March 26, 2018
S&P MAR FUTURES (SPH8)
2564-8, 2549-50, 2531-3, Support
2614-6 (PIVOT), 2642-3, 2670, 2697 Resistance
Time counts from Gann's Square of Nine chart suggests short-term lows should be near
Foreward: For those utilizing Gann's Square of Nine Chart, we see that the 14-day decline from 1/26 into 2/9 also allowed us to pinpoint turns that might be approaching in the near future. For those that make use of this chart, one way of utilziing it involves converting price to time and allows one to mathematically determine where the course of future highs and lows might arrive based on a certain high, or certain low, or Low to High range, etc. By taking price and converting it to an angle of the circle of 360 degrees, we find that the initial decline of 14 calendar days in early February equates to an angle of 67.50 on the Square of Nine. Running this 14-day count forward initially allows us to find our next prominent high in late February, while other prices at 90 or 180 degrees in time can often pinpoint areas where price can turn. In this case, our studies found that both March 2/5 lows as well as March 12/13 highs occurred on prominent angles related to this initial decline. Finding other numbers also on this 67.50 angle equated to 59 Calendar days, which from 1/26 peak in January, arrives at 3/26, or Monday. Thus, based on our recent symmetry of highs and lows, we should be at a low for this current move. Yet in the larger scheme of things, bounces would still be within a bearish trend, purely technically speaking. For those wishing to study the Square of nine chart in more detail, i highly recommend the work of Daniel Ferrera, Carl Futia, and/or WD Gann's early work itself.
The extent of the deterioration in Equities is very much a concern given the combination of near-term Technical damage, along with the decline in longer-term momentum after having reached record overbought conditions into late January. This has negative implications for this coming month of April along with the typical bearish Third quarter seasonality from July-September. Overall, the reversal in Technology looked to have been very much a catalyst at a time when US markets were struggling for leadership. Bearish factors like the intra-market divergence between the US and the rest of the world, along with the NASDAQ's divergence to SPX and DJIA also were certainly important for those paying attention. Perhaps even more important was the breakout in Libor-OIS spread which gave many concerns about a possible funding crisis down the road given the extent that borrowing costs have been surging in recent weeks. At present, it's right to mention that the Triangle patterns having been reported in SPX along with XLF, XLI and others recently have all been violated as of this past week. Furthermore, the formerly strong NASDAQ (which had pushed up to new high territory while other indices languished) has now broken back down to join the others, not vice versa. The peak in Technology which began a couple weeks ago looks very much real, and stocks like FB and AAPL are still undergoing short-term declines which haven't yet arrived at areas of importance, from a price, or time perspective. The VIX, meanwhile looks to have broken out to the highest levels since early February which was expected, but has a very bullish intermediate-term pattern that looks to be emerging yet again. Momentum indicators based on MACD on daily and weekly charts have rolled over to negative on daily and weekly timeframes. These are all negatives for stocks along with the market on the verge of entering the most bearish part of the year over the next six months.
Potential reasons for near-term Optimism
1) Long-term trends intact- Importantly, this recent correction has not yet violated longer-term areas of trendline support, which lie near February lows for SPX. As stated in our Annual report, if 2500 is breached, it's likely that the market has peaked for the year and likely will experience a more serious correction that would represent the first bear market , therefore ending the bull market run from 2009. So after last week we now have prices nearing these longer-term levels of support while fear has elevated. The initial response after a severe couple weeks of decline is to look at buying back into the market, although with close stops under 2500.
2) Fear looks to be starting to come back into the market- There was some brief signs of optimism waning into early February, but after last week we saw both the CNN Fear and Greed index go to levels that suggest Fear, along with the Total Put/call ratio finishing up above 1.5, or the highest level we've seen since 2015. However, the Equity put/call still hovers at .76 and below levels seen both in early February at .88 or last August, and both of those times saw higher levels of Put/call ratios than present. So a mixed picture but still the Put/call (all inclusive) suggests this pullback has gotten a bit ahead of itself.
3) Divergences with the spikes seen in early February with stocks hitting new 52-week lows and also the VIX which is far lower than the inverse volatility blowout back in January. Despite there being definite reasons for VIX having spiked that high in February with the inverse Volatility ETF liquidation, it's still notable that our current levels are far lower than what's been seen over the last couple drawdowns.
4) Demark indicators have begun to line up again to suggest signs of exhaustion, this time on the Downside, not upside like late January. Daily charts along with a multitude of intra-day charts all seem to suggest the next few days should prove important for at least a minor trading low.
Reasons to still think Markets might be in trouble after a minor bounce
1) We're continuing to see the rest of the world indices in very poor shape, while US has just turned down to join. SX5E along with NKY late last week both violated February lows, and have traded far worse since late January. IF anything, last week's decline simply helps the SPX join an already growing chorus of weak global markets near-term
2) Triangle formations have been broken- Structurally, the breakdown of recent symmetrical triangles in indices and sectors is problematic. These aren't normally patterns that can be formed over the course of 2-3 months, broken, and then simply snapback. Structurally we've just begun to see more serious signs of technical deterioration that really has not been present for the last few years.
3) Breadth was quite weak on the bounce from February, and as McClellan Summation index readings show, the peak of March 12/13 was far below levels seen back in January, or last Fall. Thus, we have an ongoing pattern of weaker and weaker breadth, and momentum has turned down sharply. While uptrends are intact, we've arrived at the first intersection of the last couple years where increasingly these might look to be broken.
4) Weekly momentum on the markets two highest percentage sectors, Technology and Financials, have rolled over substantially to bearish after recent negative divergences, and have seen RSI break down severely.
Bottom line, the evidence suggests that the last week's selling should be near at least minor support. However, on any signs of a bounce into early April, one would need to adopt defensive positioning again, and prepare for the possibility of additional selling and implied volatility increasing.
Appealing Risk/Reward ideas:
-Consider Defensive sectors like Consumer Staples and Utilities for the next six months as areas to favor, given the market's volatility. XLU had gotten down to key make-or-break support to the uptrend stretching up from 2009, and looks apt to show good strength if yields continue to trend lower in the next six months given the bearish tendency of yields typically during this time. (TNX peaked out last year in March) Heightened equity volatility while investors are bearish on Treasuries typically sets up for a good one/two combo for owning Utilities. Staples vs SPX in relative terms shows Demark counter-trend exhaustion BUYS on both a weekly and monthly basis, so this should be given consideration
Metals stocks should be favored given the decline in both US Dollar and Treasury yields along with massive uncertainty surrounding Trade policy. Price trends have grown more constructive from a risk/reward standpoint in the metals
Technology seems to be down near initial support on an absolute basis, given XLK's brush with $64, and stocks like AAPL also look to be just above key support (but not quite there) On a relative basis, Tech might not offer the same degree of outperformance as in the past, regardless of long-term uptrends intact. The severe deterioration in momentum seems important for this group, and makes selectivity essential for the next six months.
- Using strength in the US Dollar index to consider buying EURUSD and GBPUSD, as the Dollar should be on the verge of some seasonal weakness in April while technical trends remain bearish on the Dollar.
- Getting long Bitcoin with stops at 7500, and adding to longs over 10,000 which could drive the first meaningful rally in XBTUSD since late last year
SHORT-TERM/INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Bullish for a Bounce- Prices have gotten down to levels right above February lows, while signs of fear have begun to creep into the market in the short run. Near-term oversold conditions combined with Demark signs of exhaustion are also present which might be effective in creating an early week low. While the intermediate-term prognosis is currently negative for the month of April, prices look to be near areas to buy, and how far the bounce can carry will depend in a large part on the degree of breadth and momentum acceleration on rallies in the next two weeks. At present, looking to take advantage of covering shorts on this recent pullback down to under 2600 looks correct, while potentially selling out and taking profits potentially as early as 2680-2700.
Intermediate-term (3-5 months)- Bearish- The selloff which began again in earnest on March 12 looks to be a concern to the bullish case for this Spring, and breaks of 2500 would suggest that the Bull market from 2009 likely has peaked out in Late January. We've seen troubling lack of breadth and momentum keeping up after the bounce from February, and Europe and Asia have acted far weaker than US in the last two months, not showing any of the exuberance that the NASDAQ showed in early March when it rose to new highs, yet few other indices followed suit. Now given the worst weekly decline in two years time, momentum has moved sharply lower and has made very bearish patterns on RSI for various sectors like Financials and Technology, and MACD remains negatively sloped on daily and weekly charts. While the larger uptrends from 2016 are still intact at this time, it's worth watching carefully if these should be broken, as this could lead to a much larger selloff in the months ahead. The positives in the near-term involve Fewer stocks hitting new lows while sentiment has gotten rightfully concerned, as per the Total Put/call ratio hitting 1.5 last week. Yet, as stocks begin to move into this period of bearish seasonality during the worst six months of the trading year, it's worth keeping an eye on momentum given now negatively it's pushed lower of late. Bounces this coming week could serve as a chance to lighten up in early April.
This week's Weekly Technical Perspective covers some of the key charts surrounding our latest selloff in equities over the past week. While many charts show prices nearing initial areas of importance, additional weekly problems remain that have surfaced.
SPX- BUY this DIP Monday/Tuesday for a bounce- As can be seen in this daily S&P chart, prices are now nearing important near-term levels of support which likely should hold on this first pullback from 3/12 highs for three important reasons: First, prices are nearing former lows from early February while coincidentally nearing the 200-day moving average as well. While the 200-day doesn't necessarily always represent serious support, it did manage to hold on the last test in February and also coincides with the two-year uptrend line support from 2016 which has much more importance. Second, Demark's TD Sequential indicator will reflect a "13-countdown" likely in the next 1-2 days, while intra-day signals are also very close to forming on hourly, Two-hour, Three-hour and four-hour charts, which represents a huge confluence of downside exhaustion. Third, cyclical lows based on the initial 14-day decline, per Gann's Square of Nine chart, shows 3/26 as having importance, which should represent at least temporary support. Bounces from this level though, given the degree of damage suffered by the break of the triangle pattern from early February are problematic for Bulls, and prices have sold off much more severely compared to February lows than what would be expected to think this was just a normal pullback. We've seen breaks of triangles in several ETF's and should now likely result in further downside acceleration into the month of April after a minor bounce. However, at present, prices are nearing February lows, and from a trading perspective for SPX and other Sector ETF's, it looks right to consider covering shorts and buying in small size as this final week of March gets underway. If price fails to hold February lows, that would be a much more negative sign for the months ahead, and the area at 2500 would serve as a stop for any buys Monday/Tuesday. For now, given this volatility, a hit-and-run mentality is necessary given these swings, and enough seems to be there to suggest buying early this week.
XLF- $26.82 Financials near initial weekly Trendline support, but momentum downturn is a big concern- Financials look to be also at an interesting juncture after the weakness of the last two weeks. While prices did in fact violate the daily Triangle pattern from February, they've now arrived at key trendline support on weekly charts since the 2016 lows. This should help this group to stabilize and start a small bounce of its own. However, despite the long-term chart being intact, there are a couple warning signs worth mentioning. Momentum has taken a steep slide given the degree of price weakness in the last couple months. As seen in weekly MACD, the momentum indicator under price, it turned very bearish in the last two weeks with its breach of the signal line and is diverging down sharply. Additionally, the extent of last week's decline reaching former lows of February makes for a very different pattern in the short run than what's been seen in recent months. It's doubtful at this point that prices can form any type of symmetrical triangle pattern given how deeply prices fell last week. While the area at $26.18-$26.75 should be considered initial support to this drop early this week, it would be problematic structurally if this level is broken, and should be watched carefully in the weeks ahead for any hint of violation.
US 10-Year Treasury Yields- The extent to which Bond yields peaked out ahead of the FOMC meeting has been a question for many lately, and the reversal likely stem from two key reasons. First, yields had failed to get up above 3.05% that marks the 25 year channel highs and was thought to be major resistance to yield rallies. So, despite the FOMC hiking short rates, the long-rates simply have not responded with the same force. Second, sentiment remains quite negative on Bonds, and CFTC data shows Speculative shorts at the highest levels on Treasuries since last March. At that time, yields peaked out at 2.60 on the 10yr and travelled down to 2.00%. Such a pullback could very well repeat this year given that Bond yields and equities have begun to move in unison again in the last few weeks, while there definitely seems to be a near-term need for safety given equity volatility. In the bigger scheme of things, TNX likely gets down to 2.65% before stabilizing and turning back higher. At present though, yields have been churning between 2.79-2.92 and the path of least resistance very well might not be the upside like many think. Breaks of 2.79% would be important and an area to watch carefully on any further yield weakness.
Utilities- Recent strengthening served as a "Tell" regarding potential market weakness- This relative chart of the Utilities vs SPX shows the relative strength which has resurfaced in the Utes after a very sharp downturn from November. This recent strengthening began in January, but really started to pick up in the last few weeks, and stocks started to turn down nearly coincidentally with strength in this group. In the short run, this might stall out and back off a bit until the market enters April, but one should look to buy weakness in the Utilities into April as this group likely can strengthen as equities pullback further, which is looking increasingly likely.
Consumer Staples should be poised to turn higher given the presence of both weekly and monthly Demark "13 Countdowns" in place on relative charts of Consumer Staples vs SPX, while Daily charts now also show Counter-trend signs of exhaustion after a very steep drop from late January. The XLP, or Consumer Staples SPDR Select ETF, has neared the lowest point since the US Election in late 2016, having pulled back over 13% within the last two months. This relative chart above paints a similar picture after severe exhaustion not just from this past January, but from early 2016, having underperformed substantially. While a breakout above the downtrend is necessary to suggest the start of intermediate-term outperformance in this group, the short-term severe carnage looks sufficiently worn out heading into late March. Furthermore, this looks to be sufficient to argue for buying dips in this group heading into April, thinking that it very well might offer better safety in the market than putting money in Technology or Financials over the next six months. One should look to buy XLP at $50-$50.50 and consider overweighting Staples as a trade over the next week.
CBOE Volatlity index- VIX - Implied volatility is on the rise yet again. The VIX looks to have made a structurally bullish breakout last week with its move back over 20. As daily charts show, it's managed to eclipse the former peak from March and from February, and shows no impending counter-trend "Sells" on daily charts which would think volatility should begin to reverse back lower immediately. One can make the case for a spike up to 27 initially Monday or Tuesday which would coincide with a TD Sell setup, but this very well just might lead to consolidation, and a mild pullback only before a larger move to the mid-30's.
Weak breadth levels provided clues to downturn, and remain a source of concern- McClellan's Summation index turning lower again looks problematic, and additional weakness looks likely in the coming months. This daily chart provides a very visual perspective on how breadth has been starting to show greater and greater amounts of deterioration. This started back in January when the Summation index peaked at a much lower level than back in October, despite stocks having pushed well above levels seen last Fall. This represented the first warning sign. Then the snap of this two-month uptrend in mid-January coincided with the breakdown in equities, and breadth had been slowing largely in the two weeks prior to this trend violation Lately we see that the pullback into February caused the Summation index to go well below prior lows from both November and also May. What's interesting though is the weak rally attempt from early February, which as can be seen barely recouped half of the prior selling from late January. While the NASDAQ was smashing former highs and making records, breadth for US indices was at a much lower rate, and we still had less than 60% of all issues above their 50-day moving average in early March. That figure has dropped now to under 16%, while the percentage under their 10-day m.a. has fallen to 6%. Extreme short-term conditions, but yet greater reason to have concern about April-October of this year given how lackadaisical breadth and momentum have been lately.
Fewer new lows than February is mildly encouraging. NYSE New 52-week lows (Bloomberg) Somewhat refreshing, however is the extent to which stocks hitting new 52-week lows are but a fraction of levels seen back in February. While this can change very quickly, at present we see just 114 New lows as of last Friday, which is less than half levels seen at the prior stock market bottom. This would seem to be an encouraging sign of it could hold these levels, and begin to turn lower. With price nearly at similar levels, this does represent some positive divergence that could be helpful for stocks. However, given the prior charts showing lackluster breadth, it might just be a matter of time before these former peaks are indeed tested and taken out. One should watch charts of New Lows carefully in the days ahead, along with the VIX.
Gold looks to have begun a surge back to test early year highs after the last few days produced a downturn in Treasury yields along with the US Dollar concurrently. This chart continues to grow more bullish by the day, and should lead to an upcoming test of the important 1360-5 area which has marked the highs of a multi-year consolidation in Gold, but might finally be broken out in the weeks ahead as the Dollar embarks upon its pattern of traditional seasonal weakness in April. Given the relative outperformance in Gold vs Silver since 2011 that is part of a 20+ year long-term base, one should favor Gold over Silver for precious metals strength, and expect that Gold should lead in performance in the weeks and months ahead. At present, it's right to be long gold, looking to add on strength above 1365. ETF's like GLD, IAU will give exposure to the metal, while ETF's like GDX can give exposure to Gold mining stocks.
Facebook (FB-$159.39) FB looks unattractive heading into this week considering the large breakdown seen in shares last week that undercut February lows on heavy volume. As daily charts show, FB has made minimal progress since last Summer when this began to trade sideways, underperforming some of the other "so-called FANG stocks" Looking specifically at last week, this break on over 100 million shares which brought this down to the lowest level since last Summer is problematic to the structure since last July, and should result in FB continuing its decline in the short run. Downside targets lie near the weekly uptrend line at 145 and would be the first real area to consider buying dips. For now, despite its intermediate-term appeal, the near-term prognosis is bearish, and one should hold off on buying dips just yet, and even consider shorting, Technically speaking. FB will require a move back over $170 to consider this trend repaired, but even in this case, the extent of the weekly momentum drop looks to potentially be a bearish overhang in the months ahead.