellent risk/reward area to take a stab technically, as the combination of oversold conditions coinciding with multi-year trendline support should help this start to bottom out in the weeks ahead.  Movement back over $42 would signify that the rally has begun, and investors could consider adding to longs.  On the downside, any pullback to the low $30s in getting back down to test last week's $34 level should be an excellent time to consider buying technically speaking, despite the ongoing downtrend. 

 

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Baidu (BIDU- $204.36) Recent drawdowns have taken BIDU down to levels coinciding with the trend from 2016, making this an interesting spot to consider initiating longs for an upcoming rebound.  Last week's pullback managed to close up meaningfully off its lows, right near this trendline, while prices generally have given back a bit more than half of the rally from 2015.  However, technically the stock's pattern is much more choppy and neutral in the last couple years than many names discussed here which have dropped 50-60% of the rally up from a few years ago.  Thus, on rebounds, BIDU could potentially be stronger in its rally efforts.  Overall, BIDU's key area of importance lies near 220, and when exceeded, one could add to existing longs, expecting that the downtrend is starting to give way to BIDU starting to trend back higher.   On the downside, pullbacks under 190 would be near-term damaging to this trend, but momentum indicators like RSI show the drawdown to have taken this to near oversold territory for the first time since late 2015.  

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NetEase Inc. (NTES-$220.88) After giving back nearly 50% from its peak early this year, NTES finally looks to be closing in on levels that have importance and could help put in a tradable low for this stock in the weeks ahead.  The violation of the steeper uptrend from 2016 caused the acceleration seen most of this year, (It's almost always important when yearly trends of support or resistance are broken)  The retracement of recent months has caused this to give back roughly 50% of the prior rally from 2012,  so both on an absolute and relative basis, one can make the case that the stock is growing closer to meaningful support.  On the downside, it's important that any further weakness not violate 180 which would result in one final pullback down to near $150-5.  On the upside, the ability to get over $240 would help this start to trend meaningfully higher, so this is the key area to watch which would exceed the intermediate-term downtrend.  

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Momo Inc. (MOMO- $37.65) MOMO looks attractive from a risk/reward standpointgiven its near 35% selloff from highs seen back this past Summer.   In this case, the stock has held up quite a bit better than some of its peers, which should make this rebound in stronger fashion when this group starts to trend back higher.  MOMO's weekly charts show the pullback from June which failed to break the uptrend from 2016 and now the stock looks to be trying to stabilize after last week managed to hold prior lows and rally up to the highs of its weekly range.  Overall, a move back up to test highs seems very possible in the months ahead, and MOMO looks appealing to consider buying in small size here technically, with plans on adding on any further pullback to the low 30s. thinking that this is meaningful support which should not be violated anytime soon.  Overall, this seems attractive as a risk/reward long given that the stock has held up better than many other Chinese Technology stocks as its held up in the upper quadrant of its range in the last couple years.  Meaningful support lies near its uptrend from 2016, near 31.
 

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YY Inc (YY- $73.02) -Minor evidence of stabilization after YY gave back 61.8% of the prior rally from 2016.  YY trended sideways for nearly three years before its breakout in mid-2017.  This resulted in nearly a quick doubling in price before giving back most of those gains into September.  It did find good support near the 50% retracement level near $87 ,and then when broken, proceeded to drop down to the low 70's.  Despite the recent pullback to new lows in Shanghai Composite, YY has trended sideways in the last six weeks, giving some indication that its beginning to act a bit better. Rallies back over $78 should help this test and then exceed the former lows broken near $87.  Further gains up to $100-5 can't be ruled out, but it will take a move over $110 to think this has begun a new uptrend, as opposed to just bouncing from oversold levels.  Weekly closes back under $67 would postpone the rally, and one should hold off on buying weakness, as this could lead down below $60 temporarily before this stabilizes.  For now, the act of holding up while China has fallen in the last 2 months makes this one to consider buying into, expecting a snapback rally.

Equal-weight Technology dropping to new relative lows could make correction extend

October 8, 2018

Contact: info@newtonadvisor.com

S&P 500 Cash Index
2883-5, 2864-5,  2823-35, 2817    Support
2916-7, 2923-5 , 2945-6                Resistance

 

Summary:  Trends remain near-term bearish in the short run, with US Stock indices having rolled over to violate 4-5 month uptrends as prices finally gave way to join momentum and breadth which had largely peaked out in late August.  Meanwhile the broader intermediate-term uptrends remain very much intact.  Therefore this shakiness which began late last week remains just some seasonal volatility in a month where such volatility happens to be very common, and until larger trends show evidence of giving way, this pullback likely will turn out to be buyable into mid to late October ahead of the mid-term elections.  Meanwhile, Bonds have broken down both domestically and abroad, with US 10-year Treasury yields jumping to the highest levels in more than five years and bond yields exceeding long-term trends going back since the mid-90's.   The Dollar remains choppy, range-bound in recent months, while more positive in the near-term, as prices have carried up to near former highs and stalling.  Additionally, commodities have begun to bottom out, with the Energy rally leading Grains, Softs and precious metals to also begin to lift.  Overall, a market which remains one of many moving pieces but which sector rotation up until last week was able to bail out weakness in Technology and Financials.  The CBOE Volatility index, meanwhile has started to edge higher, and as daily charts below illustrate, last week's close successfully exceeded the entire trend from late June while having shown higher lows in the last couple months.  It's thought that a technical spike to the low 20s is possible in the next couple weeks before volatility starts to compress again, and for now, it's right to own implied volatility, expecting this could lift in the volatile month of October. 
 

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Overview:  Last week finally saw the much anticipated volatility as stock indices fell to match what breadth and momentum had been saying could happen for the past month.  The degree to which bond yields spiked last Thursday seemed to kick off an exodus out of risk assets and both stocks and bonds moved in unison with yields reaching the highest levels seen since 2011.   Most breadth indicators like the Advance/Decline and Summation index, had peaked out in late August and spent much of the last month falling, even as stock indices were working their way higher.   Technology continued to lag with drops in Semiconductor and Hardware names falling, and Discretionary also rolled over with Retailing starting to weaken, along with continued pressure in Homebuilding names.  Even healthcare wasn't spared, with Biotech (XBI) dropping to the lowest levels since May.   However, perhaps the most curious move came out of Financials which failed to keep up with yields, and despite a minor bounce last Thursday, still haven't moved up meaningfully enough to suggest any sort of change in trend.    Overall, given the ongoing negative slope in momentum while breadth has moved to multi-month lows, some time of a correction is overdue and finally looks to be underway.   Ironically, just as August and September dramatically outperformed expectations, turning in good performance in a seasonally weak time, October now looks to have the potential of being much worse than expected just as most have been talking up how bullish Q4 should turn out. 

Bottom line, we'll see the extent to which corrections could prove short-lived and allow for just minimal damage before prices start to stabilize.   At the close last Friday, SPX and NDX had both violated four month uptrends, yet remained above longer-term areas of support drawn arithmetically from late April.  This area should be tested, which intersects near 2823 for SPX, while the larger area of support lies near 2779 which would be a daily 1x1 price/time angle from the February 2016 lows.  Technology has shown evidence of turning lower, and given that NYSE new 52-week lows are spiking to multi-month highs while momentum and breadth are already bearish and dropping, a further pullback in price is expected in the next couple weeks.  If Fear starts to pick up on this decline and we see an outsized amount of volume into declining vs advancing stocks in the near future while prices remain above intermediate-term trendline support, then it should be right to buy dips ahead of the election.  However, if channel support is broken on SPX, DJIA and Nasdaq from late April lows, this could allow for a larger correction to test areas just under 2780 in SPX.   For now, a defensive stance in equities still looks correct.

Bond yields meanwhile look stretched, but should begin at least minimal pullbacks sometime this week which could take yields lower in the near-term after huge spikes.   Thelarger trend however, looks very much negative technically for Treasuries along with UK Gilts after yield breakouts of trends going back at least the last ten years, and in the case of US treasuries, yields accelerating higher in breaking out of 20+ year trend channels.   Meanwhile the US Dollar looks stretched and could begin to pullback in the weeks ahead, particularly vs some of the Emerging market currencies, while commodities look to be starting at least a minor bounce.  It remains right to favor Energy within the commodities space ahead of November, as Crude, Gasoline are showing very good signs of momentumlately and last week's late pullback should be buyable.  At present, Energy still looks more attractive than the metals, but this could show signs of changing by month's end.  Until there's evidence of crude starting to weaken,  this should still be favored above the metals complex for further gains in October.   Additional highlights, summary and charts below.


Recent developments important to highlight heading into this week:
1) Technology sold off to new monthly lows in Equal-weight terms vs SPX, breaking down under Sept lows
2) US Treasuries have started to correlate positively with Equities, with last week's meaningful selloff also coinciding with Equities weakening.  
3) Small-caps and Mid-caps have begun to accelerate lower lately, after both peaked out vs SPX in June.  The last two weeks saw meaningful underperformance
4) Biotech could be a source of near-term weakness within Healthcare after XBI broke down to new multi-week lows last week
5) Energy still favored for outperformance and XLE showed some evidence of playing catchup to both OIH and XOP last week, breaking out relatively vs SPX
8) Europe weakness still underperforming US pullback and should still lag in the next few weeks.  Patterns on SX5E, SXXP, DAX look far worse than US equity indices
9) Breadth and momentum gauges have turned down more sharply and after two late week declines, these haven't given any indication of positive divergence, but have movedlower with price, which is a negative
10) Commodities have been showing strength in the last few weeks, despite a rising Dollar and rising yields.  Energy strength has been followed by Metals, and Softs strength, which would likely accelerate if/when the Dollar turns down.   This should lead to further bounce in Emerging markets and Materials

 



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

Short-term (3-5 days):  Bearish- The near-term trend has turned bearish after the break of 2886 in SPX cash last week.  Pullback looks to be underway that could take S&P down to 2823-35 and below that to 2775-80 before this is complete.  The selloff in the bond market directly coincided with Equities starting to rollover last week and we saw Technology break support relative to SPX which is important given its 26% weighting in SPX.  Breadth and momentum have been negative and downward sloping while not yet signaling any real support after just a few days of decline.  Yet, looking back, S&P ended up peaking on/near 9/21.  For this coming week, getting under 2869 in SPX cash would allow for a final pullback into late this week (2873-S&P Futures)   To have any sort of confidence that this move was just a few-day pullback, we'd need to get back up above 2921-SPX, yet it's imperative to see Technology and Financials start to stabilize and turn back higher relatively as both groups have been under pressure lately. 

Intermediate-term (3-5 months)-  Bullish-  No change-  Its thought for now that pullbacks should be buyable as no real intermediate-term weakness has occurred and momentum weakness is short-term only and has not affected the weekly charts.   If trend channels from late April are broken (2775-80 in SPX) ahd happen in NASDAQ, DJIA, while weekly momentum starts to rollover, it would be right to expect a larger correction.    (From last week:  The beginning of Q4 kicks off the most positive stretch for Equities seasonally within the four-year election cycle.  Barron's notes this past weekend that combining the fourth quarter of a mid-term election year with the first two quarters of the 3rd year of a presidential term averages 20.4% since 1950.  Mid-term Octobers also rank as top months for performance, with average gains in DJIA of 3.1% since 1950, with 12 of them being higher and five being lower since that time.   Impressive seasonal stats for sure, however, the mid-term 2nd and 3rd quarter performance certainly deviated from the traditionally sub-par performance which happens during these years, and SPX has now strung together six straight positive months.  Overall, given the monthly close at new all-time highs for US Equities, it remains difficult to be bearish on an intermediate-term view without any semblance of weakness heading into this seasonally positive time.  However, the recent breadth deterioration, Financials weakness, and momentum waning combined with bullish sentiment are real concerns to those that simply argue a bullish tune based on price alone without studying the underlying weakness.  Bottom line, it seems more likely than usual that October turns out to be far less positive than these seasonal stats suggest.  A selective stance is preferred with overweights in Energy and Healthcare, keeping alert for evidence of any downturn that might change the thinking that dips are automatically bought.  For now, price trends and seasonal factors outweigh the breadth concerns which have all been present for some time, with little to no effect.


10 Important charts which illustrate some of the key technical moves of this past week and what might be expected going forward



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SPX-  Trendline break likely results in weakness to the lows of SPX larger six-month channel, but still looks near-term only.   The weakness last Thursday/Friday managed to finally violate the uptrend which had been tested no fewer than three times since started in late June.  Signs of negative momentum divergence ( price moving higher, but momentum not following suit ) had been ongoing for the last month, and we've seen evidence of Technology starting to rollover along with Financials (despite Thursday's bounce)  Overall, gauges of technical momentum like MACD are negatively sloped on daily charts and given the recent uptick in bullish sentiment, (with bullish readings as high as this past January) further near-term pullbacks look likely before this move is complete.  Support on this move initially looks to come in near 2832 for December S&P Futures and 2823 for SPX Cash.

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SPX weekly shows extreme negative momentum divergence compared to this past January which will likely continue to be an issue for markets heading into next year.  At present, the move to multi-week lows last week likely should retreat to test the larger uptrend from earlier this year.  The area at 2820-35 is likely to prove pivotal.  Several key points to make on this weekly:  first, weekly momentum does remain positively sloped, so despite the divergence, weekly trends remain intact and positive at this time.  Second, no evidence of counter-trend exhaustion is complete on the SPX.  Thus, while the divergence is a larger issue, for now, drawdowns likely find support near this uptrend and should be buyable.  Breaks of this would be far more problematic for Q4 and at this time, are not expected right away.  

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US 10Year Treasury notes breakout last week provided the catalyst last week for Equities to turn lower, despite the brief bounce in Financials.  As this monthly chart shows, yields have reached the highest levels since 2011, while successfully surpassing the long-term trendline channel that has been in place since 1994, over 24 years ago.  After two successful retests over the last couple decades, this trend looks to have been broken not just with US Treasuries and long-term bonds, but also with many European sovereign bond yield charts.   Near-term, it's likely that this rise stalls out and could backtrack in the next 1-2 weeks.  However, the long-term breakout at this point looks very much in place after last week's yield rise.  So near-term pullbacks in bond yields should represent chances to sell Treasuries. 

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The Energy complex remains one of the better areas to favor technically in thismarket that has gradually begun to lose steam in recent weeks.   Charts above highlight the XLE vs SPX ratio chart, showing Energy breaking out of minor trendline resistance.   Thus, continues to get stronger, and just in the last week we've seen XLE start to make progress to join the strength seen in OIH and XOP.  There remains little evidence of a WTI or Brent Crude peak at this time and still likely that prices can push up into the early November sanctions vs Iran, despite some recent bearish inventory builds.  Overall, this minor breakout in relative terms should allow for further Energy outperformance as WTI and Brent Crude both turn back higher for a push up through the balance of October.  
 

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Equal-weighted Technology has shown convincing evidence of rolling over in the last few weeks which supports the view that Technology should be avoided technically in the near-term until this correction has played out.  This is but one example of some of the sector rotation which has been ongoing in US stocks lately, where one group falls by the wayside, giving rise to strength in another.  In recent weeks, both Financials and Technology have been waning, with more evidence just last week that Technology has further to go in showing a larger correction.   Relative charts of the SPXEWIN index (Bloomberg) which is an equal-weighted Tech index, has broken down vs SPX to new monthly lows violating the trend going back since 2016.  This is a particularly damaging sector breakdown given that Tech represents over 25% in the SPX.  

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Equal-weighted Consumer Discretionary breaking down vs Equal-weighted Consumer Staples-  The ratio chart of Discretionary to Staples has violated the trend going back since late July, something which argues for a more defensive tone in October as Staples have been gaining ground to the expense of Discretionary.  This Equal-weighted version of this ratio gives a much clearer way of seeing this sector rotation unfold in a way where the large-caps don't dominate the picture.  Overall, the next two weeks should bring about further lagging from Discretionary relative to Staples and from an ETF perspective, one should favor RHS over RCD, expecting more relative underperformance out of RCD. 

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Growth vs Value has also broken trendlines going back since April over the last couple trading days.  This has been a nearly uninterrupted uptrend for Growth vs Value since the Election, but is starting to show increasing evidence of stalling out and turninglower.  The ratio chart undercut the early September lows as of last week which also violated the longer-term trend from April.   IVW vs IVE is this ratio, which now looks to be rolling over.  One should choose value, or IVE as a preferred source for outperformance in October, expecting this trend to turn down even further.  
 

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NYSE new 52-week lows have expanded now to the highest levels since early February. This daily chart shows 140 new 52-week lows as of last Fridays close, greater than the amount shown for Bulls, which numbers 22 as of 10/5/18.  While the bond selloff does indeed account for a number of new lows, this acceleration in the chart and breakout typically signals a cautionary time, and given the breakout above five former peaks in Newlows, its likely that further upside in this New Low ratio could occur early this coming week.  

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Turning to commodities, Sugar is the latest example of a recent downtrend in this area which now looks to have given way to turning back higher.  The last few days oflast week saw Sugar break out above early September highs which signifies a bullish breakout above this longer-term downtrend line which has been lower throughout the year.  Rallying to new multi-month highs is bullish near-term, and likely carries this up to 13.50 without too much trouble.  The commodity rally looked to have gotten underway right near 9/20 and started out with metals following Energy as well as grains making a big bounce, while the Softs have slowly but surely also begun to participate.  If the US Dollar starts to make a larger pullback in the weeks ahead and start to weaken into 2019, this will help the bounce in the group begin to extend much more.  For now, near-term strength in Sugarlooks likely  and one should be on the watch for a more broad-based move higher out of commodities. 

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Emerging market currencies have begun to show increasing signs of trying to stabilize lately and the JP Morgan Emerging market currency index has triggered its first weekly counter-trend exhaustion buy signal since the decline began to accelerate sharply early this year.  This will take some time given the degree of downward momentum being seen in this index, but similar readings look close for Emerging market stocks as well.  This should allow for a snapback in the EM group at a time when most had begun to avoid the EM space, and recent BaML Monthly Portfolio manager sentiment showed a very negative bias towards Emerging markets which means from a contrarian standpoint, both the equities and currencies could begin to work much better in November and December.

Energy leads while Market breadth divergence reaches extremes

October 1, 2018

Contact: info@newtonadvisor.com

S&P 500 Cash Index
2897-2900, 2883-5, 2864-5,   2830, 2817    Support
2916-7, 2923-5 , 2945-6, 2960-3                  Resistance

 

Summary:  Stocks have continued to show resilience in recent weeks, bucking the trend of poor seasonal tendencies for mid-term election years, and ignoring much of the DC drama that many thought should be important in potentially derailing the rally.  Markets now enter the seasonally bullish mid-term month of October, which has averaged 3.1% gains since 1950 (12 higher, 7 lower) and enter what's widely considered to be the best three-quarter stretch of the Election cycle.  Data from this past weekend's Barron's shows that Q4 in mid-term election years combined with the 1st and 2nd quarter in third-term Presidential years  has averaged a whopping 20.4% for the DJIA and 21.1% for the S&P over the last 70 years.   (Whether to pay attention to these stats given that the mid-term performance far exceeded expectations is a different story)  Europe meanwhile has slumped with the EuroSTOXX 50 barely positive for the month of September and both DAX and IBEX35 negative.  Whether or not Europe can be counted on to show some mean reversion snapback as the ECB gets set to dial back QE at a time when Italy and Greece might face fiscal issues is a different story.  But the real story is the extent to which global bond yields have begun to turn up sharply again while most Financials, both US and European, have not paid attention, and have indeed been moving steadily lower.  The Dollar meanwhile looks to be at areas which might stall out and turn lower, which could help Emerging markets into end of year.  With a little more than a month ahead of US mid-term Elections, investors seem fairly confident that gains can continue uninterrupted and markets have done little to prove this thinking wrong.   Yet, the divergences have grown to some of the greatest levels all year, making the index strength a bit of a mirage to the underlying sector rotation and negative momentum divergences playing out.   While right to stick with this trend until some evidence of shakiness arrives, this is starting to look increasingly likely as markets enter the notoriously volatile month of October.  Overall, it's right to own implied volatility at these levels, and be particularly selective, with a keen eye on the 4-6 month uptrends for stocks.   The chart below highlights the MSCI World index which has moved higher for its third straight month and while not at new highs, has not shown much signs of breaking the two-year trend from 2016 which will be important to pay attention to.  Momentum has waned, as might have been expected following the lackluster rally following the big drawdown from late January, yet, its proper to respect this trend until given reason to doubt it otherwise. 

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Overview:  The last few weeks have shown without any doubt that this is a market of a LOT of moving pieces, to say the least.  While Financials fell to new relative lows of the year, other groups like Healthcare gained sufficient strength to take on the top spot in performance for a 1 and 3 month period, gaining rapidly on Technology.  Transports and Small-caps have been losing ground lately, while Energy has been able to slowly but surely start to turn higher as both Brent and WTI Crude have begun to accelerate higher.   Breadth has been lackluster as has momentum lately, but these are all concepts we've discussed before, and simply haven't amounted to much.  While it's right to put more weight on actual price action than to make too much of lagging breadth, when the divergence grows as great as markets are showing now, with McClellan Summation index at the lowest levels since May and NYSE New highs having slumped to 54, the lowest levels since late June, it makes it important to pay attention.  

The Media in many Financial publications this past weekend highlighted the simple fact that markets just "didn't care" about last week's ugly judicial panel hearings and instead are focused on bullish earnings and the economy.  Unfortunately, it's always difficult to know when markets "care" and when they don't.   Investors are very much tuned in to earnings and economic updates constantly, so this tends to be an excuse that is rarely one to lean on for why markets are moving higher, or lower for that matter.  When corrections finally do arrive, investors will surely still be paying attention, yet most will likely scratch their heads as to why markets are falling until the latest narrative of the day is blamed for the decline.  More often than not, market prices move in fairly well defined patterns that have more to do with sentiment, seasonality and market cycles than anything to do with politics, or even earnings and economic data for that matter.   The second fallacy to take note of this week comes courtesy of Stock Traders almanac, the indispensable guide to having seasonal trends at one's fingertips.  We're told that this coming month and nine-month stretch is sure to be bullish, given trends going back since 1950 (which i've mentioned above)   However, should investors be paying attention as closely to this data to support their bullish leanings if the past few months simply have not worked as they should have with regards to mid-term election year seasonal tendencies.  If anything, this suggests that we're in a very different time indeed, a strange period rife with reasons to be afraid based on tariffs, trade war and political upheaval, yet reasons to be optimistic given the economy and FOMC's rate hike plans given their rosy economic outlook.  


The following seem important heading into this week:
1) Financials selling off to new relative lows for the year vs SPX
2) NYSE New 52-week highs are at 44 now, well below comfortable levels given new monthly closing highs
3) VIX holding up firmer than expected given push to new highs by Equity indices
4) Emerging markets have begun to show some outperformance and EEM is challenging key trendline resistance
5) McClellan's Summation index, fell to the lowest level on a weekly close since May. 
6) Equity put/call ratio fell into the low 50's using a 5-day ma which seems overly complacent
7) Healthcare outperformance has carried this sector to #1 performer on 1 and 3 month basis
8) Europe sold off sharply on Italian election results, & DAX fell in the month of September
9) Energy managing to outperform as Crude moves higher- Good likelihood of Brent reaching high $80's
10) Cryptocurrency volatlity reaching very low levels as patterns reach the apex of triangles- Large move coming soon

 



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

Short-term (3-5 days):  The trend will remain bullish until 2886 is broken in SPX cash, 2883-S&P Futures.  While the downturn in Financials is a concern, there hasn't been sufficient weakness in other sectors to justify any broad-based weakness, and we've still seen sectors like Healthcare and Energy come to the rescue to help keep the recent uptrend intact.  The divergences in both breadth and momentum are also important and negative, but it's important to see that reflected in price, and thus far, indices have been able to push higher and ignore all these warnings.  2940 will be important on the upside for this week, representing 9/21 highs, and above that allows for additional upside to 2957-9.  On the downside- under 2883 will lead to a test of September lows at 2864, with strong five-month uptrend line support near 2823. 


Intermediate-term (3-5 months)-  Bullish-  The beginning of Q4 kicks off the most positive stretch for Equities seasonally within the four-year election cycle.  Barron's notes this past weekend that combining the fourth quarter of a mid-term election year with the first two quarters of the 3rd year of a presidential term averages 20.4% since 1950.  Mid-term Octobers also rank as top months for performance, with average gains in DJIA of 3.1% since 1950, with 12 of them being higher and five being lower since that time.   Impressive seasonal stats for sure, however, the mid-term 2nd and 3rd quarter performance certainly deviated from the traditionally sub-par performance which happens during these years, and SPX has now strung together six straight positive months.  Overall, given the monthly close at new all-time highs for US Equities, it remains difficult to be bearish on an intermediate-term view without any semblance of weakness heading into this seasonally positive time.  However, the recent breadth deterioration, Financials weakness, and momentum waning combined with bullish sentiment are real concerns to those that simply argue a bullish tune based on price alone without studying the underlying weakness.  Bottom line, it seems more likely than usual that October turns out to be far less positive than these seasonal stats suggest.  A selective stance is preferred with overweights in Energy and Healthcare, keeping alert for evidence of any downturn that might change the thinking that dips are automatically bought.  For now, price trends and seasonal factors outweigh the breadth concerns which have all been present for some time, with little to no effect.


Energy -  Bullish and further outperformance likely in October-  5 key charts on the sector, followed by 5 bullish technical risk/rewards
 

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XLE v SPX-  Gradually turning higher, but no broad-based strength just yet.  While WTI and Brent Crude have been showing very sharp acceleration higher lately, Energy as a sector has only gradually started to turn higher.  OIH vs SPX broke out two weeks ago, but the chart of XLE vs SPX above is just arriving at its own "moment of truth" Given that technicals for Crude oil still point meaningfully higher in the weeks ahead, particularly for Brent crude, it looks likely that one should continue to position for further energy strength.  Overweighting XLE looks prudent, and increasing this bet once XLE can manage to exceed this four-month downtrend.   Overall, it looks right to position long here ahead of this move, and Energy likely can continue bucking its weak seasonal trend, as Iranian sanctions might be a bigger deal in terms of taking capacity away at a time when demand has not fallen off materially.  

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XOP, the Exploration & Production ETF, still looks like a better bet than XLE, or OIH for Energy exposure.  This daily chart of XOP shows a gradually improving technical picture after the huge decline from 2014 into 2016 lows.  Prices have tested the $45 level now twice and appear headed for this area yet again, which should help cause a breakout and drive this sector higher at a time when Crude still looks to move higher.  Longs are favored and would be increased over $45 on a weekly close which would represent the highest weekly close since mid-2015.   Upside targets lie at $50.62, with intermediate-term levels found at $53.05, the 50% retracement level of the entire 2014-2016 decline.  Movement under September lows would be necessary to postpone this rally, ($39.41) and would cast some doubt as to a continued rise. 

Brent Crude still looks likely to rally to the mid-to-upper $80's with the first legitimate upside target near $90.  While prices have gotten overbought, no evidence of any trend exhaustion has surfaced and should be at least another 5-6 weeks away.  This is suggestive of possible strength into November, when the sanctions v Iran are expected to reach 100% and should allow for Crude to rally into this time before peaking.  ETF's like BNO or USO could be considered for a short-time only but given the nature of the construction of these ETF and the futures roll affecting prices, one should be wary of underperformance vs Crude itself.  BNO, based on Brent crude, is a likely outperformer to USO in the short-run.



The spread between Brent and WTI, as shown on this weekly ratio chart, still looks to widen out materially in the weeks ahead, which is depicted by the ratio of WTI CRUDE over Brent Crude.   While it's widened out already from 2 to near 10 in the last few months, technical trends do not seem complete given last week's pullback to the lowest levels (widest) since June.  This recent pullback last week to new lows without any accompanying exhaustion signals is likely to allow for a pullback down to -12, signifying a further spread widening and Brent outperformance over WTI.  

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Drillers preferred over Equipment/Services within Energy-  Ratios of Equipment & Services stocks within Energy to Drilling show the recent break of support which had held on this chart since early 2015.  This means that Equipment and Services names are still likely to underperform Drillers and could result in much more strength out of the Drillers relatively in the weeks ahead.  A breakdown in this weekly chart of a pattern of this sort represents a multi-year Head and Shoulders pattern and until/unless recouped, means that the Drillers likely will show much better strength in the weeks ahead on a further rise in Crude while the Equipment/Svcs should underperform. 


5 Technically Attractive Risk-reward Long Candidates within Energy
 



Cheniere Energy Inc (LNG- $69.49) LNG stands out as one of the better technical risk/rewards within Energy in the near-term given its recent  push back to new weekly closing highs for the year.  Additional strength looks likely, with upside targets near the highs made back in 2014/5 in the mid-to-upper $80's.  the pattern from June itself is reminiscent of a minor Cup and Handle pattern, and the breakout last week should help this extend further without too much trouble.  Volume expanded on the rise in the last couple weeks, and the consolidation over the last few months has helped LNG to avoid getting too overbought after its rise from 2016.  Overall, LNG is seen as attractive and would be favored long until/unless prices get back under $64.70 which is not expected.
 

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Whiting Petroleum (WLL- $53.04) WLL looks attractive given its recent resilience in holding up near the highs of its 2.5 year base from mid-2016.   The stock has made several prior highs in the high $50's and has pushed up in recent weeks to test this area again.  This adds to the probability of an upcoming breakout given Crude's ongoing ascent.  Long positions recommended, looking to add to positions on the ability to exceed $56.50, near the highs from late June.  Only on pullbacks under $45.91 would this thinking be reversed, and for now, it's right to expect a move to test this $56.50 area. 

 

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SM Energy (SM- $31.53) Further gains likely in SM given the strong near-term technical structure and its recent resilience in pushing up to the low $30's.   SM had formed a lengthy downtrend line just from its latest intermediate-term peak in 2015 which was just exceeded over the last few months.   The act of getting above this 3 year downtrend along with surpassing the minor Cup and Handle pattern since late 2017 were both bullish factors that allowed the stock to accelerate once it got over resistance at $28 which was right near the 50% retracement of SM's pullback from late 2016.  Its rate of ascent has been slow enough not to generate extreme overbought readings, and SM still lies meaningfully off highs from 2014 and 2015, making this an attractive risk/reward.  Upside looks likely to near $40,which would be a 38.2% Fibonacci retracement of the entire pullback from 2014 highs.  

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California Resources Corp. (CRC- $48.53)  Bullish for move to the upper $50's.  This stock continues to make steady progress in recent weeks after pulling back to test the area of its 2.5 year base breakout near $28 in mid-August.  Its subsequent ability to rally back sharply managed to make the highest weekly close since 2015, arguing for further intermediate-term strength to the mid-to-upper $50's before any meaningful resistance.  While CRC has gotten short-term overbought, weekly RSI only shows readings in the mid-60s and volume has been heavy on the recent move back to new highs.  Overall, long positions are recommended, looking to buy any dips given the chance in the weeks ahead.  

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Hess Corp (HES- $71.58) Bullish for a move to $77 initially-  HES recent success in breaking back out to the highest levels since 2015 has helped this stock's technical position to get better in recent weeks.  The stock has exceeded not only Spring 2018 highs but also highs from mid-to-late 2016 which bodes well for its recent upward progress to continue.   Upside targets lie near $77 initially, and any pullback down under $70 would create a very good risk/reward scenario to buy dips for gains to this key Fibonacci retracement zone.  Overall, HES has been able to show some decent strength in recent months that makes this a stock to consider which is well positioned technically to be able to make gains as Crude works its way higher.

Materials, Emerging markets likely to outperform in Q4 on Dollar weakness

September 24, 2018

Contact: info@newtonadvisor.com

S&P 500 Cash Index
2897-2900, 2883-5, 2864-5,   2830, 2817    Support
2916-7, 2923-5                                             Resistance

 

Summary:  US stocks remain extraordinarily resilient, and with one week remaining in the seasonally bearish month of September, have defied all odds with indices successfully ignoring all the tariff threats and political drama thus far in the last few months.   This could potentially allow for the sixth straight month of gains for SPX and 5th of 6 for DJIA along with NASDAQ.  However, as we're all aware the NASDAQ has been lower in September, diverging negatively as Tech stocks take a back seat to Recent strength in Energy, Materials and Financials.   Meanwhile, Emerging markets have shown some evidence of snapping back, just at a time when the currency crisis was beginning to sound alarm bells and create uncertainty as it spready in contagious form to most of the continents on the globe.  This chart below shows the relative chart of the MXWO relative to MXEF-Emerging markets which has shown developed market strength since the US Election.  For the first time in nearly six months, we see that this ratio is signaling some counter-trend exhaustion just as the ratio has reached former highs.   The last time TD Sequential signals were seen on weekly charts happened in March of this year within a week of this turning up sharply as Emerging markets fell given the US Dollar strength.  At present, the opposite is happening, and bodes well for a period of Emerging market strength in the final quarter of 2018.  Or as seen in the chart below, this ratio should be likely to turn down, as Developed markets begin to deteriorate vs Emerging in the weeks/months ahead.  This should be a good sign for China which has seen its market plunge 20% at a time when the US has held up resiliently.  While  a new round of tariffs is expected which could amount to nearly half the value of Chinese imports last year, or 250 billion, combined, most charts show Emerging markets on the verge of turning back higher.  This should mean that the trade escalation might prove short-lived, and some type of compromise could be right around the corner.  The next few weeks should be important in this regard, but it's worth taking a stab at buying Emerging markets as the 4th quarter gets underway, thinking they might hold up much better than the first 3 quarters of 2018 thus far. 


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Overview:  The last few weeks have proven to be some of the more interesting times for global assets all year.   While many just concentrate on the SPX, and/or NASDAQ  & see a mild uptrend, when digging beneath the surface we see that the internals have gotten significantly worse on this push back to new highs, a discouraging development that takes away from some of the positives on a move back to new high territory.  Meanwhile we've seen the Dollar begin to rollover in the last two weeks, along with Treasury yields breaking out of ranges on the long end, with yields climbing ahead of this week's FOMC meeting.  Emerging markets have begun to stabilize which is seen as an encouraging development and is the subject of this week's Weekly, along with the Materials sector which has begun to show some evidence of turning higher.  Even if this next week adheres to seasonal tendencies and weakens, it's thought that Materials and Emerging markets overall should start to outperform and show better than average relative strength in the weeks and months ahead.

As of Sunday evening, we've seen some evidence that futures have weakened with the threat of tariff plans being accelerated yet again, with nearly 250 billion of tariffs, or half of China's imports, and index futures in US are down -0.50%.   However, we'll need to get down under 2883-6 area to have concern, with 7400 being key for NASDAQ 100.  The lows hit back on September 7 will the dividing line between bull and bear territory.  Breaks of this level over the next two weeks would necessitate a negative stance for a 3-5% correction in stocks. 

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The following seem important heading into this week:
1) Dollar rollover-US Dollar made discernible breakdowns vs both Euro and Pound sterling last week
2) Treasury yield breakout extending into FOMC-10,30yr Treasury yields continuing higher into FOMC
3) VIX holding up firmer than expected given push to new highs by Equity indices
4) Emerging markets have begun to show some outperformance and EEM is challenging key trendline resistance
5) NYSE new 52- week highs have dropped to levels nearly half of where they were a month ago
6) NASDAQ broke down vs SPX, snapping an uptrend that's lasted most of the year
7) McClellan's Summation index, fell to the lowest level on a weekly close since May. 
8) Equity put/call ratio fell into the low 50's using a 5-day ma which seems overly complacent
9) TRIN fell to the lowest level since January last week, with negative breadth but volume still more positive than negative.  This is a near-term warning sign for equities at extremes, similar to high TRIN levels during pullbacks
10) Seasonally speaking, as discussed below, markets are entering the part of September which has a distinctly negative bias and has been down more than up for the DJIA since the latter part of the 19th century.
 


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

Short-term (3-5 days):  Despite overnight Futures weakness on Tariff concerns heading into Monday, the trend will remain bullish until 2886 is broken, which would violate the trend from late June, causing a pullback to 2817.   Internals by and large all worsened last week, which despite equities gains, make for a poor risk/reward picture now with prices towards the top of the channel.   Heading into the final week of September, seasonality warrants a defensive stance, which when combined with overly bullish sentiment, near-term overbought conditions near the highs of the range while breadth has failed to keep up, should make Equities vulnerable in the near future.  So despite recent resilience, still very little confidence that this market should extend too meaningfully.  As we've discussed however, it's a must to await signs of weakness holding before thinking markets have reached a pivotal time.  Implied volatlity seems like a smarter way to play for any drawdown until technical trends change. 

Intermediate-term (3-5 months)-  Bullish-  (No change) While there remain ample reasons for concerns in the short run, now that markets have nearly finished August with little to no evidence of any real downturn, the period between now and end of year will likely only suffer minor pullbacks between now and into early October before rallying into end of year, postponing the larger decline yet again.  Specifically, the fact that Advance/Decline for All-stocks pushed back to new all-time highs into early July is thought to be a bullish factor.   The fact that Small-cap and Mid-cap indices have rallied back to new highs is also thought to be constructive, as most bear markets start with a serious dropoff in Small and mid-cap performance.  Though some of that did indeed happen in July with the Russell2k, most intermediate-term chart patterns remain constructive.    Overall, the 2 month bias is more negative for a 3-5% drop.  However, on a 4-5 month timeframe, it's likely yet again that markets exhibit seasonal strength.  so given that markets have been able to absorb the relative underperformance in Tech lately with little to no damage, we'll need to see S&P drop under 2700 to have any real concern, and given the tariff taunts which have been ongoing, the sentiment is likely to reflect fear much faster these days than normally which bodes well for the bulls into year end.


Materials and EM space-  5 important charts to watch, followed by 5 attractive Materials stocks
 

EEM strength has tested key trendline, but further strength and outperformance likely in the months ahead.  EEM daily charts above have shown increasing evidence of stabilizing in the last couple months, with its gains since early September having carried this to important make-or-break resistance on this rise.  Despite being in an ongoing downtrend from late January, it's importnat to see the degree to which momentum has begun to improve lately, starting with the rally attempt into July but also the lack of decline since that time.  EEM has shown several failed breakdown attempts in the last couple months which are key to notice and have helped momentum indicators like MACD make a string of higher lows which pushing up to test trendline resistance at $43.25.  While  EEM could very well stall out after this push initially, the degree of stabilization in the EM space lately while the Dollar begins to rollover suggests that EEM could begin to show greater strength vs Developed markets in the weeks and/or months ahead.   Climbing over $44.50 initially would be a meaningful amount of strength that suggests the start of a more gradual lift and outperformance for Emerging markets.  Bottom line, pullbacks in the days/weeks ahead should be buyable at $41-$42 for the start of more meaningful EM outperformance going forward.  
 

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S&P upside might prove limited in poor seasonal week, but UNDER 2883 is necessary for the Bears-  SPX has pushed back to the highs of its trendline channel after last week's gains and now faces one of the toughest weeks of the year seasonally speaking.  Given the track record of finishing down 22 of the last 28 weeks with an average loss of -0.96%, we're on the lookout for the possibility that stocks might pullback to the lows of the recent channel.   Breadth and momentum have weakened lately despite last week's rise and we've seen NYSE new highs fall, despite gains in the averages.  Overall, trends will remain positive until/unless 2883 is breached and it's important to see some evidence of trend failure before turning too negative.  However, internally, it's important to note that the technicals have gotten worse in the last week, not better, despite the price rally.  Sector rotation has helped to cushion the indices despite some weakening in Technology, and for now, none of the bearish arguments will mean too much until we see that trend from June lows give way.  

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Materials bullish on breakout-  Long XLB looking to Buy dips-   The Materials sector as shown by the XLB Select SPDR ETF, has just broken out of a symmetrical triangle formation that has been intact since January.  This happened initially back in late August before consolidating and then giving way to another push up to test the highs from early June.  Technically this is a real positive for this group after months of consolidation.  The rolling over in the US Dollar index should help most Metals, mining and commodity oriented stocks to begin showing better outperformance in the days and weeks ahead.  Pullbacks to 59.50-61 would create a very good risk/reward area to buy given the degree that momentum has begun to improve lately.  Upside technical targets lie near January highs near $64, making this sector seem like a good risk/reward to own and buy dips in a market where Technology is slowly but surely beginning to rollover.  
 

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The Materials sector relative to SPX has given its first real indication that outperformance is just around the corner given the sectors minor relative breakout to SPX which happened last week  The longer-term downtrend in Materials relatively speaking remains intact, but the last few weeks have shown noticeable evidence of this starting to lift, breaking the three-month downtrend while momentum has gotten noticeably stronger (Upward sloping MACD)  The rolling over in the US Dollar last week along with the signs of Emerging markets possibly starting to turn up vs Developed markets looks to be a big deal for this group and should help Materials begin a larger rally in the weeks ahead.  A pullback in Treasury yields post FOMC would start to help the Metals stocks in bigger fashion, which have all begun to show a bit more strength just in recent weeks.  Overall, this move might take a bit longer as bottoming out after a lengthy downtrend is definitely a process, and doesn't usually happen overnight.  But the incremental progress shown by Materials makes this one to consider overweighting and adding on weakness as the group's stabilization efforts look likely to continue and will eventually lead to a larger rally in the group.  
 

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Growth vs Value-  Signs of possible Reversal which would favor VALUE in the months ahead This chart of the S&P Growth (IVW) vs S&P Value (IVE) has given some important signs of an inflection point just as this ratio has reached former highs from 2000.  The indicators of exhaustion shown by Demark's TD Sequential system have produced the first "9-13-9" pattern since the shift to growth began back in 2006/7. Momentum indicators on this ratio have gotten overbought based on RSI rising over 70, but yet not as high as was seen back in 2015, thus, creating the start of some negative divergence that suggests this ratio might start to rollover.  This would favor the Value scenario vs Growth in the months ahead, and increasingly suggests that favoring Value makes sense after this record run that now seems to be stalling out.  


5 Technically Attractive Risk-reward Long Candidates within Materials
 

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Ashland Global Holdings (ASH- $85.67) An attractive technical play within the specialty Chemicals space, as ASH move back to new all-time high territory on a weekly close last week  should allow for further gains in the weeks ahead.   The act of getting above $75 back in May allowed for some real acceleration out of ASH, which looks to close out September with five straight months of gains.  Its success in making a new weekly closing high last week was not met by any evidence of exhaustion, and its consolidation for the last seven weeks makes this attractive to buy for a stock that should now play catchup for a move up to $90.  Minor pullbacks this week should prove buyable with support at $83-$85.  Until this demonstrates some evidence of weakness, it's thought that ASH is a compelling risk/reward to continue to outperform within this space, and longs are recommended technically.  


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PPG- (PPG Industries - $115.98) Bullish given PPG's movement back above the uptrend from 2016, a constructive development that allows for a likely test of multi-year high resistance just above $120.  This stock has been basing for nearly three years after a huge six-year lift which saw price rise over five-fold.  Now momentum has begun to kick in to high gear in the last few months with PPG showing outperformance and has been one of the top performing names in the Materials sector in the last month.  Most of the appeal for this name is on an intermediate-term basis, vs as a near-term play.  Structurally its success in coming back lately bodes well for a push to highs.  Given that this area has been tested once already, this is typically a very good risk/reward for expecting an eventual breakout which should take PPG to new all-time highs.  Pullbacks to $110-3 should be used to buy dips.

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China Petroleum & Chemical Corp (SNP- $97.13) Attractive given the base buildingwhich has occurred this year at levels just below the highs from 2014.    CNP managed to double in price from 2016 into early this year,  rising up to $105 to test 2014 highs before consolidating.  However the extent of the churning over the last few months has proven miniscule and SNP's 10% lift in the last two months has bought this again to within striking distance of new highs and seems like 2014 levels won't prove too difficult to exceed before a larger lift to push up to 2007 highs.  Overall, this is partially a play on a China rebound along with the US Dollar rolling over.  Both should allow for SNP to begin to improve.  Technically the act of stalling and consolidating for 4-5 weeks near a prior high without any deterioration is looked upon as a bullish omen and one would position long here, adding above 100 for 104.50-105.50.  However, the larger move should be in store once most of this group starts to hold and turn higher.  Given that SNP has outperformed despite prior China weakness, once the EM space starts to kick into full gear in turning higher, SNP should be likely to outperform at an even quicker rate.  Bullish thesis looking to add on minor pullbacks as well as a weekly close over 100.

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CF Industries (CF- $52.81) Bullish, but extended- One of the top performers this year in all of Materials, CF began its comeback in the fall of 2016, more than doubling in a year's time before consolidating into this past Summer.  The last three months have seen CF push up for six straight weeks, and at $52.50-$54 looks likely to stall and might offer some consolidation to this move.  However, on any pullback down to $49-$51, this becomes very attractive from a risk/reward perspective given its current strong momentum.  It's thought that even on a minor correction in the weeks ahead, this should be one of the top names to own within Materials and on any pullback, this would allow for long positioning for a push back higher to eventually challenge prior highs from 2015.  
 

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Sherwin Williams Co/The (SHW- $469.96)   One of the top performing stocks within the S&P 500 Materials sector this year, despite the underperformance, SHW has returned over 14.6% YTD and still looks like a compelling intermediate-term long.  Last week's pullback has helped to alleviate some of the overbought conditions on daily charts and pullbacks to near 460 would create a very attractive risk/reward profile to buy dips in SHW for a push back to new highs.  Despite last week's move to multi-day lows on Friday, SHW has managed to turn in positive gains for the last five straight weeks.  this might persist for 1-2 weeks, but SHW would be one of the stocks to consider on any weakness given its ongoing stellar technical structure.  

5 Technically attractive Longs/Shorts during a seasonally weak time

September 17, 2018

Contact: info@newtonadvisor.com

S&P 500 Cash Index
2897-2900, 2864-5,   2830, 2817    Support
2916-7, 2923-5                                   Resistance

 

Summary:  US stocks have managed to successfully dodge most of the weakness being seen globally thus far, rallying back to within striking distance of new highs as both S&P and NASDAQ showed signs of snapping back from prior week declines.  Treasury yields look to have broken out of recent ranges on the upside, while the Dollar has begun to rollover.  This provided some much needed relief within the Emerging markets space, and Turkey's rate hike combined with the general EM currency stabilization helped soothe some of the anxiety about currency weakness turning into a larger issue.   Now seasonally speaking markets enter what could be their most difficlt two week stretch of the year, as bearish seasonality kicks in for Equities which historically has taken markets lower during the latter part of September during mid-term election years.   However, the degree of the strength and resiliency of this market is seen as an intermediate-term "Plus" for now, and declines into late September likely coincide with sharp rallies back into the 2nd-3rd week of October ahead of this year's Elections.  The chart below focuses on the tendency of markets to weaken two months ahead of the mid-Term elections followed by a sharp rally as this time grows closer.   We'll look to buy implied volatility early in the week on any drop in the VIX under 12, expecting that this Equity rally cannot continue uninterrupted into October, but utilize any Market weakness into this month's Fed Meeting to buy dips.

 

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Overview:  Near-term trends turned bullish on move back over S&P 2900, but now are facing some seasonal headwinds which combined with near-term overbought conditions and some lackluster breadth could make it difficult for US indices to push higher and extend last week's rally.    Last week's bullish close still looks to extend early this coming week, but one needs to be on the lookout for any evidence of reversal mid-week and particularly one which takes S&P back under 2864 (2900 initially a warning for S&P)  with 7400 being key for NASDAQ 100.  The lows hit back on September 7 will the dividing line between bull and bear territory, and the recent Financials weakness can't be overlooked with XLF having pulled back to new multi-week lows.  Overall, i'm expecting weakness over the next two weeks before a low and rally into October.   Look to still favor more underperformance out of Europe while Asia looks to have begun a bottoming process given the EM stabilization.   Bottom line, it looks right to expect further equity weakness, but this might prove complete by the 9/26 FOMC meeting, and one should consider buying dips into this time.   

The following seem important heading into this week:
1) Financials fell to new multi-week lows last week, making this group the worst performing sector and the only one negative on the week despite the yield rally

2) As mentioned, long rates broke out of multi-month ranges last week, with both 10 and 30-year Yield breaking out

3) Healthcare moved back to new all-time highs and on a relative basis, broke out of a three-year downtrend on weekly charts vs SPX

4) NASDAQ barely reached half of the prior week's pullback, still under 8/29 highs while DJIA managed to exceed these former levels, but overall has been weaker, still not back at new all-time territory, and roughly 500 points away

5) McClellan's Summation index, fell to the lowest level on a weekly close since May.  This smoothed breadth indicator is often important to pay attention to as it can give advance warning on signs the rally isn't all that strong internally

6) Emerging market equities and currencies jumped late last week, as the Dollar decline coincided with a move in EEM to the highest level in over six days.  While this is near-term encouraging, much more work needs to be done

7) Defensive groups fell on hard times late last week, with the yield sensitive groups like Utilities, REITS, falling as yields broke out.  VNQ, the REIT ETF, broke down under trendline support vs SPX, suggesting more weakness to come. Staples underperformed the broader averages as well which might have been expected given market strength

8) While non-technical in nature, the threat of additional tariffs happening early this week could serve as a negative technical catalyst for prices to drop, even if it proves short-lived.  China has threatened to skip trade talks with the US if additional tariffs are announced, and something of the sort would likely cause the global mood to sour and potentially coincide with weakening in equities heading into late September.

9) Seasonally speaking, as discussed below, markets are entering the part of September which has a distinctly negative bias and has been down more than up for the DJIA since the latter part of the 19th century.  
 



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

Short-term (3-5 days):  Bullish above 2900, Bearish below, with upside targets at 2920-5, and movement under 2865 leading to a 3-5% drop into late September before stabilization.    The combination of overly bullish sentiment, bearish seasonality, near-term overbought conditions while breadth has failed to keep up, should make Equities vulnerable between 9/18-9/19 into 9/26 before rallies take hold.  However, given the extent of the recent strength, it's a must to await signs of weakness holding before thinking markets have reached a pivotal time.  

Intermediate-term (3-5 months)-  Bullish-  (No change) While there remain ample reasons for concerns in the short run, now that markets have nearly finished August with little to no evidence of any real downturn, the period between now and end of year will likely only suffer minor pullbacks between now and into early October before rallying into end of year, postponing the larger decline yet again.  Specifically, the fact that Advance/Decline for All-stocks pushed back to new all-time highs into early July is thought to be a bullish factor.   The fact that Small-cap and Mid-cap indices have rallied back to new highs is also thought to be constructive, as most bear markets start with a serious dropoff in Small and mid-cap performance.  Though some of that did indeed happen in July with the Russell2k, most intermediate-term chart patterns remain constructive.    Overall, the 2 month bias is more negative for a 3-5% drop.  However, on a 4-5 month timeframe, it's likely yet again that markets exhibit seasonal strength.  so given that markets have been able to absorb the relative underperformance in Tech lately with little to no damage, we'll need to see S&P drop under 2700 to have any real concern, and given the tariff taunts which have been ongoing, the sentiment is likely to reflect fear much faster these days than normally which bodes well for the bulls into year end.


5 Important charts to keep an eye on for this coming week
 

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September seasonality tends to turn negative mid-month with the average returns on SPX lower by over 1% and have been lower 74% of the time since 1980.   The DJIA performance going back since 1885 has been positive fromSeptember 16-27th only 42% of the time.  Thus, while seasonality has traditionally been positive for the first half of the month, on average we begin to peak around this time and selloff into end of month.   Holding up above 2900 will be important for S&P and under should cause a pullback to test and likely breach 2865.  
 

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NASDAQ 100 could be vulnerable given the lack of prices to recoup prior highs.   Looking at last week, NDX managed to snap back and regain about half of the prior week losses, but unlike the DJIA, it has begun to diverge negatively and remains well under the 8/29 highs.  On any move back down under 7400, this would violate the trend from this Spring, coinciding with a drop  which should take NASDAQ down 3-5% before recovering into October.  Importantly perhaps, for the first time since mid-July there is the presence of a counter-trend sell signal on daily charts which might make further progress difficult to come by this week.  The key for the Bears will be a drop under 7400, while the Bulls should need to see prices get up to challenge prior highs without much hesitation.  However, the trend right now still lies firmly in the Bulls favor.  Barring any breakdown of this trend the NASDAQ remains firmly in an uptrend.  

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Healthcare breakout worth mentioning as this sector has exceeded the three-year downtrend vs SPX that has kept the sector under pressure relatively for the past few years.  The 2018 Annual Technical outlook discussed this sector as being a favorite given the presence of counter-trend buy signals present last December, and its success has helped Healthcare claim top spot as the best sector over the last three months.  Additional gains look likely, and this should still be an area to favor ahead of Technology.  
 

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McClellan's Summation index managed to drop to its lowest level since early Augustbut is within striking distance of the lowest levels since May .  This smoothed version of breadth is a disappointment given the market's success lately and higher readings would certainly bring about much more confidence in this rally vs looking back and seeing that breadth largely peaked out in June given this index.  
 

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VIX- Close to Bottoming-The CBOE Volatility index has gotten down to attractive levels to consider buying implied volatility early in the week if/when VIX gets back down under 12.  Momentum has gotten oversold again, while counter-trend indicators are set to line up this week on any further weakness (which would occur on Equity market gains Monday) and line up with similar signals that were present back in early August that drove the VIX higher from under 11 to near 17 in a short period of time.   Such a move cannot be ruled out again given the weak seasonal tendencies directly ahead of markets into late September, and owning cheap calls as Stock replacement and/or considering protective puts on longs that have gotten stretched might make sense.  Others who are more aggressive might consider long positions in volatlity based ETFs between now and late September.  



5 Technically Attractive Risk-reward Long and Short Candidates
 

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Planet Fitness (PLNT- $51.57)  PLNT looks quite attractive technically following its breakout above the minor one-month consolidation that had been in place since early August.  The daily chart by Investors Business Daily's MarketSmith shows the recent "backing and filling" following the breakout on heavy volume in early August and the stock has consistently maintained very good structure going back over the last 10 months since it broke out on heavy volume last November.  Movement up to the mid-$50's looks likely while any move back below $49.50 would postpone this rally, shifting the structure back to near-term neutral on the failed breakout.  For now, between Monday and Wednesday of this week, it looks likely that last week's move should extend, and long positions are preferred. 

 

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Dave & Busters Entertainment Inc. (PLAY- $62.23)  Bullish breakout on high volume  Last week's success in getting over $58.86 managed to surpass not just August and June highs, but highs going back since January of this year, making this a solid breakout of a near-term Cup and Handle pattern which can be argued is part of a larger Reverse Head and Shoulders which has been in the making since last September, one year ago.  Volume spiked to 5-times average as this moved back to 52-week highs, and suggests that further gains should occur between now and end of year.  Given that markets are entering a seasonally challenging time and PLAY became stretched on Friday's move, pullbacks would offer better risk/reward areas to buy, ideally from 59.50-61.50 in the weeks ahead.  However the pattern remains compelling and this high volume breakout should be watched for any signs of backing and filling which would create a very attractive time to add to longs.  

 

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Cigna (CI- $194.77)  CI's breakout above 191 should help the stock gain further ground in the weeks ahead with technical targets near $202 initially.  While the stock has gotten a bit extended given Thursday and Friday gains last week, CI managed to exceed the former area which had given way to breakdowns this past March, and the act of exceeding this area is considered to be quite important technically   Its base from early August proved to be a bullish symmetrical triangle pattern and now that this area has been exceeded, this should help to jump-start this stock which has managed to advance as part of the bullish Healthcare space which has outperformed all other sectors over the last three months.   This group remains attractive and this stock in particular looks like a good technical long for more gains in the days/weeks ahead. 

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Apple (AAPL-$223.84) Short-term Bearish for move down to 205-208  AAPL's trendline break into early September has not been fully recovered and the near-term technical pattern remains negative and can allow for further losses over the next two weeks before this stock reaches support.   Momentum remains elevated on weekly charts with RSI readings over 70, while daily MACD has turned negative as AAPL started to stall out over the last couple weeks.   The stock had gotten very overbought after more than a 35% rally just since late April a bit less than five months ago.  Additionally, from an Elliott perspective, the pullback into early September looked to resemble a perfect five wave decline, while its counter-trend bounce should be complete as of last Friday on the rebound.  Technically if this recent pullback is equal to the first one into early September, this would target $215 for a possible support low where this could stabilize.  However, more important technical targets lie down at $205 up to 208 which would make for an attractive area to buy dips.  Overall, given the start of a weakening in other names within this group, AAPL looks to be in need of consolidation before this can make further upside progress. While the stock remains quite compelling technically on an intermediate-term basis, this recent churning and minor technical weakness still looks to need additional downside before it's complete.  Bottom line, one should hold off on buying dips too aggressively until this can get down under $210.  
 

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Mallinckrodt PLC (MNK- $30.50)  Short-term bearish, with targets initially at $27.10which would represent an 11% decline from current levels.  The reason for the near-term concerns are three-fold.  First, prices have managed to undercut last week's lows which had been an initial area thought to represent stabilization.  The Demark TD Buy Setup thus failed to lead to any real rally and now a new count has begun with the pullback down under $31.   Second another Demark signal just appeared as a "sell" on weekly charts, shown as a TD Combo 13 countdown that was confirmed on last week's close.  Third, volume spiked on both last Tuesday and last Friday's declines while prices managed to close right at the lows of the week.   Overall, while some bullish intermediate-term reasons exist given some positive developments with long-term structure which began to improve this past June, the extent of the rise since that time has carried prices to levels that are too overbought in the near-term.  Pullbacks to intersect the uptrend from this past Spring would create a much better buy opportunity for this name, and near-term the technical damage looks likely to persist.  

Technology selloff has not yet led to XLI, XLF weakness

September 10, 2018

Contact: info@newtonadvisor.com

S&P 500 SPDR ETF Trust- SPY
283.59-284, 281.62, 280.16, 279, 278.19      Support
291.17-292, 292.40                                   Resistance

 

Summary:  Last week finally saw US stocks starting to weaken to join the deterioration being seen in the rest of the world, suggesting that the long-awaited September correction is starting to get underway.  However, certainly not a very powerful or convincing pullback by any means thus far.  After the last 4 of 5 days of decline, S&P had barely given back 1/3 of the prior rise.  Indices like the DJIA have held up admirably, with above-average strength in both Industrials and Financials.  And the Growth trade is still largely holding up vs value.   Yet the Technology sector specifically began to show some real selling last week, and Semiconductor stocks along with most of the "FANG" names and Hardware have weakened rather substantially in recent days.   Stocks like Facebook and Netflix have both rolled over, each being down over 17% from recent highs.   Yet some further pressure "should" start to take place in other sectors over the next 1-2 weeks, or else this pullback will prove very mild indeed.  The fact that Financials, Healthcare, and Industrials (Transports) have held up in the last few weeks has helped to cushion the market during this rotation out of Technology.   Of all the global Equity markets, Europe began to break down the most last week, violating recent monthly lows to close down at the lowest levels since March.    Additionally, the Dollar's recent bounce has continued to put pressure on Emerging markets.  While an oversold rally in this space looks near, it still appears to be 1-2 weeks away from where this could bottom out.  For now, it's right to stick with the defensive game plan, and buying into this market still appears premature. SPX, as shown below, sold off during much of last week and lies just above initial trendline support from late June.  However, bounces likely prove mild and a larger decline could be likely which takes S&P down to 2800-2807 into late September before a rally gets back underway.  For now, its not wrong to think this pullback in S&P should be buyable into end of month given a lack of weakness, and US remains one of the stronger, most attractive equity markets in the world.  Yet, at present, it's though to have a positive stance technically in US without having some short exposure elsewhere.  
 

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Overview:  Near-term equity trends remain bearish and early to buy for anything more than a 2-3 day rally.  Additional selling likely over the next 1-2 weeks before a low of any magnitude.  Look to still favor more underperformance out of Europe and Asia while the US Dollar rally could make commodities weak a bit longer along with Emerging markets and Materials stocks.  Transports, Financials and Industrials should begin to show evidence of peaking this week, and expect each of these groups to begin weakening to join some of the recent underperformance seen in Technology.   Staples have shown some recent strength, and this push into Defensive sectors should continue for the next couple weeks and on any evidence of Long-term yields weakening, would occur even faster into late September.  For now, yields have pushed up to near resistance in the 10-Year, and some backing off should be likely ahead of this month's Fed meeting.  Bottom line, it looks right to expect further equity weakness, but this might prove complete by the 9/26 FOMC meeting, and one should consider buying dips into this time.  

The following are important to note:
1) Financials, Industrials, Transportation have largely still held up, despite Technology weakness and is one of the key reasons why US equities have proven so resilient in the face of a larger global equity decline.
2) Technology's underperformance has NOT yet been sufficient to expect intermediate-term weakness, but it has knocked Tech out of 1st place in YTD standings, and its one-month performance heading into 9/10/18 has been negative
3) VIX managed to break the downtrend from early April, finishing at the highest levels since early July.  
4) DJIA has still not joined the SPX, nor NASDAQ at new highs
5) EEM, the ETF for Emerging markets, has signaled initial downside exhaustion on Daily charts while weekly is still a bit premature.  
6) Materials sector looks to be 1-2 weeks away from bottoming and should also bolster the case for an EM bounce
7) Growth still hasn't really broken down vs Value, and while most charts show this ratio to have slowed meaningfully, the uptrend remains very much intact. 
8) WTI Crude weakness was unexpected last week, and Counter-trend indicators on weekly charts suggest Crude's time will prove short-lived as markets get into late September.   

Bottom line, the move to the upper part of the trend channel seemed to be important this past week, causing a stallout and minor trend reversal.  Excessive bullish sentiment with overbought conditions, Demark exhaustion and bearish monthly seasonality were already important and negative.   The divergences have merely gotten bigger between US and rest of the world, while indices like DJIA still have not reached new all-time highs.  Technology seems to have taken the lead in turning down, but if other sectors join suit between now and the FOMC meeting, the selloff could start to accelerate during this seasonally bearish time.  Overall, one should own implied volatility, diversify, and hold off on buying dips too aggressively until this correction has played out completely.   

 



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

Short-term (3-5 days):  Bearish into 9/19-20, and potentially into 9/25-7-  Negative-  Look to sell rallies-  Break of 2860 should lead down to 2807.  Recent weakness has gotten near initial support, but bounces should prove sellable for a break under 2860 down to 2800-7 into 9/19-25 timezone before a reversal back higher occurs.   Risk/reward remains poor for new longs, and one should consider adopting a defensive tone and not buying into recent pullbacks too aggressively during the month of September.  

Intermediate-term (3-5 months)-  Bullish-  (No change) While there remain ample reasons for concerns in the short run, now that markets have nearly finished August with little to no evidence of any real downturn, the period between now and end of year will likely only suffer minor pullbacks between now and into early October before rallying into end of year, postponing the larger decline yet again.  Specifically, the fact that Advance/Decline for All-stocks pushed back to new all-time highs into early July is thought to be a bullish factor.   The fact that Small-cap and Mid-cap indices have rallied back to new highs is also thought to be constructive, as most bear markets start with a serious dropoff in Small and mid-cap performance.  Though some of that did indeed happen in July with the Russell2k, most intermediate-term chart patterns remain constructive.    Overall, the 2 month bias is more negative for a 3-5% drop.  However, on a 4-5 month timeframe, it's likely yet again that markets exhibit seasonal strength.  so given that markets have been able to absorb the relative underperformance in Tech lately with little to no damage, we'll need to see S&P drop under 2700 to have any real concern, and given the tariff taunts which have been ongoing, the sentiment is likely to reflect fear much faster these days than normally which bodes well for the bulls into year end.


10 Important charts to keep an eye on for this coming week
 

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DJIA- No real evidence of any damage- DJIA should be highlighted for the degree of its resiliency lately, as despite the NASDAQ and S&P having showed weakness in the last week, DJIA remains within striking distance of its highs.  Thus, something will have to change in this in the next couple weeks to make a stronger case for the bears, such as a break under 25500..  Lack thereof would cause a strong move back to new highs into October, putting the bull market back on track.  Technically, it's thought that a 400-500 point selloff is more likely than not between now and the FOMC, but it's a break of this trend from late June which would allow for more broad-based market weakness. 

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Europe far weaker than US at present, and breakdown looks serious-  Europe's STOXX50 index, meanwhile, looks far weaker than many US indices, and last week's break of June/July lows puts this at the lowest levels since March, and within a hair of hitting the lowest levels since early 2017.  Structurally it's possible to make the case for SX5E to pullback to 3100, or nearly 200 points from here without breaking intermediate-term trends, but this recent weakness needs to be highlighted as being a real negative structurally, which has just begun to get underway as of last week.   FEZ, and/or VGK are ETF's tracking Europe which might be considered as technical shorts to take advantage of this weakness, and should underperform in the month of September.  
 

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DJ Transportation Avg-  Consolidating near highs is more bullish than bearish-Similar to the DJIA, it's important to point out that the DJ Transportation Avg has also not really weakened in the last couple weeks, and remains within striking distance of all-time highs.  To have a bearish bent on US stocks, we'll need to see breaks below 11200 in the next 1-2 weeks.  Lack thereof into late September would argue for a much stronger trend that has further to go into mid-October before any peak.   Technically, it's still right to expect TRAN, along with DJIA to start to weaken by 9/13 at the latest to begin at least a 1-2 week correction, but increasingly this is being thought of as mild for the time being and could lead to additional intermediate-term strength.  

 

Materials looks close to trying to bottom out-  Following a sharp lift in the US Dollar from early March, the Materials sector turned down to break key support from late 2016 that had held as support for the last 18 months.  The chart above highlights the S&P 500 Materials sector vs the SPX, which allows one to see a relative picture of how Materials are performing.  Interestingly enough, the damage has been sufficient enough that relative charts are within 2-3 weeks of producing counter-trend signs of exhaustion that should allow a meaningful bounce back to occur into the month of October.   This bottoming out looks likely between next week and the end of September, and Materials should be scanned for evidence of stocks that could offer an attractive risk/reward to bounce in the weeks ahead.  Stocks like PPG, DWDP, ECL, look attractive to consider trying to buy into in small size here, and one would look to add on any weakness, with more stocks appearing on the hit list within the next 2-3 weeks.  


 

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XLP-  Consumer Staples -Near-term Bullish, while still intermediate-term Bearish-  Own/buy between now and end of September, looking to sell into strength.  Given the outperformance in Food, Beverage & Tobacco and Staples Retailing last week, the Consumer Staples turned higher to end the week at the highest level in the past few weeks.   Daily charts of XLP show a completed TD Buy Setup a Demark exhaustion sign that has allowed for a meaningful snapback.  While the intermediate-term prospects for this sector remain poor, the next 2-3 weeks should show some outperformance in Staples as the defensive trade starts to gain more traction.  Stocks like COST, CLX, HRL, SYY, K, CL, should be favored for relative and potentially absolute strength in the weeks to come.  

 

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Industrials still bullish, but evidence of time-based resistance hits this week, which could be important.   Industrials, along with financials, is yet another Bullish sector which has shown above-average signs of strength after the breakout of the downtrend from January back in late July.  While Technology turned down sharply late last week, we still haven't seen this weakness take hold in Industrials.  Demark wise, this coming week will have some importance, as XLI will show TD Sequential sell signals on Industrials while forming a completed TD Sell Setup, given 9 consecutive weekly closes above the close from four prior.   Overall, one should be on the lookout for signs of Industrials starting to stall and reverse this coming week, and the lack thereof would be a larger bullish argument for strength into October.   Downturns which break $76 would be a technical negative, allowing for weakness back down to near $74 into late September before stabilization and rebounds take place.   For now, it's just important to highlight the degree of strength in this group, and focus on Industrials as a key group to watch this week given the presence of counter-trend Signals which have been absent for the last seven months up until this coming week.   Stocks like TXT, LII, ENS, AMR, ROP, EMR, AWI, are to be favored within this group, while CMI, ITW, CX, SWK, MHK, OC, DE, SPR are laggards to avoid. 
 

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OIH vs Crude Oil-  Ongoing weakness in OIH has now reached Spring lows, while WTI has moved sideways in the last few months.   The chart above highlights the degree to which Energy has turned down since mid-May while WTI Crude began a neutral consolidation.  While the structure in Crude is arguably still constructive, Energy has been a very difficult sector to embrace, and OIH has fallen as of last week to the lowest levels since March.   While a counter-trend bounce looks near with OIH near Spring lows, the XOP and XLE are both better longs at this time, and OIH should be avoided until it can demonstrate much better signs of strength.   Stocks like HAL and SLB have been ongoing underperformers to avoid, while the E&P and Refiners have been much preferred for strength.  

 

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Growth vs Value-   IVW / IVE-   Still right to favor Growth, until trends are officially broken.  Growth has yet to truly rollover vs Value and the act of making it through September with no meaningful trend breaks bodes well for further strength into October.   While ratio charts of the S&P Growth ETF vs S&P Value ETF (IVW to IVE) have dipped slightly in the last week, ratio charts are still trending up strongly from this past April, and still very little degree of any real weakness.    While this stalling out very well could lead to weakness, it's tough to call for this to happen in absence of any trend breaks.  At present, it still looks like the Growth trade is on, and value is to be avoided.
 

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Developed vs Emerging-  Developed still leading the charge, but nearing key levels in both price and time which might cause a reversal.   Demark signals have consistently shown the turning points in Developed vs Emerging markets over the last two years, and yet again markets seem to be nearing an inflection point, which should lead to Emerging markets to start to bounce  which could be in place over the next couple weeks, allowing for a large snapback in EM at a time when most have been slowly but surely starting to give up on this trade.  Demark counter-trend TD Sequential and TD Combo buy signals were present back in March when Developed markets turned higher vs Emerging for the first time since early 2017.  This coincided with the upswing in the US Dollar, which has persisted in recent months with little to no real evidence of any deterioration.  Now this ratio chart is approaching 2016 highs, and is within 1-2 weeks of producing a counter-trend TD Sequential 13 countdown Sell, which should stop prices just as this ratio chart is nearing prior highs.  Bottom line, while no signal can be acted on until the reversal begins, one should give Emerging markets a close look at the end of September, as the currency and Equity weakness very well could bounce in the months of October into November.  

 

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WYNN Resorts - The Casino stocks continue to be very hard hit, and this area offers opportunities for shorting stocks as the seasonally bearish month of September enters its second week.  Stocks like Las Vegas Sands (LVS) were hard hit in recent weeks, yet the other Casino stocks like WYNN, MGM, CZR have also been weakening substantially, with many of these undercutting the intermediate-term trend from early 2016.   Bottom line, for those in search of attractive risk/reward shorts among the Consumer Discretionary space, the Casino area is one to pay special attention, as many of these stocks remain quite weak and are showing no real signs of stabilizing.   WYNN, in particular is bearish, and likely to drop down to $115 in the weeks ahead.   

5 of the most important charts to watch for September

September 3, 2018

Contact: info@newtonadvisor.com

S&P 500 SPDR ETF Trust- SPY
283.59-284, 281.62, 280.16, 279, 278.19      Support
291.17-292, 292.40                                   Resistance

 

Summary:  No change :Technically it's likely that the next 1-2 weeks brings about a short-term peak that causes a 4-5% correction in stocks for the month of September.  While intermediate-term trends are very much intact for the US, and the Advance/Decline is at new highs along with many other indices, the divergences have grown striking, which as explained below, is occurring on multiple fronts and is not just about US vs overseas performance.   Furthermore, Interest rates on the long end have been quite low, representing not just ample global liquidity but also perhaps a concern about economic growth in the years to come.  However, the resilience of stocks during time of very negative news flow is something to cheer, not fret about, and the US continues to be the "best house in a bad neighborhood" with regards to global stock market performance for 2018.    While technical factors could coincide with weakness next month (which many will blame on Tariffs and political drama), it's likely that stock market corrections overall prove to be minimal in scope for now.   Betting on anything more given resilient uptrends in place coupled with mass uncertainty is almost always ill-timed and requires sufficient proof.   Below we highlight the SPX having pushed yet again back to new all-time highs by a thin margin, but yet likely will face resistance here and not get to 3000 right away.  Bottom line: Pullbacks down to 2750 should come before 3000, and while not intending to voice "doom and gloom" or ignore the records being set by US indices, it's right to have a sober, honest perspective about both the positive and negatives to try to sort things out.  
 

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Overview:  It's difficult to present something fresh and original on the heels of last week's comments, which are still very much relevant and have real importance for the month of September.   While corrections have not played out yet in US markets, they certainly have globally, and this weakness has real significance to the duration and longevity of how long our own rally can continue uninterrupted.   While a couple of the negatives have dissipated, others have grown more pronounced which we'll discuss below.  Bottom line, this is a month to pay attention, and no time for complacency as the threat of increasing tariffs, geopolitical threats and political drama, all which have grown more intense in the last two weeks.  Initially, it's right to delve into some of the new developments that have occurred over the last five days.

1) S&P Futures joined SPX cash index back at new all-time high territory, above late January highs before stalling at channel resistance

2) NASDAQ Composite and NDX both accelerated last week after exceeding their own "Ascending Triangle" patterns, and are both now at the top of the channel from late January

3) DJIA lagged on the week, and remains under January highs, having NOT confirmed the move in many of the other indices

4) Europe dropped over 1% last week as per EuroSTOXX 50 and remains a huge underperformer to the US, as does Asia

5) US Dollar index bottomed after hitting support and looks to bounce in the days/weeks ahead

6) Emerging markets look to have taken a leg down after their initial bounce, and many of the currencies were even more hard hit than the equities:  Turkish Lira down over 10%, Russian Ruble and also S. African Rand to name a few.  This looks to continue near-term

7) Long-term Treasury yields backed down and are in striking distance of breaking the entire consolidation since January (which if violated, would be a Head and Shoulders pattern, sending yields down to near 2.60%

8) Despite the push higher last week, most of this was Technology and Discretionary focused, with Healthcare also making nearly a 1% gain.  But important sectors like Financials and Industrials were barely positive, just eking out  +0.30-0.50% gains

9) The Defensive trade seems to be waning, not gaining speed, and this has reversed in the last couple weeks, with Utilities, Staples and Telecom all losing ground last week

10) NYSE New 52-week highs have been dropping again, which is a concern as stocks are moving higher.  This finished at 85 New highs last week, down from 140 back on 8/21 and well off the 178 level seen in mid-June.

11) US indices are now officially overbought on daily charts, while on intra-day we've seen strongly overbought levels on 60, 120, 240 min charts before the minor pullback late week.

12) Demark indicators have now completed TD Sequential and TD Combo patterns on NASDAQ, while S&P, IWM, MID, SML, DJIA show TD Sequential, but combo not yet in place and would take another couple days

13) Last, but not least,   Healthcare broke out to new all-time high territory last week, and we've seen a notable uptick in relative performance from this group, making this one to favor among the "risk-on" sectors. 

Now let's list the Concerns we highlighted last week, with an "INCREASED" or "DECREASED" right next to this in bold, highlighting the degree that this problem as gotten worse, or dissipated a bit.  

1) The divergence with US stocks and the rest of the world has grown to be the largest we've seen in years.    (INCREASED)
2) Technology has begun to slow noticeably in the last month, along with Financials, which combined represent more than 40% of the SPX.  Both have underperformed on a one-month basis. ( DECREASED-  Arguable about Financials, but Tech has definitely bounced
3) The VIX has begun to diverge positively with prices, holding up over 10% above where it was in early August. (INCREASED)
4) The divergence of DJIA to hit new highs like the DJ Transports has, and also S&P Futures and NASDAQ 100 are not yet at new high territory is something to watch. ( DJIA still diverging- NASDAQ and S&P FUTURES AT NEW HIGHS)
5) Negative momentum divergence on daily charts of DJIA, SPX and NASDAQ-  Prices have moved to new highs, but momentum has not and actually lower. (DECREASED)
6) The Defensive trade remains in place despite underperformance last week.  Utilities have performed better than Financials, or Industrials this year and have performed better than Technology in the rolling 30 days.  (DECREASED
7) Breadth has improved in a mild fashion since mid-August, yet McClellan's Summation index , the smoothed version of Advance/Decline, still shows this year's peak occurring in June  (SAME)
8) Seasonality in markets for mid-term election years historically shows both August and September to be sub-par  (SAME- Concern for September has increased given that August was positive
9) Sentiment indicators like Investors Intelligence have widened out to a Bull/Bear spread of nearly +40 in the last week, (August 22) with Bulls at 57.7% and Bears at 18.3%, the highest Spread since January.  (INCREASED) 
10) Only 103 stocks in the NYSE were at new 52-week highs, way down from 176 in mid-June and well below the 340 level seen in January of this year  (This ISSUE has gotten worse-  so Increase in problem, new highs are lower
11)  Last, but not least, Demark's TD Sequential and TD Combo indicators are now flashing exhaustion signals on daily charts for the SPX, DJIA, NASDAQ, IWM, MID and will show more signals if the market is able to rally into Wednesday of this week.  The VIX is also showing downside exhaustion at the same time as market indices are showing upside.  (INCREASED)  

Bottom line, the improvement out of Tech has been impressive, but yet now NASDAQ and NDX are at the top of their respective trend channels and we're seeing Demark counter-trend exhaustion on these to match what's been seen on many other indices.  Combining excessive bullish sentiment with overbought conditions, Demark exhaustion and bearish monthly seasonality while US shows huge divergences to Global equities makes for a poor risk/reward in the weeks ahead.  While this uptrend is still intact for SPX, NASDAQ, DJIA  (and yes the trend is the MOST important factor) I'll go out on a limb and say that this should turn down sometime this week, with Monday/Tuesday important as well as Fridayfor a change of trend cyclically.    

LONG/SHORT TECHNICAL STOCK IDEAS-   5 TOP LONGS, 5 TOP SHORTS


LONGS:   TLT, NEP, EXC, NRG, MPC
SHORTS:  TUR, LVS, WHR, BWA, MHK




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

Short-term (3-5 days):  Peak expected by Friday of this week- Trend bullish from Aug 15, but some signs of staling and a downturn looks near given the dropoff in New highs while Financials and industrials have waned a bit in the last week.    As was stated just above, combining excessive bullish sentiment with overbought conditions, Demark exhaustion and bearish monthly seasonality while US shows huge divergences to Global equities makes for a poor risk/reward in the weeks ahead.   Treasury yields have threatened to break key 2.80% which looks like a Giant Head and Shoulders pattern.  However, as always,  it's proper to actually await this break before calling it as such.   Overall, it's right to stick with a defensive tone for September.  Selectivity is key, and one should consider owning implied volatility for either hedging, or speculation purposes.

Intermediate-term (3-5 months)-  Bullish-  (No change) While there remain ample reasons for concerns in the short run, now that markets have nearly finished August with little to no evidence of any real downturn, the period between now and end of year will likely only suffer minor pullbacks between now and into early October before rallying into end of year, postponing the larger decline yet again.  Specifically, the fact that Advance/Decline for All-stocks pushed back to new all-time highs into early July is thought to be a bullish factor.   The fact that Small-cap and Mid-cap indices have rallied back to new highs is also thought to be constructive, as most bear markets start with a serious dropoff in Small and mid-cap performance.  Though some of that did indeed happen in July with the Russell2k, most intermediate-term chart patterns remain constructive.    Overall, the 2 month bias is more negative for a 3-5% drop.  However, on a 4-5 month timeframe, it's likely yet again that markets exhibit seasonal strength.  so given that markets have been able to absorb the relative underperformance in Tech lately with little to no damage, we'll need to see S&P drop under 2700 to have any real concern, and given the tariff taunts which have been ongoing, the sentiment is likely to reflect fear much faster these days than normally which bodes well for the bulls into year end.

Overview:  It's difficult to present something fresh and original on the heels of last week's comments, which are still very much relevant and have real importance for the month of September.   While corrections have not played out yet in US markets, they certainly have globally, and this weakness has real significance to the duration and longevity of how long our own rally can continue uninterrupted.   While a couple of the negatives have dissipated, others have grown more pronounced which we'll discuss below.  Bottom line, this is a month to pay attention, and no time for complacency as the threat of increasing tariffs, geopolitical threats and political drama, all which have grown more intense in the last two weeks.  Initially, it's right to delve into some of the new developments that have occurred over the last five days.

1) S&P Futures joined SPX cash index back at new all-time high territory, above late January highs before stalling at channel resistance
2) NASDAQ Composite and NDX both accelerated last week after exceeding their own "Ascending Triangle" patterns, and are both now at the top of the channel from late January
3) DJIA lagged on the week, and remains under January highs, having NOT confirmed the move in many of the other indices
4) Europe dropped over 1% last week as per EuroSTOXX 50 and remains a huge underperformer to the US, as does Asia
5) US Dollar index bottomed after hitting support and looks to bounce in the days/weeks ahead
6) Emerging markets look to have taken a leg down after their initial bounce, and many of the currencies were even more hard hit than the equities:  Turkish Lira down over 10%, Russian Ruble and also S. African Rand to name a few.  This looks to continue near-term
7) Long-term Treasury yields backed down and are in striking distance of breaking the entire consolidation since January (which if violated, would be a Head and Shoulders pattern, sending yields down to near 2.60%
8) Despite the push higher last week, most of this was Technology and Discretionary focused, with Healthcare also making nearly a 1% gain.  But important sectors like Financials and Industrials were barely positive, just eking out  +0.30-0.50% gains
9) The Defensive trade seems to be waning, not gaining speed, and this has reversed in the last couple weeks, with Utilities, Staples and Telecom all losing ground last week
10) NYSE New 52-week highs have been dropping again, which is a concern as stocks are moving higher.  This finished at 85 New highs last week, down from 140 back on 8/21 and well off the 178 level seen in mid-June.
11) US indices are now officially overbought on daily charts, while on intra-day we've seen strongly overbought levels on 60, 120, 240 min charts before the minor pullback late week.
12) Demark indicators have now completed TD Sequential and TD Combo patterns on NASDAQ, while S&P, IWM, MID, SML, DJIA show TD Sequential, but combo not yet in place and would take another couple days
13) Last, but not least,   Healthcare broke out to new all-time high territory last week, and we've seen a notable uptick in relative performance from this group, making this one to favor among the "risk-on" sectors. 

Now let's list the Concerns we highlighted last week, with an "INCREASED" or "DECREASED" right next to this in bold, highlighting the degree that this problem as gotten worse, or dissipated a bit.  

1) The divergence with US stocks and the rest of the world has grown to be the largest we've seen in years.    INCREASED
2) Technology has begun to slow noticeably in the last month, along with Financials, which combined represent more than 40% of the SPX.  Both have underperformed on a one-month basis. ( DECREASED-  Arguable about Financials, but Tech has definitely bounced
3) The VIX has begun to diverge positively with prices, holding up over 10% above where it was in early August. (INCREASED)
4) The divergence of DJIA to hit new highs like the DJ Transports has, and also S&P Futures and NASDAQ 100 are not yet at new high territory is something to watch. ( DJIA still diverging- NASDAQ and S&P FUTURES AT NEW HIGHS)
5) Negative momentum divergence on daily charts of DJIA, SPX and NASDAQ-  Prices have moved to new highs, but momentum has not and actually lower. (DECREASED)
6) The Defensive trade remains in place despite underperformance last week.  Utilities have performed better than Financials, or Industrials this year and have performed better than Technology in the rolling 30 days.  (DECREASED
7) Breadth has improved in a mild fashion since mid-August, yet McClellan's Summation index , the smoothed version of Advance/Decline, still shows this year's peak occurring in June  (SAME)
8) Seasonality in markets for mid-term election years historically shows both August and September to be sub-par  (SAME- Concern for September has increased given that August was positive
9) Sentiment indicators like Investors Intelligence have widened out to a Bull/Bear spread of nearly +40 in the last week, (August 22) with Bulls at 57.7% and Bears at 18.3%, the highest Spread since January.  (INCREASED) 
10) Only 103 stocks in the NYSE were at new 52-week highs, way down from 176 in mid-June and well below the 340 level seen in January of this year  (This ISSUE has gotten worse-  so Increase in problem, new highs are lower
11)  Last, but not least, Demark's TD Sequential and TD Combo indicators are now flashing exhaustion signals on daily charts for the SPX, DJIA, NASDAQ, IWM, MID and will show more signals if the market is able to rally into Wednesday of this week.  The VIX is also showing downside exhaustion at the same time as market indices are showing upside.  (INCREASED)  

Bottom line, the improvement out of Tech has been impressive, but yet now NASDAQ and NDX are at the top of their respective trend channels and we're seeing Demark counter-trend exhaustion on these to match what's been seen on many other indices.  Combining excessive bullish sentiment with overbought conditions, Demark exhaustion and bearish monthly seasonality while US shows huge divergences to Global equities makes for a poor risk/reward in the weeks ahead.  While this uptrend is still intact for SPX, NASDAQ, DJIA  (and yes the trend is the MOST important factor) I'll go out on a limb and say that this should turn down sometime this week, with Monday/Tuesday important as well as Fridayfor a change of trend cyclically.    

LONG/SHORT TECHNICAL STOCK IDEAS-   5 TOP LONGS, 5 TOP SHORTS


LONGS:   TLT, NEP, EXC, NRG, MPC
SHORTS:  TUR, LVS, WHR, BWA, MHK




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

Short-term (3-5 days):  Peak expected by Friday of this week- Trend bullish from Aug 15, but some signs of staling and a downturn looks near given the dropoff in New highs while Financials and industrials have waned a bit in the last week.    As was stated just above, combining excessive bullish sentiment with overbought conditions, Demark exhaustion and bearish monthly seasonality while US shows huge divergences to Global equities makes for a poor risk/reward in the weeks ahead.   Treasury yields have threatened to break key 2.80% which looks like a Giant Head and Shoulders pattern.  However, as always,  it's proper to actually await this break before calling it as such.   Overall, it's right to stick with a defensive tone for September.  Selectivity is key, and one should consider owning implied volatility for either hedging, or speculation purposes.

Intermediate-term (3-5 months)-  Bullish-  (No change) While there remain ample reasons for concerns in the short run, now that markets have nearly finished August with little to no evidence of any real downturn, the period between now and end of year will likely only suffer minor pullbacks between now and into early October before rallying into end of year, postponing the larger decline yet again.  Specifically, the fact that Advance/Decline for All-stocks pushed back to new all-time highs into early July is thought to be a bullish factor.   The fact that Small-cap and Mid-cap indices have rallied back to new highs is also thought to be constructive, as most bear markets start with a serious dropoff in Small and mid-cap performance.  Though some of that did indeed happen in July with the Russell2k, most intermediate-term chart patterns remain constructive.    Overall, the 2 month bias is more negative for a 3-5% drop.  However, on a 4-5 month timeframe, it's likely yet again that markets exhibit seasonal strength.  so given that markets have been able to absorb the relative underperformance in Tech lately with little to no damage, we'll need to see S&P drop under 2700 to have any real concern, and given the tariff taunts which have been ongoing, the sentiment is likely to reflect fear much faster these days than normally which bodes well for the bulls into year end.


5 of the most Important charts to watch for September, and ETF's to buy to play the move
 

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Technology waning would be a big deal to stocks-  Short XLK this week, and consider shorting SMH for Short Semi exposure given lackluster charts and performance out of MU, AVGO and others.  In the last week we've seen XLK stage a decent comeback, and move right to the higher end of its trend channel.  Now momentum is overbought, while counter-trend exhaustion is present for the first time since early this year.  If XLK turns down to break $72.15, this would be a big deal for the broader market, given Tech's weight in SPX.  For now, the sector rotation seems to have shown a move back into Tech, but i'm skeptical this can continue given where Tech is trading now.  Technology appears like a poor risk/reward for September, and it's right to take down exposure technically and wait for corrections before buying back.

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Treasury yield breakdown seems near-  Buy TLT, or 10-year US Treasuries, sell TBT-  US 10-Year Treasuries breaking 2.80% in yield terms would also likely be troublesome for stocks.   Yields seem to have continued their recent drop, despite markets having priced in over 90% Hike chances for September (which seems like a forgone conclusion)  Meanwhile the odds for December are still over 60% while yields have not quite signaled the same comfort zone with the FOMC's plans.  Sentiment seems unanimously convinced that rates are moving higher as per the CFTC data, which still shows -530k short Futures by Non-Commercial "Specs" nearly the highest on record.  Yet the technical pattern in TNX argues that yields very well could continue lower in the weeks/months ahead.  The giant consolidation seen since early this year appears like a Head and Shoulders pattern, which would be confirmed on a break of 2.80%.   This is thought to be problematic for two key reasons.  First, Financials would likely underperform in this environment.  Second, yields dropping sharply might cause the Fed to Second guess their pace of rate hikes, as the yield curve would invert much more quickly.. Yields have also tended to lead equities over the last couple years, and while this has diverged somewhat lately, it's still important if yields make a big breakdown.   Overall, this chart is very important to keep an eye on in the weeks ahead. 

 

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McClellan's Summation Index-  Watch for when this turns down- Now seemingly at resistance- This smoothed version of Advanced/Decline often gives a solid warning as to when stocks start to weaken, as a serious deterioration in breadth typically happens before stocks turn down , and vice versa.  Lately, we saw the Summation index peak out in June and also in late January, while recently having staged a bounce to levels just below July highs.   Momentum indicators on the Summation index itself have gotten overbought, while Demark indicators are now flashing TD Sell setups with a possible TD Combo 13 Countdown sell this week, similar to what happened at the highs in January and also buys right at the lows in February.  Overall, it's important to watch for when this starts to weaken, and this now has risen to levels which should mark technical resistance where this kind of thing could happen.  Bottom line, any staling in breadth or weakening in the next few days would see this turn down, likely coinciding with a broader market correction over the next few weeks. 

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VIX breakout seems imminent- Buy Implied volatility and/or consider ETF's which allow one to profit as the VIX goes higher for the next 3-5 weeks.   Watch implied volatility carefully as a warning for when stocks might rollover. The CBOE Volatlity index, or VIX,  has had a compelling record lately as a warning sign for market weakness when it begins to exhibit positive correlation with the SPX.  Just in the last year, when we've seen a 10-day correlation top 0, from negative territory, turning positive, this has happened prior to at least minor setbacks in stocks.  Yet again, we've seen the VIX start to turn higher in recent weeks, and at current levels is nearly 12% greater than where this bottomed in early August.  Technically the fact that its managed to make higher lows into August and then turn higher late last week makes this very constructive looking technically, and has gotten stronger, despite not yet having broken out.   One should be on the Lookout for when its current intermediate-term downtrend is violated, as this would coincide with a probable rapid escalation in implied volatility for the month of September.  

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JP Morgan Emerging Market Currency index-  Buy USDRUB, USDTRY, USDZAR for next 3-5 weeks, or sell EEM, and hold off on buying until late September/early October.  The downturn to new lows in Emerging market currencies very well might coincide with Equity weakness in the weeks ahead, as the US Dollar stabilization and Tariff/trade stress might put further pressure on Emerging market currencies. Last week brought about a 12% decline in the Turkish Lira, and signs of both Ruble and Rand weakness and this follows a very rapid depreciation in the Argentinian Peso and ongoing carnage in Venezuelan Bolivar.  Emerging markets seem to have turned down again, for what could be a 3-5 week pullback throughout September, and the EEM along with this index, the FXJPEMCI index in Bloomberg, should be eyed carefully for signs of downward acceleration, or in any attempts at stabilizing.  Evidence of some positive divergence is now present in this index, while Elliott structure shows this to be likely the final pullback of this current 10-year decline.  However, given the recent breakdown, this has begun to pick up speed, and the skittishness in Emerging markets seems important to highlight as a negative factor for stocks.  

Top Energy stocks to consider, Technically

August 27, 2018

Contact: info@newtonadvisor.com

S&P 500 SPDR ETF Trust- SPY
283.59, 281.62, 280.16, 279, 278.19, 2760276.50      Support
286.01, 286.62, 287.01, 287.50                                   Resistance

 

Summary:  Technically it's likely that the next 1-2 weeks brings about a short-term peak that causes a 4-5% correction in stocks for the month of September.  While intermediate-term trends are very much intact for the US, and the Advance/Decline is at new highs along with many other indices, the divergences have grown striking, which as explained below, is occurring on multiple fronts and is not just about US vs overseas performance.   Furthermore, Interest rates on the long end have been quite low, representing not just ample global liquidity but also perhaps a concern about economic growth in the years to come.  However, the resilience of stocks during time of very negative news flow is something to cheer, not fret about, and the US continues to be the "best house in a bad neighborhood" with regards to global stock market performance for 2018.    While technical factors could coincide with weakness next month (which many will blame on Tariffs and political drama), it's likely that stock market corrections overall prove to be minimal in scope for now.   Betting on anything more given resilient uptrends in place coupled with mass uncertainty is almost always ill-timed and requires sufficient proof.   Below we highlight the SPX having pushed yet again back to new all-time highs by a thin margin, but yet likely will face resistance here and not get to 3000 right away.  Bottom line: Pullbacks down to 2750 should come before 3000, and while not intending to voice "doom and gloom" or ignore the records being set by US indices, it's right to have a sober, honest perspective about both the positive and negatives to try to sort things out.  
 

Overview:  Yet again, US equity markets continue to defy gravity, churning higher to set new records for the longest bull market of all time with little to no regard to much of what's going on in the rest of the world.  (Whether the May-October 2011 decline causes this bull market record to be relabeled is a topic for a different discussion)  While news of political convictions, guilty pleas and/or grants of immunity have failed to take markets lower, neither have the ongoing tariffs which many believed would be problematic.  News of course is a funny thing.  It's often what serves as the narrative to explain both good and bad times in markets, yet often is conveniently ignored when it doesn't work.   Given political drama ramping up again, it's insightful to take note of what Barron's (Aug.27, 2018) notes about impeachment and market activity.   They reference the Watergate period coinciding with one of the steepest declines in Equities on record during 1974, yet Nixon resigned before facing impeachment.  The Clinton era in the late 90s however saw stocks rally 25% in 1998 leading up to Bill Clinton's impeachment which obviously wasn't a time to avoid Equities and seek safe havens.  Now the US faces a similar period of uncertainty with regards to how recent developments will play out this year and heading into the mid-term elections.  The bottom line of course, if history is any guide, these prior times in history only serve to reinforce the importance of paying attention to markets, while avoiding the news.

Of course, technically speaking, we're always taught to ignore news, as it rarely matters anyway as to being the actual "cause" of price action.   Only in retrospect do most of us look back and select various news stories to back up why we believed prices moved the way they did.   Yet, price action is largely based on sentiment and cycles and often has no bearing on where prices should go, as markets always tend to discount events and its widely known that noone truly knows the value of any one piece of information, and what's "in" the market already, and what's "not"  So trusting the trends  provides all of us with a non-emotional, mechanical way of being able to trade with the trend regardless of good, or bad news.  

Getting back to markets, there have been ample reasons to be skeptical of the longevity of this move, despite the lack of trend damage, which have nothing to do with News.  Let's list out the concerns, and also the positive factors.
1) The divergence with US stocks and the rest of the world has grown to be the largest we've seen in years.  
2) Technology has begun to slow noticeably in the last month, along with Financials, which combined represent more than 40% of the SPX.  Both have underperformed on a one-month basis.
3) The VIX has begun to diverge positively with prices, holding up over 10% above where it was in early August.
4) The divergence of DJIA to hit new highs like the DJ Transports has, and also S&P Futures and NASDAQ 100 are not yet at new high territory is something to watch.
5) Negative momentum divergence on daily charts of DJIA, SPX and NASDAQ-  Prices have moved to new highs, but momentum has not and actually lower.
6) The Defensive trade remains in place despite underperformance last week.  Utilities have performed better than Financials, or Industrials this year and have performed better than Technology in the rolling 30 days.
7) Breadth has improved in a mild fashion since mid-August, yet McClellan's Summation index , the smoothed version of Advance/Decline, still shows this year's peak occurring in June
8) Seasonality in markets for mid-term election years historically shows both August and September to be sub-par
9) Sentiment indicators like Investors Intelligence have widened out to a Bull/Bear spread of nearly +40 in the last week, (August 22) with Bulls at 57.7% and Bears at 18.3%, the highest Spread since January.  
10) Only 103 stocks in the NYSE were at new 52-week highs, way down from 176 in mid-June and well below the 340 level seen in January of this year
11)  Last, but not least, Demark's TD Sequential and TD Combo indicators are now flashing exhaustion signals on daily charts for the SPX, DJIA, NASDAQ, IWM, MID and will show more signals if the market is able to rally into Wednesday of this week.  The VIX is also showing downside exhaustion at the same time as market indices are showing upside.

Yet of course, there's been a lot of positive developments also that need to be considered. 
1) First and foremost, long-term uptrends remain intact as well as uptrends from 2016 winter lows and uptrends from April of this year.  A move down under 2750 would be needed to show even minor short-term trend damage
2) The Russell 2000, the S&P Small Cap 600 index, S&P Mid-cap 400 index along with the DJ Transportation Average and SPX, and NASDAQ Composite have all moved back to new high territory. 
3) Credit has been in very good shape, and no evidence of spread widening.  The High Yield OAS index is at just 3.36%, or 336 bps over the 5-year Treasury, or a tad tighter than where 2018 started.
4) Advance/decline line is at new highs, & historically pulls back sharply to diverge ahead of bear markets.  This has only peaked along with stocks twice in the last 100 years:  1946 and 1976.. Mostly this gives an excellent warning.
5) Technology, the main driver of this rally in the last 12 months, remains trending higher vs SPX in ratio form.  Despite the underperformance lately, tech has not broken its relative uptrend
6) Growth has made just a near-term peak vs Value, but overall still trending higher on intermediate-term basis given the uptrend from November 2016 when this bottomed and rose sharply following the US Election


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

Short-term (3-5 days):  Trend bullish and 2890-5 cannot be ruled out, but SPX likely to peak sometime in the next 2 weeks with Demark indicators being complete by Wednesdayon a plethora of assets.  The reversal down under 2846 should be respected, and likely leads down to test and break 2800.  Ideally this would take the form of an early week rally but which peaks out Tuesday or Wednesday and turns lower to end the week down.  However, until then, as has proven to be the case over the last week, owning implied volatility could prove to be a more attractive trade than trying to short Futures before prices show evidence of breaking trends.    Defensive tone recommended and selectivity is key as markets enter the seasonally bearish month of September


Intermediate-term (3-5 months)-  Bullish-  (No change) While there remain ample reasons for concerns in the short run, now that markets have nearly finished August with little to no evidence of any real downturn, the period between now and end of year will likely only suffer minor pullbacks between now and into early October before rallying into end of year, postponing the larger decline yet again.  Specifically, the fact that Advance/Decline for All-stocks pushed back to new all-time highs into early July is thought to be a bullish factor.   The fact that Small-cap and Mid-cap indices have rallied back to new highs is also thought to be constructive, as most bear markets start with a serious dropoff in Small and mid-cap performance.  Though some of that did indeed happen in July with the Russell2k, most intermediate-term chart patterns remain constructive.    Overall, the 2 month bias is more negative for a 3-5% drop.  However, on a 4-5 month timeframe, it's likely yet again that markets exhibit seasonal strength.  so given that markets have been able to absorb the relative underperformance in Tech lately with little to no damage, we'll need to see S&P drop under 2700 to have any real concern, and given the tariff taunts which have been ongoing, the sentiment is likely to reflect fear much faster these days than normally which bodes well for the bulls into year end.


This week we'll take the time to dissect the Energy sector, as the recent breakout in Crude oil has resulted in this sector outperforming every other sector this past week.  While Energy is the worst performing sector on a 1 and 3 month basis, it's the best in the past week and third best in the past six months, so a very interesting roller coaster ride indeed.  Bottom line, Refiners along with the broader Exploration and Production stocks remain the most attractive part of this group.  While the Oil service names have rallied, they have not yet done so in a manner that suggests a large Energy boom awaits.   Overall, selectivity is important for Energy as with most sectors in the market at this moment.  We'll cover technicals of some of the sector indices, relative charts and then cover 5 attractive stocks to consider for long trades.


ENERGY-  Crude, XLE/SPX, Sector charts, and 5 Technically Attractive Energy to consider
 

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WTI Crude oil  (October '18 contract)    Crude's breakout last week was constructive in thinking prices likely can rise back to challenge July highs.  However, after 6 of the last 7 "Up" days, it's likely that prices might require some minor consolidation in the near future before an immediate retest occurs.  Daily charts show prices having broken the minor downtrend from early July which is a technical positive.  However, Bollinger Bands (shown in Yellow) which give 2% standard deviation price range, show prices now nearing the upper end of this band, making a move right away above $71 probably unlikely.   Seasonality tends to favor the period from February-May rather than October-February for Crude and the last 10 years have shown mixed results into year-end.  Despite the last two positive years for September/October period, the five years preceding were largely negative, seasonally speaking.   Overall, the near-term trend is more bullish than bearish, and does support the notion that an eventual retest should occur rather than a move back down to test the lows.    Crude longs are favored for a move to 71, while only a violation of $64 would postpone this rally, changing the thesis to more negative.  

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XLE vs SPX-  Short-term Positive, but challenges await-   Relatively speaking, it's still a bit early to think that Energy has turned the corner-  As was mentioned earlier, Energy has been the best performing sector in the last week, but the worst performing over the last one and three-month period.   Last week's outperformance helped the relative strength in Energy to improve slightly and this ratio chart managed to exceed a minor one-month downtrend.   Overall, this is constructive.   However, the pattern from May remains downward sloping and has not been exceeded.   This is the critical next step for Energy as a sector to start to demonstrate real strength and more signs of trending behavior.  At present, short-term strength is likely only and difficult to make the larger call without more evidence.  

 

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Exploration & Production ETF (XOP- $42.05)  Bullish for further bounce after last week's reversal near important trendline support.   The weekly XOP chart shows prices having pushed up into key resistance near $45 before reversing back lower into early August and hitting trendline support.  This looks to have successfully held given last week's push to new weekly highs, having held where it needed to.  Thus, a push back up to $45 looks likely, and any ability to get back over at this point given the consolidation near the former highs would be quite bullish for this group to start a larger rally.   For now, it remains right to be selective, as certain stocks like APA, XEC, NFX, EOG just aren't all that attractive yet technically and patience is required.   XOP does still look better than either OIH, or XLE, so this sector should still be favored for outperformance and bulls are right to consider XOP within Energy given the structure and recent relative strength.  
 

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XOP/OIH  Relative chart-   Big outperformance since this spring in XOP after Breakout-  One of the bigger mysteries to many this year concerns the degree to which XOP has powered higher, while most of OIH has been under pressure and/or has not participated.  This can be clearly seen in this ratio chart, which technically broke out earlier this year and has shown steady outperformance in recent months.  This has made XOP the way to play Energy, as opposed to owning OIH and expecting any meaningful strength.     Indeed, many stocks within OIH like HAL, WFT, RDC, DO, NBR, have had rough years, despite Crude being higher.  Halliburton is down over 10% for the year, and stocks like Weatherford are lower by over 30%.  While this ratio of XOP to OIH looks stretched, we'll need to see more evidence of this peaking out before thinking that this relative ratio is reversing.  Counter-trend signs of exhaustion look to be close, but given the uptrend and ongoing resilience, XOP still looks like the place to be.  

Exploration and Production ETF, Relative to Drillers  As this relative chart shows, the E&Ps have actually been lagging in the last month vs Drillers, most of which have bounced hard while the E&P names have underperformed.  However, this relative chart looks close to turning back higher, and as such the Exploration and Production stocks should be counted on to start to move higher in the weeks ahead relative to the Drillers.  Most of this thinking is based on a combination of near-term oversold conditions for this ratio along with counter-trend signs of exhaustion that were present at both former bottoms in the Spring and also in early 2017 the last time this bottomed and turned higher.  



Top Technical Long Ideas among Energy-   SM, VLO, PVAC, DNR, and ANDV
 

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SM Energy (SM- $30.39) Bullish Trendline breakout- SM should be favored for further gains in the weeks ahead.   The stock has just managed to exceed the two prior highs from earlier in the year.  As this weekly chart shows, the stock has broken out of the three-year downtrend and now just beginning to extend after a lengthy period of base-building.  Near-term technical targets for SM lie near $31.40, then $35, with movement over that allowing for a push up to near late 2016 highs.  $40 would represent a 38.2% Fibonacci retracement of the entire pullback from 2014.  On the downside, $26 represents the key area of risk for SM, and it can't afford to get back under that level without changing its pattern.  

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Valero Energy Corp.  (VLO- $120.55) Most Refiners still quite positive- Move to challenge/exceed all-time highs likely  VLO has shown some stellar performance in recent months.  The stock has doubled from levels seen at this time last Summer, and after just a minor consolidation since early June, last week's push to new weekly highs should represent the start to a push higher to challenge and exceed the highs made in early June near $127.  Initial resistance is at $122.60 and only on a violation of $110 would the trend turn back to negative.  For now, last week's push to multi-week highs gives this a lot of near-term acceleration and I expect higher prices.  

 

Penn Virginia (PVAC- $83.43)   The recent pullback from early July looks complete and should enable PVAC to turn higher to test and exceed recent All-time highs made back in mid-July.  Last week successfully closed at the highest weekly close in three weeks time, and after a minor pullback following its steep decline from this past Spring, makes this attractive for further gains to challenge targets at $95-$96 and then push higher up to $100.   Momentum remains positive given the degree of gains this showed in nearly tripling in price from this past Spring, and when $90 is exceeded, it's likely to not have too much trouble in getting up to $100 given its momentum.  Only a move down under $75 on a weekly close would postpone this advance, signaling a potential further drawdown to $72 before this bottoms which represents the first meaningful downside Fibonacci target on its pullback.   
 

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Denbury Resources Inc (DNR- $5.22) DNR is quite bullish near-term given the stock's ability to have exceeded mid-July weekly closing highs which puts this at the highest levels since mid-2015.  Further near-term strength looks likely based on last week's gains to areas near $6.24, and then $7.70, and $9.78 are both important for different reasons.  When scanning this stock for possible exhaustion, we see that at both former bottoms, last Fall and also in early 2016, DNR had completed counter-trend TD Sequential Countdowns (13) while on this rally they remain early by at least another 3 weeks.  Overall, the act of making a new weekly close above the highs of the last few weeks bodes well for this to follow-through higher, and longs look attractive, looking to buy dips if given the chance in early September. Only a move back under $4.19 would cancel the attractiveness of this pattern.  

 

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Andeavor (ANDV- $155.26) Push to new all-time highs keeps this rally intact.   ANDV has shown some excellent strength in recent months, having engineered a successful breakout of a large Cup and Handle pattern back in late April when the stock got above $120 which represented a breakout of both early 2018 as well as 2015 highs.  While ANDV has shown steep gains since this Spring, there's no immediate evidence of this losing speed, and if anything, last week's move back to new highs likely can allow for additional strength into the Fall.   While counter-trend sells look to be 3-5 weeks away, any near-term weakness before these are complete should be a buying opportunity for a push higher , with targets up near $170.   

Top REITS to consider technically

August 20, 2018

Contact: info@newtonadvisor.com

S&P 500 SPDR ETF Trust- SPY
283.59, 281.62, 280.16, 279, 278.19, 2760276.50      Support
286.01, 286.62, 287.01, 287.50                                   Resistance

 

Part 2 of last week's Divergence comments center on the extent to which the US and the rest of the world have diverged.   This chart shows the S&P having rallied steady since early April to within striking distance of highs.  However, the MSCI "All-World" Ex-US index has plunged to the lowest levels of the year as of last week, hitting levels it hasn't seen since last Summer.   This is somewhat problematic for the bull case heading into the last couple weeks of a very seasonally challenging month along with the worst seasonal month of the year, September.  While many expect profits to remain steady, the FOMC to hike rates and economic expansion continuing with stocks rising into year-end, this graph paints a very different and more troublesome picture.  Either Europe and Asia rebound sharply, or the US could begin to narrow this gap by turning down.   While intermediate-term trends are very much intact for the US, the next 4-6 weeks look to be problematic for the Bulls.  The defensive posturing tends to be an early warning sign, and now FANG stocks have struggled lately, which is something to keep a close eye on.  This week's Report discusses the Defensive trade in further detail, highlighting some of the better REITS to consider, along with some index charts to make sense of the S&P and Global equity indices. 
 

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Summary:  US markets are growing closer to experiencing weakness but heading into the final two weeks of August, it remains difficult to have nearly as much confidence about avoiding US stocks when comparing prices to the rest of the globe.  The early week pullback in US stocks proved incredibly short-lived, with US holding key support near 2800 before moving higher.  Despite breadth and momentum rolling over, US equities have been able to successfully defy gravity despite all the divergences.  Defensive sectors like Utilities, and REITS showed strong outperformance last week, while Technology demonstrated additional evidence of trying to rollover.   Meanwhile, China's Shanghai composite hit the lowest levels since 2014 while Europe also fell on hard times, as the STOXX50 moved to levels which haven't been seen on a weekly close since late March.  Clearly a much different picture than has been seen nearly all year in Equities, and indices going in sharply different directions.  Elsewhere, the Dollar showed a few signs of trying to turn lower, while Gold and Crude managed to bounce fractionally into end of week after having experienced a very difficult August thus far.   To close out the week, the CBOE Implied Volatility index, or VIX, plunged down below 13 to violate the lows of the last four days, in a pattern many would describe as a Head and Shoulders top on hourly charts.  

While  factors like Declining momentum and poor breadth were important most of the week (outside of last Thursday), other warning signs included this Divergence highlighted above.  Seasonality tends to suggest the period between now and end of month is a negative and indices have just passed the most bullish part of August (the 8-13th trading day) while the rest of the month tends to be fairly negative in mid-term Election year Augusts  (Particularly in the NASDAQ which are down nearly 1.9% or the 2nd to worst month of the year) Furthermore, as has been mentioned, the NY FANG index (NYFANG-Bloomberg) peaked out in June and has trended lower, as has the SOX, the Philly Semiconductor index which often can serve as a leading indicator.   Bottom line, the MSCI "All-World" Ex-USA index falling to the lowest levels of the year seems to NOT be a positive, and eventually should lead the US to join suit.   Heading into this coming week, that might still prove premature, but signs of Technology waning further were present late last week, and this sector seems to the glue that's had the market together for now.  When Tech finally starts to turn down (instead of just wobbling and underperforming) one can make a stronger negative case for Equities in the short run.   Specifically for early this week, a retest of August 7 highs looks likely, but would cause the first Demark Sequential and Combo exhaustion signals to appear in unison for the first time this year.   Upside looks limited given SPX's push to test upper channel resistance highs in a manner which suggests a possible completion to a five-wave advance from the middle part of last week.  For this week, early week strength to test and exceed early August highs should be seen as an opportunity to pair down longs into this advance. 

The following support levels, specifically are important and should be watched carefully if indices begin to pullback and test/break July and/or  June lows in unison throughout September.

SPY-  280.16, 276, 268.49
SPX- 2796-2800, 2755-2760, 2691
DJIA- 24965, 24,000
NASDAQ 100- 7158, 6950
Nasdaq Composite- 7604, 7419


While an upcoming peak is anticipated for stocks, these reasons stand out as reasons why its Impossible to be that negative on an intermediate-term basis yet, and near-term pullbacks would represent buying opportunities when they arrive.:

 

  1. "All Stocks" Advance/Decline line still within striking distance of new highs (New highs in early August)
  2. No evidence of Credit trouble. If anything, high yield has remained fairly calm over the last few weeks. High Yield typically will turn down in advance of Stocks
  3. Sentiment could turn bearish pretty quickly given the Tariff threats and now EM stress as a 1-2 punch.  Thus far, the Turkish situation seems to be idiosyncratic and not as source of systemic risk.  
  4. Long-term trends are still in good shape for most, if not all US Equity indices and sectors, and no real intermediate-term trend breaks



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

Short-term (3-5 days):  Leaning Bearish for the week, but expecting that S&P likely challenges early August highs Monday or Tuesday before a late week pullback.  Upside should be contained at 2860-75 while initial warning levels on the downside lie at 2833, and then 2821.  Under 2821 should lead to a test and probable break of the August 15 intra-day lows near 2800.   Key support to look at buying on pullbacks under 2800 lies down at 2750-5.  Monday should allow for a final push higher as part of the wave structure since last Wednesday's lows, and it's expected that SPX should test, if not briefly exceed 2863.48, the intra-day highs from August 7, before stalling out and turning lower.  Note, to have conviction that a bear trend has begun, prices need to break 2821 on a close, but it's thought that a bullish stance in the last 2 weeks of August should be a poor risk/reward and difficult to monetize given the rampant sector rotation.  


Intermediate-term (3-5 months)-  Bullish-  While there remain ample reasons for concerns in the short run, now that markets have entered August with little to no evidence of any real downturn, the period between now and end of year will likely only suffer minor pullbacks between now and into early October before rallying into end of year, postponing the larger decline yet again.  Specifically, the fact that Advance/Decline for All-stocks pushed back to new all-time highs into early July is thought to be a bullish factor.   The fact that Small-cap and Mid-cap indices have rallied back to new highs is also thought to be constructive, as most bear markets start with a serious dropoff in Small and mid-cap performance.  Though some of that did indeed happen in July with the Russell2k, most intermediate-term chart patterns remain constructive.    Overall, the 2 month bias is more negative for a 3-5% drop.  However, on a 4-5 month timeframe, it's likely yet again that markets exhibit seasonal strength.  so given that markets have been able to absorb the relative underperformance in Tech lately with little to no damage, we'll need to see S&P drop under 2700 to have any real concern, and given the tariff taunts which have been ongoing, the sentiment is likely to reflect fear much faster these days than normally which bodes well for the bulls into year end.




SPX, 10-Year Yields, REIT ETF (VNQ)  and 5 Technically Attractive REITS to consider
 

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S&P 500 Index (SPX- 2850.13)  Trend bullish, but prices starting to "wobble" a bitwith prices up near highs of this trend channel.  The recent price action increasingly suggests that this rally might require some greater consolidation, particularly heading into a rough stretch of market seasonality.   Overall, the pattern in SPX remains positive technically and as daily charts show, has been trading within this trend channel for the last few months ever since stocks bottomed in early February.  While the trend itself has been positive in recent months, momentum has begun to diverge as a result of this recent failure to make headway above the upper side of the channel, and failed to follow prices when S&P moved up to make its high into August 7/8.   While not specifically bearish trend-wise until prices get down under 2800 (with larger support 2750)  the upside and risk/reward for stocks appears increasingly sub-par.  The risk of a reversal back lower in the next few weeks looks to be very real, and falloff in Technology in particular could be the culprit for at least a short-term decline.  This daily SPX chart should be watched carefully for evidence of failure  while upside should be limited over the next couple weeks into September.  
 

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10-Year Treasury Note Yield (TNX-2.86%) Yields have pulled back in recent weeks to key areas of near-term support just above 2.82%.   While a counter-trend bounce is likely, potentially into late August/early September, the long-term chart has grown more top-like given the extent of the recent yield decline, resembling a potential large eight-month Head and Shoulders pattern.   The positioning of the non-commercial traders right now adds some credibility to this pattern, as CFTC data shows shorts continuing to build to new records in the last couple weeks (-698k as of 8/14/18) This ongoing "building" of shorts by traders will likely result in this pattern breaking down for yields, potentially in the month of September, as the markets is anticipating another round of tightening in next month's meeting.   However, given that long rates have not moved up as anticipated, but are threatening a larger breakdown, it should still pay to favor defensive sectors, and among these, the Real Estate Investment Trusts, which is the focus of this week's Weekly Technical Perspective.   Overall, breaks of 2.82 would argue for a quick move down to 2.73, but would result in a larger yield decline before any turn back higher.  Note on daily 10-year Yield charts that momentum failed to match the yield spike into May and yields have subsequently made a much lower highs into late july before turning down sharply over the last couple weeks.   Technically one should use any minor lift in yields to consider buying Treasuries for an upcoming yield break in the weeks/months ahead, and any support violation should keep yield-sensitive sectors like the REITS as outperformers.  

 

Vanguard Real Estate ETF (VNQ- $84.06) (DAILY CHART) REITS look attractive technically given the ability of prices to have pushed up through the recent one-month "Cup and Handle" pattern started in early July.   Further gains look likely with targets up near $86 initially which marked the highs for most of 2017.   Daily charts show last Friday's breakout, along with the move in VNQ back over the prior lows that were in place for most of 2017 before this broke down early this year.   The act of reclaiming these lows is thought to be constructive in helping VNQ to outperform during an upcoming challenging time for US stocks in September.  Dips back down to 83-83.50 are thought to be attractive to buy into after a sharp four days of gains that led to this breakout.  Conversely any break of $81.38, last Monday's lows, would postpone any larger rally for now.  
 

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Vanguard REIT ETF (VNQ-$84.06)  WEEKLY chart- Bullish on break of two different trends back higher.   This weekly REIT chart presents a different view from what was seen above and shows the flattening out of this uptrend since bottoming out back in 2009. The minor support trendline representing the flatter pace of advance from 2011 was undercut briefly into this year, but the last few weeks have helped to regain this uptrend, along with exceeding another important trend from 2016 highs.   Given that yields are on the precipice of a potential breakdown while defensive stocks have improved, VNQ looks likely to rally up to challenge and exceed 2017 highs near $86 and could make a bit more headway to close in on 2016 highs before any peak occurs.  The trend from early 2018 remains positive and this recent progress is thought to be bullish for this sector, and an area to consider for the next 6-8 weeks which might bring about increased market volatility.  

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VNQ relative to SPX-  Bullish near-term on the ability to break the downtrend from mid-2016.   This daily ratio chart shows the recent progress in the REITS which have made this sector one to favor technically at a time when many are still focused on Technology.   The steady decline last year relative to the market coincided with a period of rising rates when the 10-Year bottomed out at 2% and steadily rose to near 3% into early this year.   Now that yields have begun to weaken back to key support and form a potentially larger topping pattern for the next few months, it's thought that REITS should continue to outperform, both from a positive structural standpoint, but also relatively speaking at a time when yield trends have been largely rangebound and more negative than positive in recent months.   If when this mild uptrend from early this year gives way, it will be important to address.  At present, between now and October, this looks like a sector to favor.   



Top Technical Long Ideas among the REITS
 

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Prologis Inc. (PLD-$67.43) Bullish with last week's rally back to new highs breaking out of the consolidation which has been ongoing for PLD since last November as part of the uptrend from early 2016.   Interestingly enough, after last November managed to exceed 2007 highs by a small margin, this required some consolidation which has now lasted eight months.  Last week's breakout, however, suggests that PLD is exiting this range and starting a new uptrend.   This is compelling technically not just for the act of exceeding a prior high, but also that PLD is also making a more meaningful move above the highs from 2007.  One should position long in PLD, using any dips to buy, with resistance initially found in the low $70s, but with intermediate-term technical targets up near $80. 

 

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Brookfield Asset Management (BAM- $43.98) Bullish, and while minor resistance lies near December 2017 highs, just above current levels, the act of BAM having begun to accelerate at a quicker pace in recent months bodes well for this to trade up to the high $40's without much trouble.  The act of surpassing 2015 highs helped BAM show some great momentum at a time which was generally poor for most REITS.   The consolidation between December '17 into February of this year proved brief in scope and duration and failed to violate any real support.  Pullbacks managed to hold at the former peaks which look to have now served as support to the decline. The last six months have seen BAM rally back to test the former highs and should pave the way for an upcoming breakout to follow the move seen in VNQ last week.  Overall the long-term symmetrical nature of this advance which has grown steeper in ascent in the last 12 months combined with it trading right at all-time highs makes it attractive to own for further gains in the weeks ahead.   Pullbacks to $41-42 should offer a better risk/reward buying opportunity for strength into the high $40's.  

 

CubeSmart (CUBE-$31.75) Bullish, and CUBE's pullback over the last month now looks to be complete and should offer a push higher to test and exceed recent highs made near $33.18.  Looking back at its weekly chart over the last dozen years, CUBE has carved out a very bullish technical pattern with its ability to exceed 2007 highs before consolidating since mid-2016.   This former high following the peak in April 2016 has already been tested once into early July, and last week's gains to turn back up sharply to new multi-week highs signify the likely start of gains which ultimately should break out to new high territory in the next 6-8 weeks.  The act of pulling back from early July has helped to alleviate the near-term overbought conditions, making for an excellent risk/reward at a time when REITS have begun to outperform given the recent downdraft in long rates.   Overall, CUBE is attractive to buy at current levels technically and pullbacks in the week ahead would offer a better suited risk/reward for buying with targets in the high $30's.

 

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Apartment Investment & Management (AIV- $43.91) Bullish for test of highs- Given the recent snapback in Apartment REITS over the last six months, AIV looks appealing to own for a move back to test and exceed all-time highs made back in 2016.   The structure from 2007 to 2016 showed a very steep decline followed up by a slow rally back to retest those former all-time highs, which happened nearly 10 years after initial highs were made.  The subsequent two years gave way to consolidation within striking distance of these former all-time highs, which now shows evidence of possibly being complete.  The rally over the last few months have proven strong enough to help monthly RSI regain 50, and MACD has rapidly been converging towards the signal line.  While some might view the break of the eight year uptrend as being bearish, the fact that AIV has managed to recoup the former lows that were breached in the low 40s is thought to be a real positive, structurally speaking.  Any push back to test $45-$47.50 will help this recent two-year consolidation take the shape of a "Handle" of a large Cup and Handle from the 2007 peaks.  Therefore, this looks attractive to own now as this makes its way back to former all-time highs.   While $45-$47.50 should offer at least some resistance, the long-term structure of this pattern is excellent and will grow more bullish on the ability of AIV to exceed $47.50 on a weekly close.  Only a pullback down under $40.50 postpones this move, and $37.97 would be an important area for risk that can't be breached without thinking this scenario is wrong.  At present, this should advance to test all-time highs technically in the weeks ahead.  

 

SL Green Realty Corp (SLG- $105.86) Bullish given SLG's ability to exceed intermediate-term trendline reisstance that had held this REIT in a downtrend since peaking out in 2015.   While progress back towards all-time highs will take time, the fact that this breakout just happened within the last couple months of a decline that had been ongoing for the last three years, SLG should show some above-average gains between now and October at a time when REITS have begun to outperform.   This has added attractiveness for those that prefer buying well off all-time highs, as SLG trades over 20% off all-time highs made three years ago, yet has begun to show some excellent signs of momentum acceleration in recent weeks.  Initial targets come in near $108, the 50% area of SLG's entire decline from 2015, while above that should pave the way for a test of $118-$120 near late 2015/mid-2016 highs.   Pullbacks in the days/weeks to come near $102-$104 should offer an even better risk/reward, while only a decline under $97 negates this pattern and would result in additional weakness.  At present, this looks like a great mean reversion candidate at a time when this group has begun to pick up steam.   

Odds favoring a pullback to S&P 2800 unless immediate recovery of 2833 occurs

August 13, 2018

Contact: info@newtonadvisor.com

S&P 500 SPDR ETF Trust- SPY
282.13, 281.24-281.83, 278.30, 276.43, 268.49      Support
283.85-284.37,  284.52, 285.85                              Resistance

 

As global markets have reached mid-August, it's important to see the extent to which the rest of the world has not joined the US Equity rally of late.  This chart features the MSCI All-World EX-US index, which peaked back in January, but yet came nowhere near these levels into May highs, as the rally recouped only about 1/3 of the prior 14-day decline.  After then selling off to new multi-month lows into early July, the recent rally into August  has only regained about half of the move down from May, keeping global equities in a difficult spot overall.   The break from early August highs has now violated this minor uptrend over the last couple weeks, and threatens another retest of lows and now August has been even weaker.  Last week's downturn caused this index to break the uptrend from late June, putting even further pressure on how equities are trading when looking at a broad-based global gauge.   So the takeaway here is that it's important in these times to focus away from the FANG names near-term, which have been more resilient in August, while carefully scrutinizing how the larger world indices are doing which might have a bigger effect eventually on how the US does.
 

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Summary:   The weight of the evidence seems to suggest that stocks have begun a correctional phase, and while most of the selling has occurred thus far in Europe and Asia with the Emerging markets having been hit particularly hard this past week, developed Equities have also begun to stall out and turn down, which happened for the World indices on July 26.   Growth has been increasingly shaky vs Value and has broken uptrend lines on respective indices, while the Bond market has been much stronger than anticipated, with rates having given back much of the yield rise into mid-July.   Trade tensions boiling over between the US and other countries, one by one, which seems to be increasing by the day, has coincided with extraordinary weakness in the currency markets of many Emerging markets, and slowly but surely seems to be affecting Equities as well.  While the world didnt't care much on Russia tension, despite a 10% decline in the Ruble, when the attention turned to Turkey, most developed Equity markets finally began to show some evidence of turning down.   Last Friday saw the rare combination of Equity, Treasury, and FX volatility and while Emerging market turmoil might be seen as something that's been ongoing, one should note that warning factors for this equity rally have also been present for the past couple weeks with a few added areas of concern just in the past coupe days that have seemed important.

Specifically, the following seem important and negative
1) Treasury yields broke down on the long end late last week, with 10 and 30 year yields cracking support and directly coinciding with Financial weakness.  Yields directly led Equity movement into mid-June for highs and then early July as lows.  
2) Europe broke down, as per SX5E severing uptrends of the last month and we're still seeing quite a bit more weakness in global equities than US
3) Technology's main SPDR ETF, XLK, rolled over to new four-day closing lows, confirming a TD Sequential sell signal in the process on daily charts.  Tech has been slowing down in the last month with the NY FANG index having peaked out in mid-June and making two consecutive lower highs.
4) Emerging market weakness has begun to show capitulatory parabolic declines in most currency markets with outsized declines in USDRUB and USDZAR while USDTRY got most of the attention late last week.  
5) The Defensive trade still looks to be in place, with a few minor days of weakness last week in Staples;  However, Utilities are outperforming Technology in the rolling 30-day period with returns of 1.71% vs 1.70% for Tech
6) Seasonally speaking, the month of August tends to be the 2nd worst for the NASDAQ, and averages -1.9% in mid-term election years.  (1971-2017) The S&P and DJIA typically also fare worse in mid-term election years, averaging -0.4% and -0.7% respectively
7) Implied volatility seems to be firming, and VIX closed last week at the highest weekly close since July 6, higher than the prior four weeks.
8) NYSE only showed 64 new 52-week highs last Friday, way down from early July and also well off peaks seen in January (340+) 
9) Momentum is showing negative divergence on NASDAQ with RSI having peaked out  in June, while DJIA and SPX both showed peaks in late July
10) Summation index still shows breadth having peaked in June, and while Advance/Decline did move back to new all-time highs, the dropoff in hotels, casinos, Financials, Industrials last week is a concern to the broad-based rally narrative.  

The following factors make it seem like perhaps a snapback rally might happenMonday-Wednesday before the pullback gets underway but that any minor rally likely would be short-lived
1) Breadth wasn't all that strong on last Friday's decline, although finished at 2/1 negative
2) Demark counter-trend exhaustion failed to signal "Sells' as of Friday, (No completed 13 countdown) and ideally, a small recovery rally into Tuesday/Wednesday would help these to materialize, creating a stronger sell
3) Seasonality for August, according to Stock Traders Almanac, tends to see most of the month's gains made in the 8th-13th trading days of the month, whereas the balance of the month is historically flat for DJIA, S&P and NASDAQ, though decidedly worse for mid-term election years


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

Short-term (3-5 days):  Leaning Bearish- Monday will be a critical day- Followthrough on Friday's selling under 2833(Under as of Sunday evening) means that a pullback down to 2800 is underway (which can't be said just yet given that S&P managed to rally up from early lows to stay above this level)  The ability to trade higher Monday likely means 1-2 days of rally attempt during a seasonally positive week for August before selling gets underway.  However, the action in US indices on Friday coinciding with Europe, EM weakness which doesn't seem to be ending, likely will cause a pull lower for the US into end of August.  (As of Sunday evening, Futures were down 9 ticks.)


Intermediate-term (3-5 months)-  Bullish-  While there remain ample reasons for concerns in the short run, now that markets have entered August with little to no evidence of any real downturn, the period between now and end of year will likely only suffer minor pullbacks between now and into early October before rallying into end of year, postponing the larger decline yet again.  Specifically, the fact that Advance/Decline for All-stocks pushed back to new all-time highs into early July is thought to be a bullish factor.   The fact that Small-cap and Mid-cap indices have rallied back to new highs is also thought to be constructive, as most bear markets start with a serious dropoff in Small and mid-cap performance.  Though some of that did indeed happen in July with the Russell2k, most intermediate-term chart patterns remain constructive.    Overall, the 2 month bias is more negative for a 3-5% drop.  However, on a 4-5 month timeframe, it's likely yet again that markets exhibit seasonal strength.  so given that markets have been able to absorb the relative underperformance in Tech lately with little to no damage, we'll need to see S&P drop under 2700 to have any real concern, and given the tariff taunts which have been ongoing, the sentiment is likely to reflect fear much faster these days than normally which bodes well for the bulls into year end.


5 Technical Long ideas and 5 Technical Shorts:
LONGS: TLYS, M, EXC, CLX and NI
SHORTS: ITW, LVS, AMBA, HLT and EXEL



LONG IDEAS
 

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Tilly's (TLYS- $16.33) Bullish long-term pattern breakout-  One of the more compelling long-term breakout structures of any of the stocks screened in recent weeks.   This small-cap Online Specialty Apparel maker has a market cap of just 480 million, but has EPS growth of over 47% in the past year and is expected to continue growing Earnings at over 17% on average over the next two years.   Technically speaking the price action has been compelling of late as TLYS has advanced by more than 50% in just the last three months alone but its consolidation from June has kept the stock from becoming excessively overbought. The reason for near-term optimism is based on TLYS advance to new 2018 highs just last week, on the verge of a giant 5-Year+ base breakout.   TLYS is within 10 cents of reaching the highest levels since 2012.   The pattern resembles a giant Reverse Head and Shoulders pattern which are rare to see on stock patterns longer than five years in length.   This move above $16.20 should help TLYS begin a lengthy intermediate-term advance, and is thought to be quite positive technically.  While volume has not yet risen to sizable levels above prior averages, it looks compelling technically to own here and looks right to add to upon moving above 16.50, for the start of a move to the $20's.  Only declines below $14.70 would change this thinking and postpone the advance.
 

Macy's (M- $39.97)  Cup and Handle pattern is bullish for further gains.  Heading into earnings this week, Macy's looks appealing to own for an upcoming breakout above its Neckline resistance at $41 for a move up to $45.50.  The stock has enjoyed some decent momentum in the last eight months, more than doubling, yet still lies more than 50% off its all-time highs made back in 2015.   The rally from this past May makes it particularly attractive technically given the sharp rally followed by bullish consolidation.  This churning in the last couple months has taken the shape of a Bullish Cup and Handle pattern, with Neckline resistance at $41, at the highs from two weeks ago.  Exceeding this should help the stock rally sharply to test the prior swing highs made just after the US Election,  and the upcoming earnings could be a catalyst for a move of this sort.   Overall, the Cup and Handle tends to be a very favorable pattern following a sharp rally for a chance for a stock of this sort to continue its advance, and one should consider positioning long, looking to add above $41 for a chance to reach the mid-$40's initially.  Only a pullback under $37.83 would postpone this move and would be a stop for trading longs.  

 

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Exelon (EXC- $43.13) Exelon's ability to exceed the highs of its own Cup and Handle pattern since last November bodes well for further gains to targets near $50.70 which represents a 38.2% Fibonacci retracement of the decline EXC made since 2008.   This Utility has been undergoing consolidation for the past eight+ years, so this recent surge in strength which began back in 2017 is seen as a very welcome development.   The initial breakout to new annual highs led to some mild consolidation, but now the stock has turned up again in the last six months and has just not only July 2018 highs but also highs from November of last year.  This brings EXC up to the highest weekly closing price since early 2012, making this appealing to buy with initial targets at $45.45, but eventual movement to $50.70.   Given that Treasury yields have just broken down again, defying most investors futures bets for higher yields according to CFTC positioning,  Utilities look likely to continue to outperform in this environment.   EXC looks like one of the better to favor given its move to new 52-week highs and is considered a technical overweight.  
 

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Clorox (CLX- $140.21)  Pullback last week represents buying opportunity- CLX has been the top performer of any of the Consumer Staples stocks in the last month, returning 5.83%, and outperforming all other 31 stocks within the S&P 500 Consumer Staples index.  Its breakout two weeks ago has been followed by a big pullback last week, which makes this far more attractive to buy dips.  Pullbacks are not likely to violate 136 before turning back higher to challenge 150, making this an attractive risk/reward to consider during a potentially tough time for equities.  Overall, CLX has been a leader in relative strength among this group, and technically speaking its move to the highest since early January is considered a bullish move and should allow for further strength to challenge and surpass early year highs.  Only a move down under $135 would postpone this rally. 
 

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NiSource (NI- $26.61) Bullish, and recent consolidation should allow for a move up to test late November 2017 highs near 27.68 and then higher.    NI has shown its own signs of forming a Cup and Handle pattern since early July and the rally into early August failed to show too much consolidation but remains within striking distance of early July highs.  Overall a very strong name within the Utility complex, and expect this to further its gains in the weeks again during a potentially tough time for Equities.  The drop in Treasury yields should only add to the allure of this stock within this defensive, yield sensitive group.   Bullish, looking to buy dips. 





SHORT IDEAS
 

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Illinois Tool Works (ITW- $136.47) No sign of relief for this ongoing downtrendThis stock's break of the minor uptrend from July lows suggests further selling is in store, and it's right to avoid buying dips and/or consider shorting for a pullback down to test and break recent lows on its way to $120.   While many in the Industrials space have been able to snapback and rally in the last couple months since early July, ITW has shown exactly the opposite.  The gap down into July failed to gain much ground and has just violated the early August lows which makes further weakness likely   Momentum has risen a bit from early oversold levels given the recent consolidation, so this recent rolling over shouldn't run the risk of shorting into an extremely oversold state.   The ongoing decline makes buying into this very much premature and last week's break in particular suggests that further weakness should result between now and October.  

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Las Vegas Sands (LVS- $67.85)  Bearish break of Head and Shoulders pattern-While this stock was touched upon in the Weekly Technical Perspective back in mid-July, it's still right to mention again given the additional weakness seen in last week.  The snapback rally attempt after the initial break of this Head and Shoulders "neckline" failed to offer much relief, and held right where it needed to for a continued bearish stance.  The last week has seen this pullback and now should begin its decline to the low to mid-$60's in this seasonally weak time.  Most of the Casinos remain in poor shape technically, but LVS stands out given its large Head and Shoulders pattern since January of this year, making this particularly negative for those considering buying.   One should avoid and/or short, technically for further losses in the next 3-5 weeks.  

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Ambarella (AMBA- $38.72) Consolidation during a bounce in Technology is not encouraging AMBA's last four weeks have failed to participate in any of the snapback rally in Technology and appear like a Bear trap which should result in this pattern being violated to selloff down to the low $30s to test prior lows made last Spring.   AMBA has shown very poor relative strength all year long, yet doesn't show any meaningful signs of trying to carve out a low of any sort.  The last few weeks should have shown far more evidence of rallying off the lows during a month when Equities have moved higher.   Prices lie under lows from last Fall and little support is present until the 2016 lows, which lie about 10% lower.  This looks to be a logical target for further weakness in the weeks and months ahead, and breaks of the most recent six-week low would represent a green light for technical shorting and/or to avoid buying into this weakness.  

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Hilton Worldwide Holdings Inc. (HLT- $75.65) Breakdown likely leads to additional weakness in an already weak sector. The break of June lows for HLT also represents a violation of the uptrend that has held since the US Election for Hilton, and is considered a bearish development that likely will lead lower in the weeks to come.   The entire Hotels space has been hit hard since earlier this year, with many stocks such as MAR, WYND having peaked out in January and have dropped off every since.  Most of these have been tied to the housing slump that seems to be slowly materializing, as per data since January.  Last week's decline warrants avoiding buying dips and/or considering shorting the stock for aggressive traders.  Movement down to near $70 looks likely in the short run, with intermediate-term targets in the mid-$60's.  

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Exelixis Inc (EXEL- $20.40) Lackluster consolidation should be sold into- EXEL looks ripe to turn back lower after a lackluster consolidation following its decline from late last year.  The last two weeks showed prices closing down right at the lows after early week rally attempts.  Looking at weekly charts, the breakdown earlier this year violated nearly a two-year uptrend in the stock.  This resulted in a quick pullback to the 50% retracement of the prior advance.  However, the resulting recovery attempt has proven to appear counter-trend in nature, not the start of a rally that should carry EXEL higher in the weeks ahead.  The decline from two weeks ago in particular represented a key reversal that engulfed the prior six weeks of trading.   Declines look likely to test $18.15, the 50% area that had held on the prior decline.  However, this should represent only minor support before a break of this level to reach technical targets at $14.75, which is right near the 61.8% Fibonacci area of support.   Overall, this looks like a good risk/reward short for a selloff that could prove to be 15% or greater between now and late October.  

10 attractive Long/Shorts with earnings in a pivotal week

July 23, 2018

Contact: info@newtonadvisor.com

S&P 500 SPDR ETF Trust- SPY
278.41, 275.84, 274, 272, 268.49, 266.90          Support
281-281.5, 283.5-284                                          Resistance

 

The CBOE Volatility index, or VIX, managed to close Friday at the highest levels of the week and as this four-hour chart shows, has begun to stabilize near former lows from mid-June at a time when Equities have started to show a few signs of stalling out.   Prior lows in VIX also occurred right near this 12 level and bodes well for buying implied volatility for a 2-3 week hold, and/or also a three-month hold, as recent uncertainty likely won't be alleviated anytime soon, and "VOL" is now down near the lows for the year when breadth and momentum have been slowly but surely stalling out.   Any early week Equity rally that coincides with implied volatlity dropping would be a good chance to average down (<12) while movement up above 14.25 would serve as a trend following buy signal for VIX for at least a 20-30% spike in implied volatility.  At current levels, after having dropped from near 20 to 12 in just one month, this looks like a very appealing time to consider buying VIX.
 

Summary:   US Equity indices have shown increasing signs of stalling out over the last week which likely has begun the topping process of this latest rally which began on June 27.   Signs of mean reversion in some of the weaker sectors allowed both Financials and Industrials to stage bounces last week, making up two of only four sectors which recorded positive gains.  (Technology and Staples were the others)  While the net change in the broader indices over the prior week has been very minimal (+/- 0.25% for DJIA, SPX and NASDAQ) the slowdown in breadth and momentum remains a key theme that needs to be re-emphasized.  McClellan's Summation index remains lower than it was in mid-June, despite S&P and NASDAQ having attempted to push higher.  Moreover, the All-stocks advance decline peaked out on July 9 and has also not confirmed this move up in the indices these last couple of weeks.   Meanwhile, S&P's "breakout" over June and March highs certainly has not allowed for any acceleration.   Although it was healthy to see some signs of rally in a couple of the weaker sectors, i.e.-Financials and Industrials, this bounce has not broken out above key trendline resistance drawn from January highs (So both of these sectors merely have bounced within downtrends)   Additionally, counter-trend Demark based exhaustion Sells have in fact been confirmed for the NASDAQ Composite and 100 index, and should limit the degree to which these indices are able to rally in the weeks ahead.   While indices didn't decline on cue as of July 13th, like we've seen over the past five months, breadth certainly peaked out at that time.  Any ability to hold up intoThursday/Friday of this week would be thought to coincide with an even greater near-term top, producing weakness into early August before prices can stabilize.   Bottom line,  It looks far more likely that at least a minor pullback should get underway, so a defensive stance is recommended for this coming week, using any rallies that happen Monday-Wednesday as a chance to pair back longs.   

Of the six reasons given last week as to why a cyclical pullback to this rally could get underway sooner than later, none of the six concerns have been alleviated.  Breadth and momentum remain lackluster and many gauges peaked between July 9-13.   Sector Non participation still shows Financials and Industrials to be weak sectors, which have not broken downtrends from January highs.  While Technology and Discretionary have led the charge over the last three months and also YTD, Discretionary showed some evidence of stalling late last week and starting to rollover, as XLY pulled back to new multi-day lows.  Technology has lost quite a bit of momentum, having performed "on-par" with the market in the last month, and barely was able to register any gains last week (+0.22%)  The "FAANG" group meanwhile has not gotten above June highs and NFLX showed some evidence of peaking two weeks ago, while GOOGL and FB have earnings this coming week, and both are up against difficult resistance.  Sentiment has continued to weigh in as bullish, despite the threat of tariff escalation.  Investors Intelligence polls have now widened out to +35% spread between Bulls and bears, and  the Equity put/call ratio is trading at .66 while the VIX has been basing and still under 13 (despite having firmed all of last week)  With regards to Demark exhaustion, we've seen more confluence into late last week with counter-trend sell signals for NASDAQ Composite and NDX, while the cycle that provided peaks to the US indices in late January points to July 26-27 as being important for a possible turning point.   Rallying into this time zone would present a good shorting opportunity for traders, while selloffs into late week likely would be buyable.  Yet it's thought that this rally from late June should be largely erased in a short-term selloff which given the longer-term uptrends intact, likely would be buyable initially, with losses proving no greater than 3-5% initially. 

What were the key developments for the past week?  And does this get us closer, or farther away from thinking a pullback should begin in the next 3-5 trading days?  

1) The mean reversion bounce in Financials and industrials was largely the biggest development sector-wise, but as mentioned, this bounce occurred within the framework of a bearish pattern for both. 

2) Markets showed a minor breakout in Yields on the long end, with 30-year Treasury yields rallying back up above 3% and look to test 3.08-3.10% before any peak. 

3) The Yield curve steepened pretty dramatically late in the week with the breakout in 30yr yield which also coincided with 10yr yields moving up to 2.89  (Doubtful that yields can exceed 3% in the 10year near-term and should provide a buying opportunity for Treasuries)

4) The Dollar's pullback late in the week seems important and coincided with the start of a bounce for Emerging market currencies which could also trigger bounces in EEM and in China.  If global risk assets peak out, however, this might put a damper on this rally.  However, ratios of MXWO to MXEF look to be peaking near-term, so my thinking is a selloff starting in late July likely proves small in scope, as Emerging markets should be able to rally in the month of August.

5) Commodities undercut the 2-year trend from 2016, yet time-wise look to be 1-2 weeks away from a very attractive trading bottom in the group.  This has bullish implications for precious metals, energy, grains, and Softs.  CCI should have limited downside this week and should be favored for August outperformance



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

Short-term (3-5 days):   Bearish as risk/reward has grown poor for longs over the next few weeks and momentum and breadth are both suggesting upside should prove limited.   Pullbacks to 2770 are initially important, than 2747-50 and 2700.   Resistance to sell into lies at 2815 and above would lead to a quick but short-lived move to 2830-45

Intermediate-term (3-5 months)-  Bearish-  Trends likely should be negative overall in July and any larger selloff into late July would merit turning more positive for a bounce into September/October.  While it's thought that November/December likely can be positive, the next couple months are difficult just yet to think are positive, despite the extent of the pullback we've seen over the last few weeks.   Until some evidence of sector stabilization happens in Financials, and Equities start to rally on more broad-based participation and good volume, the intermediate-term trend is still thought to be vulnerable.  Intermarket divergence is a concern for equities also at this point, with US ignoring the selling being seen globally which can only last for so long.  Furthermore, intermediate-term momentum dropped off very sharply into early February and has not really recovered, despite a choppy mild back and forth rally.  This should set up for more traditional negative momentum divergence on longer-term charts on any move back to new highs, so this is the one bearish factor which has been missing over the last few years, and is more suggestive that the larger trend is gradually changing from bullish to neutral and then should turn to negative sometime late this year or early next.  For now, we'll need to see the larger trend give way before thinking the larger peak is already in place, and despite the loss of momentum of late, there just has not been sufficient deterioration to think this is the case just yet.   Intermediate-term support to buy lies down at 2450-2550. 


10 Charts of stocks with earnings this week are shown below with comments.  While playing earnings is a tricky game, for either a technical or fundamental discipline near-term, these charts give some guidance as to the current trend and typically will show signs of exhaustion before stocks peak out


GOOGL-  Minor stalling out near former highs, but structure argues to buy any dips given the chance

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Alphabet Inc (GOOGL- $1197.88) A few signs of stalling out, but structure still suggests buying dips is correct.   GOOGL has pushed higher about 7% since late June, and as weekly charts show, this move has been constructive technically, rising above June peaks, as well as March and January.  However, the last few days show some evidence of this stalling out as opposed to accelerating on this breakout, while momentum gauges like RSI are well below levels hit back in January when this peaked out along with the market near 1/26.  Near-term, one can make the case for a mild pullback given the multi-week rally up to former peaks which is now stalling, yet one would look to buy all weakness near 1140-60 if given the chance, as GOOGL has shown precious little evidence of any trend deterioration on a larger scale, despite momentum starting to tail off a bit.  Counter-trend signs of weekly exhaustion remain at least 2-3 weeks away, arguing for a push up to 1280-5 before this starts to weaken.   So, given earnings it looks right to position long with a time frame of 4-6 months, looking to use any pullback into late July/August or in September to buy dips until/unless this structure starts to give some indication of failing.  Initial support to buy lies at 1140-60 while under would bring about a test of GOOGL's two-year support at 1050.
 

TD Ameritrade (AMTD- $57.43) Bearish and recent gains should represent a chance to sell strength.  AMTD had been a very positive stock within its sub-sector of Financials up until June, when this snapped an eight-month uptrend on above-average volume.  Its subsequent rebound into mid-July has occurred on less volume than the breakdown and now prices are right near former lows that were violated, creating an attractive risk/reward opportunity to sell strength.  Momentum remains negatively sloped on weekly charts, so a 10% rally in the last couple weeks as part of a suddenly bearish structure represents a good technical opportunity to sell strength.  Resistance lies at $57.50-$60, while downside has support near former lows at $53.27.  Breaks of this would lead to a much lengthier correction down to $48.50.

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Eli Lilly (LLY- $88.47) Bullish and recent push to new monthly highs should allow LLY to make a beeline towards former all-time highs at $109. This month's success in getting over prior highs resembles a bullish triangle breakout, and likely should help LLY climb further in the weeks and months ahead.  The stock began its ascent like many during the latter part of 2008/early 2009.  A six-year rally ensued before nearly three years of sideways consolidation.   This now looks to be giving way to a push higher to the highest month-end close since the early 2000s at current levels.  While the last days have pulled back , this sets up well to buy dips at $87-$88.50 for a push back to new high territory to end the month on a good note.  Pullbacks under $84.50 are needed to change the bullish forecast.  Until then, this looks technically appealing going into earnings and it looks right to use recent consolidation in the high $80's to buy dips. 

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United Technologies (UTX- $130.26) Bullish, but short-term extended-  UTX has largely gone nowhere for most of 2018.  The selloff from $140 managed to get down to just under 120 before turning back higher, and its success in getting above Spring highs should help this rally continue.   While the last couple days have backed off after an early month surge, the push back above $129 allowed momentum to turn more positive.  Weekly MACD has turned bullish and UTX maintains an attractive intermediate-term uptrend which intersects near July lows at $123.  As long as this area is not undercut, one should use any dips post earnings to buy UTX, with upside technical targets found near $139 which was hit in early February right when stocks peaked out.  Support to buy pullbacks lies initially at $127.50-$128.

New Oriental Edu & Tech (EDU- $93.30) Bearish and pullback to multi-day lows likely allows for a test and break of $90 in the days ahead.   EDU has largely traded sideways over the last couple years with a few volatile spikes that have been immediately given back.  The last few weeks showed this attempting to rally back after a big decline into early July, but EDU managed just a fractional bounce before rolling over late last week.   The larger structure is unappealing and pullbacks look likely to near $88-$90 with under $88 leading to a lengthier decline down to the low $80's.  To have any bullish opinion, this would need to reclaim last week's decline and move back up above $95, which looks unlikely technically speaking.  

 

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Las Vegas Sands (LVS- $73.85) Heavy volume decline in recent weeks gives reason for concern about further weakness.   LVS has been a pretty stellar standout among the casino space over the last couple years, more than doubling off early January 2016 lows, and rising to within striking distance of 2014 peaks.  However, the stock began to falter this past Spring, and its higher high into June was not confirmed by a similar move in momentum.  Since that time we've seen LVS pullback sharply on heavy volume, and while prices managed to hold the former Spring 2018 lows, this near-term pattern has begun to take on a much different shape than it has in the past.   Rallies in the last couple weeks have created a chance to sell into strength, as the stock has largely stalled after this first bounce ahead of earnings.  However, after filling this gap from June, LVS looks right to sell strength, expecting a pullback to test its most recent lows.  The area at $70 is an important area of support which lines up with the two-year uptrend in this stock. Breaking $70 would constitute the first meaningful long-term trend violation in the last couple years, putting LVS on the list for a good likelihood of more intermediate-term trend damage.  At present, the near-term setup is short-term bearish only.  

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Baxter International Inc (BAX- $75.00)   BAX is bullish technically and further gains look likely to the high 70's with additional near-term targets at $80.  The art of pushing back up above January highs into mid-June was reason to have confidence in BAX and then the mild consolidation over the last month failed to do much damage, holding above the area of the breakout.   Last week's gains then managed to rise to surpass the last four weeks' highs, rising to the highest levels since early June.   This kind of mild breakout on the heaviest volume in over a month (last Friday) is very encouraging for BAX to follow through higher, and longs are recommended, looking to buy any weakness given the chance.   The area at $73.59 should serve as a trading stop for longs, while upside into the high $70's/low 80s into Fall looks very much achievable, technically.
 

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Align Technology Inc (ALGN- $375.38) Bullish and movement up to near 400 likely before this stalls out.   Overall this has been one of the top performers in all of Heatlhcare this year, rising nearly 69% on a YTD basis through 7/20/18.  The recent pickup in acceleration in the last few months has helped this start a new parabolic trend, and last week's gains helped to push back up above the prior highs from June.   Overall the act of making just a minor consolidation over the last month which then results in highs being reclaimed is normally a very bullish development, and bodes well for this to continue higher in the weeks ahead.   Momentum has been overbought on weekly charts for some time, but its the art of holding up near its highs throughout this minor correction into early July followed by a thrust back up to new highs which gives reason to embrace technically.  Pullbacks post earnings would be used to buy at $357, or below at $339, neither of which would cause any issues with the ongoing uptrend.  Under $332, which isn't immediately expected, would postpone any further rallies.

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Amazon.com Inc (AMZN- $1813.70)   Short-term correction likely within uptrend-  AMZN remains difficult to fade on any timeframe other than a few days given its long-term uptrend and little to no evidence of any deterioration.  However, after having gained 12% since late June, or nearly a 200 point rise, we've begun to see the first evidence of this stock starting to rollover within its uptrend.  3-month trendline support intersects near 1735 and could be tested on pullbacks into late July/early August.   The key reasons for near-term concern involve near-term overbought conditions where the stock is now beginning to stall out and turn lower, as seen by the minor pullback which started late last week.  Counter-trend exhaustion signals are present, while momentum is at lower peaks than what was seen back in June at the former peak.  On a longer-term timeframe however, the stock's structure remains quite attractive and despite being overbought , which has been ongoing for some time, AMZN would need to show at least some evidence of undercutting the prior months lows to have the opinion that this might start to slow its rate of ascent.  Currently, this intersects at 1635, so minor weakness in the next 3-5 weeks likely should constitute a good risk/reward to buy.  

Starbucks (SBUX- $50.91)  Bearish-   Long-term uptrends have been broken in SBUX as of the month of June, with a heavy volume decline that saw volume spike to the highest levels in over five years on monthly charts.   Prices have pulled back under the lows from 2016/2017, and this bounce in recent weeks from $47.50 to $51 should provide an attractive area to sell/short SBUX for a move down to the low $40's.   the area at $41.43 would represent the first 38.2% Fibonacci retracement area of the entire rally up from 2008 and is thought to be good initial support.  Movement under this could reach $34-$37.50 on an intermediate-term basis, but should set up for a decent risk/reward to buy.  For now this stock is unattractive heading into earnings and requires a move back over $55.31 to have any hope of this pullback being complete.  

Trend reversal likely in risk assets this week

July 16, 2018

Contact: info@newtonadvisor.com

S&P 500 SPDR ETF Trust- SPY
275.84, 274, 272, 268.49, 266.90              Support
279.93-280, 280.41-280.75, 281-281.5      Resistance

 

The S&P might look to some to have broken out last week, but important to see the degree to which momentum has begun to diverge with price, not joining on this push to new monthly highs.  Counter-trend indicators of exhaustion are also present, and sentiment has taken a big step higher in the last couple weeks, as tariff escalation has not led to any dismantling in Equityland.   Given the price march into what I believe to be an important time cycle-wise early in the week, my feeling is it's right to take profits on this move, expecting prices to stall out and turn lower.  Key areas for the S&P lies at 2805-10, which aligns with quite a few Gann's Square of Nine targets from prior lows in June, February and early May.   Financials meanwhile failed to get any meaningful lift from initial earnings last Friday, and broke down relatively yet again vs SPX which looks to be an additional near-term Headwind.  The strength in Treasuries in not selling off to coincide with the Equity move along with Technology reaching key upside levels also looks important and could lead both yield and Tech to also turn down this coming week.  Watch for signs of 2770 being broken, which would lead to a more severe pullback down to 2747-50 initially, but then likely 2700 area.
 

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Summary:   The Equity trend has been bullish for the last two weeks now as part of a larger consolidation that is ongoing since the January peaks.  While the SPX has structurally improved with its ability to get over June highs, Equities have begun to show evidence of slowing momentum and breadth that likely can produce the same kind of trend reversal seen back in Mid-March, Mid-April, mid-May and Mid-June.  Sector non-participation and divergences between US indices and global indices are rampant and show this market to be far different than what many might feel upon just looking at "FAANG stocks like FB, AMZN, AAPL, NFLX, or GOOGL.   It's thought that this week brings about a peak in the near-term trend, and while it might prove minor initially, a selective, more defensive stance looks proper heading into this time.   Bond yields are thought to move lower this week, and the Dollar looks to have just a bit more upside before turning lower into August which should bring about some relief for the commodity trade.  

Looking back, Equities finished the week with a string of two consecutive days higher that allowed SPX to close above the mid-June and March closing highs and the highest levels since early February. After the first seven of nine "UP" days, equities have now started the quarter with gains of over 3%, as indices managed to bottom on schedule into late June and turn back higher.  Healthcare, Technology, Discretionary have been the leaders this month, each with gains of greater than 3%.  However, when looking back over the last month, it's been a much different story.   Utilities, Real Estate, Staples and Telecom have all outperformed in the rolling 30-day period, a much more defensive time than Equity performance would have us believe.   Additionally, two of the key "risk-on" groups like Financials and Industrials, have both shown losses of greater than 2.5% during this time.  While it's thought that Equity indices "ignoring" the volatlity inducing news such as tariff escalation is a positive, the lack of broad-based participation in this rally seems to be a larger concern which could serve to hinder Equity progress in the weeks ahead and should be addressed.  I'll list what I believe are the five biggest near-term concerns at this stage of the rally  (Note, given that long-term trends are intact, these deal purely with short-term concerns, and until the long-term trends give way

The 5 Warning signs that a pullback could get underway this week

1) Breadth & Momentum slowdown-   This is always an important factor to watch during rallies, as the lack of strong breadth normally can warn that a rally is tiring, despite prices being "up" over any given time period.   The Advance/Decline peaked out on or around July 9, and McClellan's Summation index (Smoothed breadth indicator) made its highest peak for the last month in mid-June.  The last few days of trading last week saw breadth nearly flat, barely more stocks rising than falling, which is a far cry from what happened in early July at most recent lows.  Momentum meanwhile has begun to diverge negatively on 4-hour charts and the latest push up to new highs last week was not accompanied by Momentum.   This is an important and negative development.

2) Sector Non Participation-  ( Deterioration in Financials while Technology and Discretionary shows upside exhaustion.)  While many realize SPX and NYA are trading well below their January peaks, it's important to see how the lift above June highs in SPX really hasn't been followed by many of the leading sectors.  When looking at the five major sectors by SPX weight, Tech, Healthcare, Financials, Discretionary and Industrials, these comprise over 3/4 of the market currently.   However,  Financials are now trading nearly 5% below June peaks and Industrials also are 4% below levels hit in mid-June.  Technology meanwhile and Consumer Discretionary have snapped back to test or briefly get over June peaks, but yet both sectors show counter-trend signs of exhaustion that might now limit their upside.   Healthcare is the true standout that shows excellent technical structure which looks to outperform further.  The key message here is that one by one we're starting to see leading sectors fall by the wayside, (in this case, Industrials and Financials)  so any hint of stalling in the Tech and Discretionary sectors this week would likely cause index prices to turn lower.

4) Sentiment-   The Equity Put/call ratio lies in the low 60s and its 13-week moving average has been dropping since late April and lies at .61.  Both Investors intelligence and AAII polls have rebounded, as might have been expected with equity rallies in the last two weeks.  So trend-wise, sentiment has continued to get more and more optimistic given Equities resilience in managing all this "potentially market moving" negative News and holding up.  While certainly not at extremes, the quickness with which sentiment went from bearish to bullish of late is worth mentioning, given that Financials and Industrials trends are under pressure. 

5) Demark exhaustion- The daily counts on SPX, NDX, INDU all show evidence of Counter-trend exhaustion now and in the case of NDX, the first TD Sequential sell signal on daily charts since it peaked in late January.  IWM got a signal back in mid-June and still lies beneath these June peaks, while intra-day charts on S&P have lined up to show the first 240 minute (4 hour chart) Sell since the lows in Late June.   Historically, when these signals tend to cluster on different time frames and different equity indices, they can be importnat in producing turns.

6) Cycles-  While the key 6-month 180 degree cycle from late January hits in late July, indices have now reached mid-month yet again, a period this year that's had importance given the last five months and should be watched carefully for evidence of turning down similar to recent months.  Gann's Square of Nine chart pinpoints the area at 2805-2815 to have much importance for SPX in being important for a possible key area of resistance this coming week, so aside from 7/26-7/27, it's thought that the first few days of this week could cause a stallout.  

Other issues such as Defensive outperformance has been ongoing for the last month, as discussed above, while most of the Developed and Emerging market world has shown far less superb performance of late. Additionally, we still see US intermarket divergence with DJIA and SPX not confirming the NDX's push back to new highs.  The intermarket divergence has been an issue for most for most of the last couple months, along with divergence to overseas, as Europe and Asia are well below June highs. 

With regards to the positive issues, I feel the Advance/Decline pushing back to new highs is a positive towards thinking any near-term pullback proves to be buyable and does not lead to any deterioration right now in excess of 3-5%.  Additionally, the SML and MID push back to new highs also seem like intermediate-term bullish factors.  Most major market peaks normally begin a pronounced period of breadth deterioration before larger peaks unfold, and we don't seem to be there, despite being nine years into this rally.  However, given the momentum dropoff from late January, it's going to be unlikely that equity indices can regain that peak in momentum, and for the first time in years, we're setting up for classic intermediate-term negative divergence.  Finally, the degree that sentiment has turned bearish quickly into late March, April, May and June all are factors that have limited the equity weakness, and for now are putting a floor onto any larger pullback.  All in all, the longer-term trends are obviously very much intact, and a near-term pullback is expected only for now, with a chance for greater technical damage in September/October.   This goes towards the thinking that the intermediate-term thesis remains bearish and prices should ultimately be lower over the next few months before turning up.


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

Short-term (3-5 days):   Bearish as risk/reward has grown poor in the last couple days, with S&P up against prior highs from March and June while breadth and momentum have given warning signs at a time when indices have reflected upside exhaustion.    Pullbacks to 2770 are initially important, than 2747-50 and 2700.   Resistance to sell into lies at 2805-15.    

Intermediate-term (3-5 months)-  Bearish-  Trends likely should be negative overall in July and any larger selloff into late July would merit turning more positive for a bounce into September/October.  While it's thought that November/December likely can be positive, the next couple months are difficult just yet to think are positive, despite the extent of the pullback we've seen over the last few weeks.   Until some evidence of sector stabilization happens in Financials, and Equities start to rally on more broad-based participation and good volume, the intermediate-term trend is still thought to be vulnerable.  Intermarket divergence is a concern for equities also at this point, with US ignoring the selling being seen globally which can only last for so long.  Furthermore, intermediate-term momentum dropped off very sharply into early February and has not really recovered, despite a choppy mild back and forth rally.  This should set up for more traditional negative momentum divergence on longer-term charts on any move back to new highs, so this is the one bearish factor which has been missing over the last few years, and is more suggestive that the larger trend is gradually changing from bullish to neutral and then should turn to negative sometime late this year or early next.  For now, we'll need to see the larger trend give way before thinking the larger peak is already in place, and despite the loss of momentum of late, there just has not been sufficient deterioration to think this is the case just yet.   Intermediate-term support to buy lies down at 2450-2550. 

LONG/SHORT IDEAS for the week:

    Attractive Technical Longs           Attractive Technical Shorts
1)  XLV- Healthcare                                       KBE-  Banks ETF
2)  TLT-  20-yr Lehman Bond ETF                SMH-  Semiconductor ETF
3)  ACN-  Accenture                                      IWM-  Russell 2000
4)  MRK- Merck                                             QQQ- NASDAQ 100 ETF
5)  XOP- Exploration & Production ETF        EL-  Estee Lauder
6)  CXO-  Concho Resources                       UAA- Under Armour inc
7)  MTN-  Vail Resorts                                   DFS-  Discover Financial
8)  KFY-   Korn/Ferry Intl                               SYF-  Synchrony Financial
9)  AAOI- Applied Optoelectronics                WDAY- Workday
10) TNDM- Tandem Diabetes Care Inc         BKNG- Booking Holdings
11) BAX-  Baxter Intl                                      T-   AT&T
12) MDU- MDU Resources                            AMBA- Ambarella
13) MELI-  MercadoLibre Inc                         VGK-  STOXX 50 ETF
14) GWPH- GW Pharmaceuticals                 JNPR- Juniper Networks
15) APC- Anadarko Petroleum                      RF-  Regions Financial
            


Five charts are shown that illustrate some of the recent technical developments that are importnat to know going into this week


XLV- Healthcare-  Ongoing push higher makes this one to favor technically

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Healthcare continuing to make positive strides and should still be overweighted, despite short-term market concerns.  This chart of XLV has now advanced to the highest levels since January exceeding both June and March peaks.  Biotech initially took the lead, but Pharma has since been playing catchup, along with a number of former laggard Biotechs which have made an above-average bounce in recent weeks.  This sector still is the one to favor for the weeks and months ahead, despite Biotech ETF, XBI getting a bit ahead of itself.  XLV should be able to rally up to 90 and above to test January highs before any stalling out.  Key stocks to favor within this space: MRK, LLY, PFE, UNH, ABMD, REGN, ALXN, VRTX, BAX, BDX, and BSX.
 

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Financials have pulled back to new relative lows last week, an uncomfortable development for Bulls hoping this sector would be able to carry the market higher after its recent underperformance.  After earnings in C, JPM and WFC last week, the sector deteriorated relatively vs the SPX again to the lowest level since last June.  This makes any sort of broad based market rally premature until this sector finds its gripping and for now, this group should be avoided, expecting additional relative and absolute weakness over the next couple weeks.  

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QQQ has reached an area which looks right to take profits and consider betting the other way for a pullback into late July before any real low is in place.  For the first time since early April, the NASDAQ 100 ETF, QQQ is showing counter-trend exhaustion signals, similar to what it showed back in late January at the peaks.  Additionally, we're seeing evidence of negative momentum divergence on this rally back to new highs, as neither RSI, nor MACD is nearly to the same degree that it was back in June when it peaked out last month.  Overall, it's thought to be likely that QQQ can back off into late July similar to what happened into late June before this can turn higher.  While the longer-term trend in Tech and Biotech remain very much in place, they both look to have moved a bit too far too quickly and prices lie at unattractive levels to think this rally continues. 
 

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Treasury yields remain key to Equities and for now, the trend still looks to go lower.   After peaking out in mid-May coinciding with bearish positioning, Yields dropped sharply then made lower highs before pulling back again.  Given how this yield trend seems to coincide with Financials performance, no thorough look at Equities is complete without examining the bond market given the degree of correlation in the last couple years with yields and stocks.   IN the short run, a pullback in 10-Year Treasury yields down to near 2.76% looks likely and should lead the Yield curve and Financials lower.

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Commodities have pulled back sharply in the last month largely coinciding with the strengthening in the US Dollar since early June.   While it was thought that the outperformance early this year and CCI index breakout in early June were constructive, the recent downward pressure does not look complete near-term, and might coincide with weakness into late July before a turn back up into August/September.  Weekly CCI chart shows the break of the Uptrend since last Summer and last week's selloff puts this exhaustion count on a 6, indicating that at least another 2-3 weeks of weakness are possible before this reaches support and turns back up.  Precious metals, Energy and Grains have all been hard hit of late and the Dollar rally still looks to be in only a gradual topping process and oculd lead to a bit more strength in the next week before peaking.  Therefore investors should hold off on buying this dip in the commodities space in July, and this weakness has negative implications for Materials likely also in the coming weeks.  Late July likely should coincide with this group starting to stabilize and turn higher.

Trend shows mild improvement, but No time for complacency

July 9, 2018

Contact: info@newtonadvisor.com

S&P 500 SPDR ETF Trust- SPY
271, 268.49, 266.90, 266.20, 263     Support
276.58, 278.73, 279.48, 280.41        Resistance

 

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The NY Composite's daily chart shows the extent to which US Equities have largely gone nowhere in the last five months, despite many concentrating on FANG stocks moving back to new highs and overall market resilience in the face of Tariffs.   this Daily chart shows the price as of last week's 5th day of the month, with closing prices ranging from 12493-12680.  So while the trends have been sporadic and given way to sector rotation, we've largely seen very little net change in US Equities and this index, the NY Composite, contains all NYSE listed stocks and a much more broad-based index to study.   Note that last Friday's gains did help prices make some minor progress after prior stalling out was more suggestive of weakness given the trendline from early April being undercut.   It's thought that last Friday's gains should lead a bit higher near-term, while any reversal back down which erases Wed-Friday gains would be thought to turn trends immediately bearish.  

Summary:   Equities finished the week not unlike what we've witnessed now for the last few months, with Gains, but now are approaching a time that might be important at the end of this coming week in providing a peak again, not unlike what we've seen also in recent months as early month gains give way to mid-month peaks and then back month weakness.   Overall the gains on both Thursday and Friday seemed like true positive near-term developments after about eight straight days of range-bound trading.  Breadth expanded in ways markets hadn't shown in at least a few weeks time, while sector indices like XLI, TRAN, XLY, XLV, XLB all made short-term breakouts, as did the NY Composite.  So short-term momentum and breadth improved last week, despite this being a shortened holiday week with below average volume.   The threat of Tariffs last week had cast a thick cloud of uncertainty over markets, and the consensus seemed to be that stocks would selloff sharply after tariffs were announced, as the uncertainty would certainly be heightened.  Well, we saw the deadline come and pass with no meaningful "pullout" from this threat, but yet stocks advanced, and managed to do so on above-average breadth.  This was one of our key reasons to be optimistic going into this past week.  Sentiment had shown signs of getting too skittish on the possibility of a selloff. AAII, Investors intelligence polls contracted, while the Total Put/call all rose early  in the week.  The second reason for optimism this past week revolved around the thinking that pullbacks to former important lows for TRAN, XLI, XLB would all hold and likely attempt to bounce.  this happened as well.  and Third, as discussed, equities obeyed the early month bullish seasonality which had been seen before.  So where do the problems lie?   

Unfortunately the negative momentum on weekly charts remains intact, while we're still witnessing pretty meaningfully wide divergences between US and the rest of the world.   Additionally, sectors like Tech and Financials remain broken technically after recent deterioration.  These two sectors along with industrials and Materials were all down over 2.50% for the month of June, and have not rebounded sufficiently, (despite Thursday andFriday gains last week) to turn technical trends back to positive.  One of the key worries is the extent to which bond yields have plunged in recent weeks with the 30-year having arguably just broken down out of a month-long head and Shoulders pattern, which should make rates move lower a bit more quickly.  The yield curve has flattened out substantially while credit has wobbled a bit of late, and all of these have combined to put pressure on Financials in a way where technical trends still haven't recovered after the June weakness.  So Technology and Financials remain trending down, while a few other sectors have attempted small bounces from initial support. Overall, while the last couple trading days were a technical positive, it's tough putting too much stock in this as something which will lead back to new highs.  I still expect a difficult trading environment  in the weeks ahead, so gains should be used to

Where to from here?   2 Distinct scenarios are possible given many of the disparities and divergences:  First, equities move up into July 12-13 before reversing course sharply and selling off into July 27-August 2.   Second, Equities could show the opposite, and give back a couple days after recent gains before moving up in the back half of July before making a larger peak come end of month in this same time frame.  The end of July has real importance given that it lies 180 calendar days from the former peak in late January, cyclically,  It also lies 45 days away from the mid-June peaks and 135 days from the mid-March highs.  (Those that follow my work know how much importance I put in confluence of various timeframes from former peaks and troughs.)  Bottom line, I view July 11-13 as being important, along with July 26-29, and would use strong moves into these time zones to buy or sell accordingly, expecting a reversal. 


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

Short-term (3-5 days):   Bullish given S&P's ability to recapture 2747 and get over this level which had been troublesome for stocks since late June.  Any near-term weakness from 2763-5 should likely hold 2747, before attempting to push higher again.  In the event that 2747 does not hold on pullbacks, this would be a minor warning, with a larger warning on any weakness down under 2731.  For now and for the remainder of July, it looks right to have a very selective stance on what to buy and own, and utilizing tight stops is key, given a market of many moving pieces and not all of them up.  

Intermediate-term (3-5 months)-  Bearish-  Trends likely should be negative overall in July and any larger selloff into late July would merit turning more positive for a bounce into September/October.  While it's thought that November/December likely can be positive, the next couple months are difficult just yet to think are positive, despite the extent of the pullback we've seen over the last few weeks.   Until some evidence of sector stabilization happens in Financials, and Equities start to rally on more broad-based participation and good volume, the intermediate-term trend is still thought to be vulnerable.   Intermediate-term momentum dropped off very sharply into early February and has not really recovered, despite a choppy mild back and forth rally.  This should set up for more traditional negative momentum divergence on longer-term charts on any move back to new highs, so this is the one bearish factor which has been missing over the last few years, and is more suggestive that the larger trend is gradually changing from bullish to neutral and then should turn to negative sometime late this year or early next.  For now, we'll need to see the larger trend give way before thinking the larger peak is already in place, and despite the loss of momentum of late, there just has not been sufficient deterioration to think this is the case just yet.   Intermediate-term support to buy lies down at 2450-2550. 

LONG/SHORT IDEAS for the week:

    Countertrend Longs                    Trend following Longs           Attractive Technical Shorts
1)  DBA-  Grains                                   XLV- Healthcare                             KBE-  Banks ETF
2)  EEM- Emerging mkts ETF              TLT-  20-yr Lehman Bond ETF       SMH-  Semiconductor ETF
3)  FXI-  China ETF                              ACN-  Accenture                             UUP-  Invesco DB Bullish USD
4)  EURUSD- Euro/USD                       LLY-   Eli Lilly
5)  Gold-  GC_F, or GLD, IAU               MDCO-  Medicines Co      
 


Five Key charts are shown that illustrate some of the recent technical developments of this past week


S&P

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S&P's move above 2747 was constructive, but likely will need to be consolidatedTuesday/Wednesday before further gains can happen.  S&P's move above 2747 was a minor positive for US Equities last week, as this coincided with similar moves from XLI, TRAN, and minor breakouts in XLY and XLV.  However, now prices lie near the next make-or-Break area at the minor trendline from mid-June.   What's troubling however is the bond market seems to not be paying attention, as Yields broke down in the 30year Long bond, cracking key support that should allow for another leg lower in yields which has already caused some concern given the extent that the flattening yield curve has raised alarms about upcoming inversion.   Additionally, Financials certainly will be hard pressed to show proper gains if yield and yield curve are pulling back, while Technology already looks to have peaked in mid-June.  Breadth did expand favorably both Thursday and Friday of last week, at amounts which hadn't been seen on this recent bounce from late June.  Yet holding these gains will be important in the week ahead, heading into a cyclically important time at mid-month.  The sector gains in the oversold sectors which had stabilized, like XLB, XLI and TRAN are vital to hold and produce further sharp followthrough next week.  Any failure which results in Tech and Financials turning down and S&P reversing its gains to pullback back below 2747 would be the first warning, while under 2731 represents greater proof that this bounce was purely a counter-trend move and should begin another leg down into late July.  
 

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Bond yield weakness likely to persist- Bond yields have been pulling back sharply in recent days and last week witnessed a breakdown on Friday of the two prior lows in this reversal pattern for Treasury yields which has been ongoing most of the year.  The 30-year yield's close under 2.95 is thought to put further downward pressure on yields and 30Year Treasury yields could fall to near 2.75-2.80% before finding much stabilization.  10 Year Yields also look vulnerable heading into this week, and could drift lower to near 2.75-7%, right near the lows from late May before stabilizing.   Financials likely will continue to underperform in this environment and it's right to avoid buying into the Banks on this weakness given the ongoing pullback, which doesn't look complete, for XLF, nor KBE, nor KRE.

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Healthcare Breakout has begun to accelerate-  Favor this group for Outperformance-  Healthcare's rise should be revisited as the Weekly technical Perspective from 6/18 highlighted this group has having an above average chance of outperforming.   Last week this group was the best performing group of all 11 major S&P GICS Level 1 groups, higher by 3%.  The charts have improved relatively speaking as well as XLV vs SPX on ratio charts has furthered its recent breakout by exceeding June highs, and as the chart shows, this breaks out above the entire downtrend for the group since last September.  Biotechs had kicked off the strength a few weeks ago along with Medical device stocks, and many of the downtrodden Biotechs which had underperformed in in the last 12 months have suddenly shown sharp rallies off the lows-   Regeneron, Vertex, Alexion, Gilead, Celgene, and even Non-Biotech laggards like Allergan and CVS have shown improvement.  Meanwhile the Pharma space looks attractive as well with stocks like Pfizer, Merck, Eli Lilly all setting up with bullish patterns which bode well for these to outperform even further.  

 

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Russell 2000 vs SPX-   Time to Sell Small-caps?    Getting close, but arguably still not quite there Still looks early to sell Small caps given the ratio of RTY to SPX having broken out above the longer-term consolidation trend from late 2013.  Just in the last couple weeks we've seen this ratio exceed early 2017 peaks, which is a definite technical positive.  Additionally, counter-trend Demark exhaustion remains at least 2-3 weeks away from forming any type of peak.  Therefore, while July has had seasonal headwinds in Small-caps historically, we'll need to see more weakness to think that this area underperforms.   Near-term, IWM has shown a few signs of faltering on absolute terms, but does not yet look like a relative short.  
 

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Developed Markets vs Emerging-   Despite the recent stabilization in EM, it still looks early to fade the underperformance in EM, and Developed market strength looks to accelerate-  The relative chart of MXWO vs MXEF still looks to extend in the short run, given the breakout of this pattern in the last couple years.   This pattern is not unlike the chart above of Small-caps to large and for near-term, it shows that underperformance is still likely for Emerging markets, even if EEM bottoms out and makes an absolute rally.  Most of Developed markets should still show better than average strength vs Emerging, and Demark indicators are also premature in calling any sort of relative top in this relationship.