November 7, 2016
S&P DEC FUTURES (SPZ6)
2078-9, 2070-2, 2049-51 Support
2107-8, 39-41, 2148-50 Resistance
The Sunday night ramp in Equity futures given the Clinton file being put to rest brought prices back to the area where they broke down last week. This should be an area to sell into this move, but pullbacks into the Election Tuesday and/or Wednesday would become buying opportunities . Over 2110 on a close likely helps prices extend higher. For now, this area looks important as trading resistance for S&P to sell into, and doesn't represent any meaningful change in structure.
Electronic session pre-mkt gap in futures has neared the former area of the breakdown from last week at 2107 as of Sunday evening, which should be a strong area of resistance to sell into prior to the Election. The market seems to be attempting to "front-run" a possible Clinton win given FBI Director Comey's statement that the re-opening of the Clinton case had now been officially closed. Whether or not a Clinton win would truly be bullish for stocks or not is truly difficult to handicap. However, prior swings on news announcements tend to lead to the conclusion that the market views a Trump presidency as far more uncertain with more potential for volatility, vs having more clarity under Clinton. At present, without taking sides, it's at least possible to say that the market has at least given a thumbs-up given some degree of uncertainty having been cleared up.
Overall, the recent selling in Equities had neared initial support, but technically it was still difficult to mark this as an official bottom after last Friday's trading. Indices managed to snap consolidation on day six of the current nine-day decline, causing a rapid pullback to the lowest levels since early July for S&P, DJIA and NASDAQ Composite. The MSCI AW World index fell to new four month lows while we saw Treasury yields follow suit along with the US Dollar, all of which were different moves than what occurred throughout most of October. Momentum had pulled back to oversold territory, but yet there really wasn't much sign of any capitulation in volume to the downside, nor counter-trend signals officially in place for indices such as the NASDAQ which should lead the S&P.
At present, uncertainty remains high ahead of Tuesday's US Election, and if Sunday evening volatility is any clue as to the degree of volatility in store with a close election, it will truly still be tough to handicap directional movement in the next 24-48 hours. While the weekly selloff in indices over the last week does look important and negative, the jump in momentum given Sunday's gap higher in Futures (if it holds into Monday, which at the time of writing, is uncertain) would likely signal the start of an oversold bounce. (Even on pullbacks back to lows at this point, we would see a pickup in momentum that would create divergences and be thought of technically as a minor positive. For now, despite a very negative short-term tape since mid-October, insufficient signs of fear in the market, and low breadth and momentum readings, a few things stand out that are positive that bear mentioning:
Key Technical Positives that Could help Stocks stabilize & rally post Election:
1) Oversold conditions- Daily RSI readings have broken below 30 for just the second time this year (January being the first) while only roughly 1/4 of all stocks remain above their 10 and 50-day moving averages - 25%, & 27.80% respectively for SPX
2) Intermediate-term Trendlines for NASDAQ remain in place from February lows, while SPX remains above key Price/time lines 1x1 from February- (One unit of price per unit of time, which tend to be more important as a source of support than Static trendlines)
3) Demark counter-trend signs of exhaustion - Currently quite a few major indices and sectors are showing TD BUY SETUPS( SPX, MSCI World index, RTY, and NASDAQ) (within 1-2 days) that suggest this selling should face at least a pause, and potential sharp reversal
4) VIX Backwardation- Spot VIX is trading above both 3 and 6 month futures at levels seen post Brexit announcement. While this signal isn't a single factor per se that could drive stocks higher right away, it should mean that implied volatility has gotten elevated to levels where any sense of calmness or elimination of uncertainty in the Election could cause a stock market bounce.
5) Transportation Strength-The degree to which Transports held up well in the last week is encouraging, with this sector turning in the ONLY positive performance of any of the 24 SPX Level 2 Industry groups last week, with returns of 0.63%. The Dow Jones Transportation Avg was higher in four of the last five days last week and closed at the highest levels since early October.
6) Small-caps gave some clues last Friday that a sharp reversal could be imminent with strong outperformance vs the broader market. While the deterioration in Small-caps was pointed out as a bearish factor that preceded this recent selloff, the bounce last Friday near key support vs. S&P in relative terms suggests an oversold bounce is close.
7) Evidence of Healthcare trying to bottom out- Healthcare's underperformance this year has been staggering, but there looks to be sudden signs of stabilization in the last few days, coupled with counter-trend signals that suggest an oversold rally is very near. Given that Healthcare represents 13.96% of the S&P, the second largest sector by capitalization, this would be important and positive for stocks if Healthcare could begin to rally.
8) Seasonality- Equities remain in a bullish time of the year seasonally with Election year Novembers being the #1 month for the NASDAQ and DJIA and #2 for SPX since 1950. Given that this first four trading days recorded losses of nearly 2% for S&P and DJIA and nearly 3% for NASDAQ, the odds seem to favor a bounce in the weeks ahead.
9) Sentiment remains poor, and some evidence of Fear in the short run- It goes without saying that an uncontested election will help uncertainty lessen dramatically, which should be a major positive for an oversold, scared market ahead of the election.
10) Treasury yields and the yield curve itself are positively sloped, and rising, and the market has given the Fed a "Green-light" to hike rates in December as seen by Fed Fund Futures pricing in a 76% probability, despite this market weakness of late. So rising yields (provided they don't rise too rapidly) should help Financials outperform into end of year, which given their 13.43% representation in the SPX, is also thought to be a positive.
This week's Weekly Technical Perspective concentrates on the Healthcare sector, which despite last month's report suggesting further weakness, now is showing several things which could allow for some stabilization to this decline and looks to be setting up for an above-average risk/reward bounce, no matter who becomes President. The FBI Director's "Case Closed" announcement might seem to be a negative for Healthcare early in the week as Clinton's chances might show some uptick, but the worst looks to be factored into many of these stocks and enough is there technically to consider buying selectively, and awaiting a turn back higher. 14 stocks within the S&P Healthcare index were down 20% or more in the last three months. Below we'll pick the ones we
TECHNICAL Long/Short Ideas:
LONGS: VRTX, EW, MNK, REGN, AGN, RF, FDX, VMW
Shorts: PM, TRIP, FOSL, EEM, BKS, GDX, PHM, ITB, IBM, ANF, TSCO, HON
SHORT-TERM/ INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION
Short-term Thoughts (3-5 days) : Bearish into the Election, Then Rallies likely could take hold- (Sunday evening early Surge in Futures has risen right to former Breakdown spot for S&P as of Sunday evening, which should be a good risk/reward area to sell into ) The near record number days of consecutive decline for US Stocks looks to be nearing a bottom into the election, as Demark signs of exhaustion per daily charts along with a ramping up in Fear could help stocks bottom out. However, given the depressed levels in breadth and momentum, the degree of participation in a year-end rally will be extremely important. For now, the area from 2050-70 is quite important for S&P futures, and lows should come about in this range sometime this coming week. Meanwhile, prices will need to get back above 2107 to expect the worst might be over for now, which would help SPX futures move back up into this prior consolidation that was violated.
Intermediate-term Thoughts (2-3 months): Bullish- The recent downward acceleration in stocks has set records for consecutive days down, but is thought to be unlikely to extend into end of year. A few factors are important in this regard, such as the elevated level of bearish sentiment/indecision that's giving way to the beginning of Fear (gauged by Equity Put/call ratio spiking to new four-month highs) along with VIX backwardation. Meanwhile, longer-term uptrend lines for SPX remain very much intact and we're nearing a time where the uncertainty "should" subside post Election, putting most of the focus on the December rate hike probabilities, which now stand at 76%. While the negatively sloping momentum on a daily, weekly and monthly basis IS an intermediate-term concern, the bullish seasonality for this time of year should provide stocks with a healthy rally into year-end before any larger correction gets underway. For Election week, weakness is likely, but should translate into buying opportunities in formerly strong sectors like Technology and Financials which have slumped a bit in the last week, while severely oversold sectors like Healthcare stand a good chance of rallying.
Charts below show S&P along with various charts of Healthcare indices and sub-sectors on an absolute and relative basis.
Healthcare is showing some evidence that an oversold bounce might be right around the corner, regardless of whether Clinton takes the White House or not. XLV has lost over 13% in just three months' time, having given back about 75% of the prior rally from February to August. Signs of downside exhaustion are now present, with Demark 9-13-9 patterns present on daily charts of XLV which often can bring about a sharp reversal of trend. Prices seem to have stalled in this decline over the last couple days, which has caused momentum indicators like RSI to jump from the most oversold level this year to near 26 in just the last couple of days. While prices will need to climb back over 68 at a minimum to suggest the possibility of a larger move higher, it looks like a good risk/reward here to buy at 66.48 in XLV, thinking that 68 is a worthwhile target for the short run, with over leading quickly back to near $71. For now, despite the severe downtrend in place, it makes sense to play for some mean reversion in this year's worst performing sector heading into the last six weeks of the year.
Monthly relative charts of XLV vs SPX show this area to be important as support after the severe selloff from last year. While the near-term trend has been quite negative and downward sloping, this monthly chart puts the group's recent underperformance into perspective. A retest of an area near two prominent former highs typically can equate to an above-average risk/reward to buy on a pullback attempt like what's been seen. So the combination of near-term oversold levels with indications of counter-trend buy signals per Demark indicators along with monthly relative charts showing this area to be much stronger than what most Daily or weekly charts might show, looks important.
Pharmaceutical stocks don't look as attractive to buy just yet as the XLV does however, with prices having just pulled back under prior lows from February. An additional 2-3 weeks of decline would help this index line up with counter-trend buy signals similar to what are now present in the XLV and XBI. For now, DRG will need to regain 473.20 on a weekly basis to have a chance at stabilizing in the short run, so a bit more selectivity is needed for this particular part of Healthcare, at least until late November when any further weakness would make this a compelling buy from a counter-trend perspective.
Biotechs look to have hit a key area of trendline support in the last couple days after this steep selloff and given the stabilization in the last few days along with indications of counter-trend buy signals developing on both a daily and weekly basis similar to what's now present in the XLV. Given that this area has been an important area of trendline support for Biotechs since February, a lift seems likely in the days and weeks ahead. If prices can manage to exceed $58, a larger rally should get underway, as this would surpass the downtrend which has existed in this group since late September.
The Healthcare Equipment and Services index relative to Pharmaceutical and Biotech index looks to extend recent gains and outperformance over the next few weeks given the ongoing upward sloping relative chart and momentum in this relative chart which continues to favor the Equipment and Services stocks. However, on a weekly basis here there is evidence of the opposite signals seen in XLV and XBI, where now exhaustion signals on the upside are near completion. This could allow for an upside peaking out in these stocks, relative to Pharma & Biotech, which very well could come from a bottoming out in the latter and sharp bounce in December and January. For now, the presence of these signals being near completion potentially by the end of November is worth at least some mentioning, as the uptrend should face at least some resistance in the weeks ahead after gaining ground for 2-3 weeks.
Vertex Pharmaceuticals (VRTX- $78.96) VRTX was down 21.26% in the last three months, but is showing above-average signs of holding prior lows from March along with trying to break out of its downtrend from August highs. Weekly charts show the formation of TD Sequential buy signals in place with a completed 9-13-9 count which are the same but opposite signals which occurred at the stocks' highs last August. While a weekly closeabove the close from four weeks prior is necessary to confirm this signal, VRTX looks like an excellent risk/reward under $80 for a move back up to the low to mid $90s in the months ahead.
Allergan PLC ($195.00) AGN is another example of a stock which has lost over 20% in the last three months, and in this case 23% into last Friday's close with over 15% of that coming about just in the last 10 trading days. Needless to say, AGN has gotten quite oversold but last Friday's "Inside Day" could translate into a reversal of this downtrend, particularly given the presence of Demark's TD Buy Setup in place which has marked quite a few lows in this stock in the last six months, along with highs (See the presence of Green 9 counts at many prominent highs above ) The act of finishing right back at former May lows looks important for last Friday, and any move above $199 should result in at least a rally to $210-$215 which initially might provide resistance. Unfortunately, the stock will need to show more evidence before thinking a large rally back to Summer highs can occur. For now, an outsized bounce looks likely in the weeks/months ahead.
Regeneron (REGN-$341.39) REGN is yet another example of a stock which has gotten oversold of late, having lost more than 21% in the last three months, yet finds itself right near a prominent former low which could act as near-term support. Shares rallied hard last Friday to eclipse the former Down day from Thursday, and the risk/reward for shorts in this stock at this point look poor given the extent of the decline. Rallies back up to near $370 to $385 look likely which constitutes a good near-term technical target. Weekly support in REGN does lie a bit lower in the event that Friday's lows are broken. Under $325 on a close would lead down to $298-$300, so one would hold off on continuing to buy in the event this requires one final pullback.
Edwards Lifesciences (EW- $89.63) EW's -20.67% loss in the last three months has taken this right down to a very important long-term area of trendline support which should create a decent buying opportunity for the stock for a bounce in the near future. This area has held as support since 2013 and could provide a decent risk/reward opportunity at a time when weekly momentum has reached the lowest levels in nearly three years. While failure to get back up to highs and then downturn could be an intermediate-term concern, for now EW looks attractive to buy here given this strong area of support that has held on every pullback the stock has experienced since 2013.
Mallinckrodt PLC (MNK- $54.65) MNK's 30+% decline in the last few months is now nearing a very important area near former lows that should create an attractive risk/reward entry for longs with the stock under $55. Momentum has become quite oversold but the stock has held $50-$55 since 2015 and this selloff should hold these former lows given signs of counter-trend buys emerging in the XBI and XLV. While declines under $53 would necessitate holding off on buying until this reached $50, it's hard to not see MNK as a good technical risk/reward given the severe decline to near important former levels that have held over the last year. Bounces to the mid-$60s look likely.
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