November 26, 2018
Mark Newton CMT, Newton Advisors, LLC
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.
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
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.
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.
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.
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.
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.
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.
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.