June 11, 2018
S&P 500 SPDR ETF Trust- SPY
276.87, 275.50, 272.80 Support
279.56, 280.41, 280.94 Resistance
The negative inter-market divergence shown by the SPX and DJIA along with the TRAN not joining the NASDAQ back at new highs is at least a temporary issue, and it's difficult to call this too broad-based until we see more evidence of a widespread move back to new highs. The Small-cap rally has been encouraging lately, and mid-Caps have just made new all-time closing highs last Friday. Yet, the large caps have been faltering of late, so this is something to note. Most European indices and China also are quite a bit weaker than what's been seen in the US, and this divergence also can't be ignored. Many of the rallies back to highs have far more conviction when they happen all together, and when US and Europe and Asia are all rising in Tandem. So while there are reasons to be optimistic given recent progress, there also are concerns that need to be alleviated.
Summary: Equity markets are entering the 2nd full week of June on a very optimistic note, despite the huge number of Potentially market moving events that lie directly ahead. After what looks to have been a less than successful G-7 meeting, rife with combative talk and threats of reciprocal tariffs, Trump now has flown to Singapore for the historic meeting with North Korea's Kim Jong Un. This week also brings about the long-awaited decision of the US case to block the mega-merger of AT&T and Time Warner which might have implications to other deals. Additionally, we have the long awaited June FOMC meeting along with an ECB meeting this week. The FOMC's projections for 2018-9 and also ECB detailing plans for any Bond tapering will be watched with great interest.
Overall, technically speaking, these last couple weeks have been largely positive in producing some breadth improvement and structurally bullish developments with constructive short-term technical breakouts in Healthcare and Materials to join the recent lift in Industrials and Discretionary. The lift in Yields ahead of this week's FOMC meeting has helped Financials to bounce as well while the Defensive sectors have underperformed dramatically. The Dollar has shown signs of turning down, which has fueled a rise in the Metals and Ag stocks, but largely much of the rally in the last month has been largely dominated by Technology and Retailing which have both shown sharp outperformance, largely fueling the move in Consumer Discretionary back to highs. Advance/Decline line for "All Stocks" is back at new highs, while popular technical momentum gauges like MACD have now turned back to positive on both a Daily and weekly basis and are also positive on a monthly basis.
However, all is not positive in the markets as we continue to grapple with intermarket divergence between the NASDAQ and DJIA, SPX, where the latter two have not shown the same degree of strength in being able to push back to new highs like NASDAQ. Sectors like Financials have broken down relatively on weekly charts, where even a minor bounce in the banks likely will not be sufficient to turn this momentum back to positive. Moreover, cyclically there are two different cycles that suggest a change of trend this week, while Demark's TD Setup count is within 2-3 days of reaching conclusion. (This could make a further advance quite difficult into end of month, and lines up directly with this week's FOMC meeting) Additionally, sectors like Technology look to be very close to peaking out after having turned in some very pronounced outperformance in the last month. Tech has had a history of showing outsized performance which then is given back, most recently in September-November 2017 as well as February-March. Now the rally from late April looks to be nearing conclusion, and also might bring about a peak. There also stands the issue of Sentiment having widened back out between Bulls and Bears, while speculators have taken to buying up calls to take advantage of this rally, as Equity Put/call ratios are down near levels which marked the peak from late January in the SPX. Finally, seasonal headwinds lie directly ahead for US stocks, and given an average "June Swoon" pullback to the tune of -1.7%-1.9% for S&P and DJIA during mid-term election years, this will take quite a degree of selling to erase the +2.7% we've seen during the first six trading days of the month. (Both NASDAQ and SPX are higher by 2.73% MTD, while the DJIA is up by over 3.6%)
All in all, it seems like the market has been able to successfully weather almost everything that's been thrown at it lately, and regardless of the uncertainty of a potential trade war on the direct horizon, geopolitical unease, or the possibility given lackluster GDP growth that the Fed could be hiking into a fragile recovery, stocks have pushed higher nearly 3% in a seasonally weak month, while the broader Equity market structure still needs a lot of help to turn bullish. Prices still lie under March lows and under January, and this negative divergence between the US indices, or vs Europe which has lagged, does not seem to be dissipating anytime soon. Technically I suspect that Technology should stall out this week and turn down, and Yields also could face weakness again post FOMC meeting, (given ongoing huge CFTC Spec Short positions in Treasuries ) and the combination of these should result in weakness in both Technology and Financials again starting late this week. Given that these represent over 40% of the market, I suspect stocks should have difficulty in making too much more progress. However, at the start of the week, trends remain intact and the recent progress still looks to have more upside early in the week. So one should bet on a final push this week, but one which should be utilized for profit-taking and weakness over the last two weeks of June.
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Bullish- (With Stop and Reverse on any move under 2740) Markets still haven't shown much signs of technical weakness, outside of a bit of stalling out in Technology, which has been directly replaced with strength in Retailing, and various Materials and Healthcare stocks. Yet, the combination of bearish seasonality, cycles, Demark Sells and overly optimistic sentiment ahead of FOMC could all come together to cause some serious headwinds late in the week, and one should be cautiously optimistic, but with an eye on the exits.
Intermediate-term (3-5 months)- Bearish- It's thought that markets are nearing an initial inflection point given the seasonal trends combining with other cycles which could allow for gains to be met with solid resistance throughout the back half of June. An above average pullback looks likely into July, and if sentiment can contract sufficiently, this might warrant a bullish stance into the Fall before cutting back exposure again. But it's thought that Technology is nearing important resistance and the bounce in some of the other sectors hasn't proven nearly strong enough to combat a slowdown in Tech. Whereas longer-term uptrends from 2016 are intact and Advance/Decline is back at new highs, the risk/reward for equities rallying through the balance of June is sub-par, and gains should be used for profit-taking. However, it's thought that a larger pullback likely should still constitute a buying opportunity for a push higher into the Fall before any larger selloff gets underway. While short-term support lies at 2740 and then 2675-85, the Intermediate-term support to buy lies down at 2450-2550.
As with last week, we'll look at some charts of what appears to be some of the better risk/reward ideas heading into this current week. Below is Technical Analysis of 10 Attractive stocks which look to trend higher over the next few weeks, and look like appealing technical longs
Costco Wholesale (COST- $203.76)
Costco Wholesale (COST- $203.76) Breakout from four month base bodes well for future gains- COST has been churning since January, but after bottoming out in late March, has quickly moved back up to test former highs, and these were just exceeded in Cup and Handle fashion as of late last week. This is a bullish development technically and one should look to consider COST and particularly on any minor backing off, as the stock looks appealing at 200-1 for a move up to 210-15. Stops on longs are placed under 195, as this can't be breached without changing the structure of this pattern.
O'Reilly Automotive Inc. (ORLY- $283.13) Bullish two-year breakout- ORLY's breakout of early year highs also managed to exceed the mild consolidation resistance that had held the shares dormant since 2016. Technically, the act of getting above early year highs changes the structure for the better, and should allow for a push up to test former highs near $292. Only under $272 would this rally be postponed, arguing for a move down to $265. Near-term, it's thought that ORLY should be considered for a move back to test highs, and over that would allow for a much sharper move in the weeks ahead.
UnitedHealth Group (UNH- $250.68) Bullish with Cup and Handle breakout likely leading UNH up to test $275. This Healthcare standout has largely been under pressure since early this year and the peakout led to more than a 15% decline into early February before this found support, retested, and then started moving higher. The initial retest came in late May, but this has since been exceeded as of late last week, which is a bullish development and bodes well for further gains. Upside targets lie near $275 while one would utilize $240 as a stop for longs, technically.
Zoetis (ZTS- $86.78) Bullish, with upside targets initially near $90 and additional strength likely to find its way to $100 without too much trouble before finding resistance. ZTS has been trading in a very narrow range over the last few months, with highs near $86 and increasing lows since early May. Last Friday's ability to close up over the highs of the prior couple months is thought to be quite constructive technically, and bodes well for additional gains as the Healthcare space gradually begins to try to rebound. Only a move back down under $82 would cancel the positives in this chart and for now, its right to expect additional gains.
Old Dominion Freight Line (ODFL- $160.64) ODFL's ability to breakout of the consolidation since January, churn sideways without any meaningful pullbacks, and then push back higher is considered a real positively technically, and bodes well for additional strength up to near $170 before this finds any meaningful resistance. This stock has managed to exceed recent consolidation in a much more bullish fashion than many within Transportation, and while many within the Airline space are range-bound and have made zero progress for the last few months, this stock has clearly been a standout. Minor dips in the next couple weeks could present even a better risk/reward, but it's right to be long at current levels, looking to add, while utilizing $150 as a level for stops on Bullish bets.
RH- (RH- $113.28) RH's bullish breakout over its large Cup and Handle resistance highs since 2015 bodes well for this to continue pushing higher with initial targets near $120. The six-month Cup and Handle pattern has quite bullish implications given how deeply prices fell before recovering just as quickly and the 25% plunge and roundtrip in short order should help this push higher without much trouble in the near-term. Only on a pullback down under $106 would this postpone the rise.
KMG Chemicals (KMG- $70.43) Bullish, with targets near $77.50 then $80. KMG's ability to push higher to surpass April and May highs is a positive development for this stock given the triangle pattern in place. The start of the turn back lower for the US Dollar has helped many chemical and metals names outperform, and KMG's pattern here resembles a Bullish pattern which as traded in a very unorthodox, choppy, yet positive pattern since the middle of last year. The last few months in particular resemble a triangle pattern of slightly lower highs and higher lows while last week's ability to exceed the prior few weeks should mark the start of the breakout higher. Movement up to near $75 looks likely, while a move down under $66 is necessary to postpone this rally.
New Oriental Education & Technology Group, Inc (EDU- $105.00) The increasing number of tests of $105 since January is quite constructive for this pattern, which had largely shown no real net change since last Summer when it began to consolidate following the push up off the lows from the US Election. The act of moving from highs near $120 down to under $85 before pushing back higher to test this same level back in late May was important and now has been revisited in short order just in the last week. Movement up to near $115 looks likely technically as EDU has formed a minor Cup and Handle pattern just since January, and should be overweighted for a push back to new highs. Movement back down under $100 would postpone this move, but for now, the technicals are pointing for higher prices in the short run.
Resmed (RMD- $106.79) RMD's breakout in late April helped this to claw back to test and exceed all-time highs from January just in the last week. This is a bullish development and bodes well for further near-term strength up to near $110, then $115 before any major resistance. RMD's pattern has become more parabolic in its rate of ascent during the early part of this year. The consolidation in recent months has helped to alleviate the overbought conditions, while the breakout last week should help RMD to now accelerate higher in the weeks to come. Counter-trend signs of exhaustion are premature, and pullbacks should provide an even better risk/reward for a push higher in the days/weeks to come.
Umpqua Holdings Corp. (UMPQ-$24.86) The recent act of building a "base" on top of a former base is very encouraging for UMPQ to rally further in the weeks to come. The consolidation in the last month happened while holding the $23 level which had marked highs in this stock since last November. The case for near-term bullishness however, is a result of the push higher back to new highs and exceeding the former peak back in April. This should allow for an upcoming push up to near $26.50-27 and is thought to be quite constructive. Only a move back lower under $23 changes this structure sufficiently.