November 19, 2018
Mark Newton CMT, Newton Advisors, LLC
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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 .
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.