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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.