June 25, 2018
S&P 500 SPDR ETF Trust- SPY
273.71, 270.90, 267.76 Support
279.48, 280.41, 281.45 Resistance
As the 2nd Quarter grinds to an end. we see the degree to which stocks have largely gone nowhere in recent months, a far cry from how resilient Technology and Retailing have performed and how most view this rally in recent months to have been parabolic in nature. Given most of the attention on Big-Cap Technology, it's no wonder, as stocks like NFLX, AMZN, GOOGL, FB, have all risen 30% or more in the last few months. Yet, the trend in the NY Composite, one of the more broad-based measures of the stock market that exists, one sees a pattern that's more like the DJIA, than the NASDAQ or S&P. Stocks have fallen off since mid-June, not much different than what's happened in May, April, or March. Now as we near the final week of June, prices have yet again pulled back to what appears to be an attractive risk/reward entry point for longs headed into July. Until markets start to show greater signs of Tech deterioration, it's right to use broader market weakness which gets down to key levels, as daily NYA charts illustrate, to cover shorts and expect that last week's out-sized decline should be nearing its end. While one can't rule out one final pullback early in this coming week to test or even take out last week's lows, particularly in Industrials, or Financials, Materials, all three sectors look to be near support to buy, for short-term tactical trading purposes while Technology is not turning lower.. So until this trend and seasonality starts to change, we'll look at recent pullbacks as a chance to buy dips.
Summary: A very schizophrenic market to say the least in recent weeks.. The NASDAQ pushes back to new highs largely on Technology, Biotech strength, while the DJIA nearly sets a record for the longest number of consecutive down days since the late 1970's. Trends arguably remain lower from mid-June after replicating the mid-month peaks seen in recent months, though the broader indices really have been more lifeless and range-bound, and have not really accelerated to the downside, which was thought to be a possibility heading into last week. While Industrials and Materials certainly suffered some real carnage, Technology and Healthcare acted quite well relatively and the Defensive sectors garnered the most inflows with Utilities, REITS and Staples outperforming all the other eight sectors, outside of a last minute Energy surge helping this sector squeeze in the top 3. Breadth had fallen off heading into this past week, and momentum based on traditional gauges like MACD had rolled over to negative on daily charts. Yet, Technology and the NASDAQ have still not meaningfully broken uptrends from the early May lows. The Small-cap surge has certainly not been followed by Large Caps and Growth is still largely outperforming Value, though this trend has stalled out a bit in recent weeks after a stellar run-up in April and May. Meanwhile we've seen Treasury yields largely stall out very similar to what has played out in Equities this past week, while the Dollar has shown a few signs of trying to peakout. While a pullback in USD could positively affect Commodities, it seems to be setting up for an upcoming bounce in Emerging markets which have been beaten up badly in recent weeks.
Overall, given the negatives of Momentum divergences and index divergences coupled with Sentiment having gotten complacent in a rough period of seasonality, what do the Technicals suggest can happen this coming week? When scanning the sectors and indices, it looks apparent that this recent pullback should be close to nearing an end. The drawdown in Industrials, Financials and Materials have not been successful in pulling the larger market lower, and now XLI, XLB and XLF are all within striking distance of price and time based support this coming week. While a move back under this past week's lows still looks likely, my thinking is, this should prove short-lived and provide yet another buying opportunity as markets enter the beginning of July. While the sentiment and seasonality issues won't go away anytime soon, if equities are to bottom out, it's right to focus on both Technology and also Small-caps, as it's thought that this stock rally likely should persist as these two areas gain ground. Upon nearing the middle part of July, if indices are able to rally into this timeframe yet again, it would be right to sell into this move, expecting another drawdown, which this time around, might prove a bit stronger into late July to the downside.
Outside of Equities, Yields look to have largely stalled out this past week, but short-term Treasury strength still looks like a possibility, while the Dollar has shown some evidence of turning back lower. Charts of AUDUSD, EURUSD and GBPUSD all seem to support rallies in the short-run, while the Grains look interesting to rally after having suffered a very seasonally bearish few weeks, which has been a historically great bearish trade for the month of June. Precious metals look apt to begin turning back higher in the near future, and could begin sometime this next week.
Sector wise, this week's Weekly Technical Perspective focuses on Healthcare, as this group has shown above-average performance and its constructive rally of late suggests this group should continue to make strides in outperformance at a time when Technology has gotten very overbought and looks like a poor risk/reward in comparison. Healthcare managed to break out of its intermediate-term downtrend vs SPX which has been in place since last September, and while Biotech has broken back out to new high territory (XBI) many beaten down stocks within this sector are beginning to make meaningful signs of rallying off the lows for the first time in months. Stocks like REGN, VRTX, ALXN, BMY to name a few, which had lagged substantially, are now showing convincing signs of bottoming out in the near-term. We'll review the charts of these and the absolute charts of several Healthcare indices below.
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Early week Negative, but Bullish for a turn back higher this week- The first couple days I expect very well could be bearish this week, as prices retest and violate recent lows, but my forecast for the week is for weakness to prove short-lived and turn up to close the week positive. Early weakness should not violate 2709, and XLI, XLB and XLF all look very close to trading lows, but structurally and time-wise, all require a move back down to new low territory first. So initially one should hold off from being too aggressive in buying early in the week, but on evidence of price pulling back down to 2735-40, look to start covering shorts and utilizing pullbacks to buy. Small long positions are how we're starting out this week, looking to increase on early weakness.
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.
This week we'll look at some charts of the Healthcare space, which looks technically like some of the better risk/reward ideas to consider in a market that's shown all types of divergences. This group traditionally tends to outperform in the Summer, and with Biotech having broken out to new highs, many of the former laggards within the Biotech space are shaping up quite nicely to end the 2nd Quarter.
XLV- Healthcare Sector SPDR ETF
XLV- Healthcare gaining momentum- OVERWEIGHT- Healthcare has begun to show convincing signs of strength in the last month which bode well for this sector to outperform at a time when many other sectors simply aren't performing that well, or in the case of Technology, have risen parabolically to levels which represent a poor risk/reward for the next 4-6 weeks. Healthcare is one of four sectors that is positive for 2018 out of 11, and its gains thus far for the month of June have helped it take the third spot thus far sector-wise with +3.35% gains which have taken this sector back to positive territory for the year with +2.83% gains YTD. Biotech and Medical Device stocks have shown stellar signs of outperformance recently, with XBI moving back up to new all-time highs and a definite pattern of mean reversion happening in some of the laggards, which have begun to show real signs of mean reversion. Technically, the selloff from late January has been nearly half recouped, but the rally into early June managed to break out above the prior highs from April/May, turning momentum back to positive. Following just a brief consolidation, this has now pushed back higher above $85, setting the stage for a rally back to the high $80's. One should overweight Healthcare given this pickup in strength, favoring further near-term outperformance.
XBI- S&P SPDR Biotechnology ETF- ($99.08) A sharp rally back to new high territory has caused many stocks within the Biotech space to begin showing above-average strength, with strong gains in May/June from many issues within Biotech, both the leaders and laggards. While near-term stretched after recent gains, technically this pattern is attractive in having exceeded highs last made in 2015. this should bode well for further gains, though one might consider some of the former laggards, which are now beginning to stabilize and turn back higher. (This ETF seeks to replicate the performance of the S&P Biotechnology Select industry index, which is an equal-weighted index. Given 120 holdings, it seems to be a better gauge for this space, than viewing the NASDAQ Biotechnology ETF, or IBB. )
Healthcare vs SPX- Relative chart (XLV/SPX) Healthcare's gains have been sufficient in the last couple months to officially break out above the downtrend in this group which has been ongoing since last Fall. After having been tested already on two separate occasions, this move over the downtrend can allow for further near-term outperformance from this group, suggesting ongoing outperformance. One should consider buying into Healthcare given this relative break of a nine-month downtrend, which argues for gains at a time when many sectors simply don't look that appealing.
Alexion Pharmaceuticals (ALXN- $127.53) Bullish- Mean Reversion rally off the lows looks to be starting- The rally last week to exceed highs going back since January bodes well for further gains in ALXN which has slowly but surely begun to demonstrate signs of trying to bottom out following nearly a 50% loss in value since 2015. Volume expanded on gains last week with weekly charts showing price having moved up to the highest levels since late January. This uptick in momentum at a time when the group is starting to show better relative strength should carry ALXN up to near-term targets at $139, with additional levels near $152, or the 50% retracement of its pullback since 2015, a key level. The ability to get over this level, while not expected right away, would suggest a much more positive intermediate-term trend for ALXN, helping this stock to begin the process of recouping much of the damage since 2015. Near-term, last week's gains seemed like a meaningful step in the right direction to helping this stock start to move higher. Longs are recommended with stops near $114 for traders.
Regeneron (REGN- $332.50) Trendline breakout and recouping of former lows is a real positive. Bullish weekly gain above prior 2016 former lows bodes well for additional gains in the weeks ahead. Overall, after having lost more than 200 points since last Summer, equating to a loss of more than 40%, REGN is finally showing some signs of turning back higher. The gains in the last couple weeks have broken out above the downtrend from last year's highs, made this exact week last June, while prices have moved to multi-week highs above the prior low levels carved out in 2016-7. This is important as the former area of support that had broken, has now been regained. Upward progress looks likely in the weeks ahead, with targets initially near $375, and then near $409 on further rallies. While a rise from current levels likely doesn't move in a straight line, the next 4-6 weeks look positive for REGN, and long positions are recommended, looking to buy any minor dips.
Bristol-Myers Squibb (BMY- $55.23) First meaningful bounce off the lows looks to carry further- Last week's ability to push up over the highs of the six week consolidation should allow for further gains in the weeks ahead into July. Momentum has turned positive and has shown evidence of turning up sharply last week, as BMY has slowly but surely begun to rebound after its very steep decline from early February which produced a 20% + decline in just two-months' time. Movement back to $57 looks initially likely, and then over would produce gains to near $60-$62 which should prove to be the first area to consider profit-taking given this first meaningful rise off the bottom. While intermediate-term charts require additional strength before weighing in too positively on the broader structure, the near-term picture looks technically bullish, arguing for long positions here and pressing gains after last week's rise, thinking that the first upside target is right around the corner.
Becton Dickinson (BDX- $238.49) Minor Cup and Handle breakout last Friday part of a larger bullish base from January- BDX looks quite positive near-term after its ability to gain ground over both April and early June highs last week. The stock formed a mini Cup-and-Handle pattern from mid-April, and its breakout of this pattern in the last two weeks should allow for a push up to $245-$250 without too much trouble. While some might choose to avoid BDX given the monthly overbought conditions, the ability to have consolidated gains since early this year has managed to form a nice bullish base that bodes well for this turning up more sharply to test prior highs. Long positions warranted here, looking to add on any early week pullback.
CVS Health Corp. (CVS- $72.34) Bullish trendline breakout along with exceeding former highs bodes well for further strength. CVS has begun to show compelling signs of trying to bottom out and begin to work its way higher after moving to new monthly highs as part of an existing monthly downtrend from 2015. However, the daily chart shows the reason for optimism, as CVS has just broken out above its near-term downtrend from late January along with getting back up above the former peak from late April. This recent price action is constructive and should allow for further gains up to near $79 which intersects a minor two year trend from 2016. The larger area of importance with regards to its broader monthly pattern lies at $85. So while the longer-term pattern has some definite work to accomplish before getting its uptrend back on track, the near-term success should help this to make some further progress over the next 4-6 weeks before its next challenge.
Merck (MRK- $61.56) Consolidation post breakout looks complete- Higher prices likely to Mid-$60's initially. MRK remains a bullish stock to own technically and last week's ability to snapback up from near $61 to multi-day highs was a good indication that its minor pullback likely was complete. MRK made excellent progress back in early June after having broken out of its base since last Fall. The stock consolidated for a few weeks and has now turned back higher as of late last week, holding its uptrend from late March/early April lows while remaining above its intermediate-term trend from last Fall's highs. This latest progress should help to carry MRK back to March 2017 highs at $66.80 while getting over that level would successfully complete a breakout of a long-term bullish base in this stock since 2002. Overall, it's thought that MRK should be starting its climb back up to the mid-$60's with intermediate-term targets up near $91.50 from December 2000.
Vertex Pharmaceuticals (VRTX- $159.65) Breakout to new monthly highs bodes well for this stock starting to turn higher- VRTX has struggled so far this year, peaking out near $180 in March before selling off down to just under $145 over the last few months. However, its recent ability to bottom out near early May lows and then exceed the prior highs cements this pattern as a Double bottom formation, and should allow for VRTX to continue trending higher in the weeks to come with initial targets near $165.20 and above leading back to $178. In the bigger picture, VRTX has consolidated in the last few months after having more than doubled from late 2016. The stock's daily pattern shows its recent progress, while the weekly chart (not shown) illustrates how VRTX still lies within a few percent of its all-time highs, so any minor backing off in recent months hasn't done much to alter its larger structure and this remains bullish.