July 23, 2018
S&P 500 SPDR ETF Trust- SPY
278.41, 275.84, 274, 272, 268.49, 266.90 Support
281-281.5, 283.5-284 Resistance
The CBOE Volatility index, or VIX, managed to close Friday at the highest levels of the week and as this four-hour chart shows, has begun to stabilize near former lows from mid-June at a time when Equities have started to show a few signs of stalling out. Prior lows in VIX also occurred right near this 12 level and bodes well for buying implied volatility for a 2-3 week hold, and/or also a three-month hold, as recent uncertainty likely won't be alleviated anytime soon, and "VOL" is now down near the lows for the year when breadth and momentum have been slowly but surely stalling out. Any early week Equity rally that coincides with implied volatlity dropping would be a good chance to average down (<12) while movement up above 14.25 would serve as a trend following buy signal for VIX for at least a 20-30% spike in implied volatility. At current levels, after having dropped from near 20 to 12 in just one month, this looks like a very appealing time to consider buying VIX.
Summary: US Equity indices have shown increasing signs of stalling out over the last week which likely has begun the topping process of this latest rally which began on June 27. Signs of mean reversion in some of the weaker sectors allowed both Financials and Industrials to stage bounces last week, making up two of only four sectors which recorded positive gains. (Technology and Staples were the others) While the net change in the broader indices over the prior week has been very minimal (+/- 0.25% for DJIA, SPX and NASDAQ) the slowdown in breadth and momentum remains a key theme that needs to be re-emphasized. McClellan's Summation index remains lower than it was in mid-June, despite S&P and NASDAQ having attempted to push higher. Moreover, the All-stocks advance decline peaked out on July 9 and has also not confirmed this move up in the indices these last couple of weeks. Meanwhile, S&P's "breakout" over June and March highs certainly has not allowed for any acceleration. Although it was healthy to see some signs of rally in a couple of the weaker sectors, i.e.-Financials and Industrials, this bounce has not broken out above key trendline resistance drawn from January highs (So both of these sectors merely have bounced within downtrends) Additionally, counter-trend Demark based exhaustion Sells have in fact been confirmed for the NASDAQ Composite and 100 index, and should limit the degree to which these indices are able to rally in the weeks ahead. While indices didn't decline on cue as of July 13th, like we've seen over the past five months, breadth certainly peaked out at that time. Any ability to hold up intoThursday/Friday of this week would be thought to coincide with an even greater near-term top, producing weakness into early August before prices can stabilize. Bottom line, It looks far more likely that at least a minor pullback should get underway, so a defensive stance is recommended for this coming week, using any rallies that happen Monday-Wednesday as a chance to pair back longs.
Of the six reasons given last week as to why a cyclical pullback to this rally could get underway sooner than later, none of the six concerns have been alleviated. Breadth and momentum remain lackluster and many gauges peaked between July 9-13. Sector Non participation still shows Financials and Industrials to be weak sectors, which have not broken downtrends from January highs. While Technology and Discretionary have led the charge over the last three months and also YTD, Discretionary showed some evidence of stalling late last week and starting to rollover, as XLY pulled back to new multi-day lows. Technology has lost quite a bit of momentum, having performed "on-par" with the market in the last month, and barely was able to register any gains last week (+0.22%) The "FAANG" group meanwhile has not gotten above June highs and NFLX showed some evidence of peaking two weeks ago, while GOOGL and FB have earnings this coming week, and both are up against difficult resistance. Sentiment has continued to weigh in as bullish, despite the threat of tariff escalation. Investors Intelligence polls have now widened out to +35% spread between Bulls and bears, and the Equity put/call ratio is trading at .66 while the VIX has been basing and still under 13 (despite having firmed all of last week) With regards to Demark exhaustion, we've seen more confluence into late last week with counter-trend sell signals for NASDAQ Composite and NDX, while the cycle that provided peaks to the US indices in late January points to July 26-27 as being important for a possible turning point. Rallying into this time zone would present a good shorting opportunity for traders, while selloffs into late week likely would be buyable. Yet it's thought that this rally from late June should be largely erased in a short-term selloff which given the longer-term uptrends intact, likely would be buyable initially, with losses proving no greater than 3-5% initially.
What were the key developments for the past week? And does this get us closer, or farther away from thinking a pullback should begin in the next 3-5 trading days?
1) The mean reversion bounce in Financials and industrials was largely the biggest development sector-wise, but as mentioned, this bounce occurred within the framework of a bearish pattern for both.
2) Markets showed a minor breakout in Yields on the long end, with 30-year Treasury yields rallying back up above 3% and look to test 3.08-3.10% before any peak.
3) The Yield curve steepened pretty dramatically late in the week with the breakout in 30yr yield which also coincided with 10yr yields moving up to 2.89 (Doubtful that yields can exceed 3% in the 10year near-term and should provide a buying opportunity for Treasuries)
4) The Dollar's pullback late in the week seems important and coincided with the start of a bounce for Emerging market currencies which could also trigger bounces in EEM and in China. If global risk assets peak out, however, this might put a damper on this rally. However, ratios of MXWO to MXEF look to be peaking near-term, so my thinking is a selloff starting in late July likely proves small in scope, as Emerging markets should be able to rally in the month of August.
5) Commodities undercut the 2-year trend from 2016, yet time-wise look to be 1-2 weeks away from a very attractive trading bottom in the group. This has bullish implications for precious metals, energy, grains, and Softs. CCI should have limited downside this week and should be favored for August outperformance
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Bearish as risk/reward has grown poor for longs over the next few weeks and momentum and breadth are both suggesting upside should prove limited. Pullbacks to 2770 are initially important, than 2747-50 and 2700. Resistance to sell into lies at 2815 and above would lead to a quick but short-lived move to 2830-45
Intermediate-term (3-5 months)- Bearish- Trends likely should be negative overall in July and any larger selloff into late July would merit turning more positive for a bounce into September/October. While it's thought that November/December likely can be positive, the next couple months are difficult just yet to think are positive, despite the extent of the pullback we've seen over the last few weeks. Until some evidence of sector stabilization happens in Financials, and Equities start to rally on more broad-based participation and good volume, the intermediate-term trend is still thought to be vulnerable. Intermarket divergence is a concern for equities also at this point, with US ignoring the selling being seen globally which can only last for so long. Furthermore, intermediate-term momentum dropped off very sharply into early February and has not really recovered, despite a choppy mild back and forth rally. This should set up for more traditional negative momentum divergence on longer-term charts on any move back to new highs, so this is the one bearish factor which has been missing over the last few years, and is more suggestive that the larger trend is gradually changing from bullish to neutral and then should turn to negative sometime late this year or early next. For now, we'll need to see the larger trend give way before thinking the larger peak is already in place, and despite the loss of momentum of late, there just has not been sufficient deterioration to think this is the case just yet. Intermediate-term support to buy lies down at 2450-2550.
10 Charts of stocks with earnings this week are shown below with comments. While playing earnings is a tricky game, for either a technical or fundamental discipline near-term, these charts give some guidance as to the current trend and typically will show signs of exhaustion before stocks peak out
GOOGL- Minor stalling out near former highs, but structure argues to buy any dips given the chance
Alphabet Inc (GOOGL- $1197.88) A few signs of stalling out, but structure still suggests buying dips is correct. GOOGL has pushed higher about 7% since late June, and as weekly charts show, this move has been constructive technically, rising above June peaks, as well as March and January. However, the last few days show some evidence of this stalling out as opposed to accelerating on this breakout, while momentum gauges like RSI are well below levels hit back in January when this peaked out along with the market near 1/26. Near-term, one can make the case for a mild pullback given the multi-week rally up to former peaks which is now stalling, yet one would look to buy all weakness near 1140-60 if given the chance, as GOOGL has shown precious little evidence of any trend deterioration on a larger scale, despite momentum starting to tail off a bit. Counter-trend signs of weekly exhaustion remain at least 2-3 weeks away, arguing for a push up to 1280-5 before this starts to weaken. So, given earnings it looks right to position long with a time frame of 4-6 months, looking to use any pullback into late July/August or in September to buy dips until/unless this structure starts to give some indication of failing. Initial support to buy lies at 1140-60 while under would bring about a test of GOOGL's two-year support at 1050.
TD Ameritrade (AMTD- $57.43) Bearish and recent gains should represent a chance to sell strength. AMTD had been a very positive stock within its sub-sector of Financials up until June, when this snapped an eight-month uptrend on above-average volume. Its subsequent rebound into mid-July has occurred on less volume than the breakdown and now prices are right near former lows that were violated, creating an attractive risk/reward opportunity to sell strength. Momentum remains negatively sloped on weekly charts, so a 10% rally in the last couple weeks as part of a suddenly bearish structure represents a good technical opportunity to sell strength. Resistance lies at $57.50-$60, while downside has support near former lows at $53.27. Breaks of this would lead to a much lengthier correction down to $48.50.
Eli Lilly (LLY- $88.47) Bullish and recent push to new monthly highs should allow LLY to make a beeline towards former all-time highs at $109. This month's success in getting over prior highs resembles a bullish triangle breakout, and likely should help LLY climb further in the weeks and months ahead. The stock began its ascent like many during the latter part of 2008/early 2009. A six-year rally ensued before nearly three years of sideways consolidation. This now looks to be giving way to a push higher to the highest month-end close since the early 2000s at current levels. While the last days have pulled back , this sets up well to buy dips at $87-$88.50 for a push back to new high territory to end the month on a good note. Pullbacks under $84.50 are needed to change the bullish forecast. Until then, this looks technically appealing going into earnings and it looks right to use recent consolidation in the high $80's to buy dips.
United Technologies (UTX- $130.26) Bullish, but short-term extended- UTX has largely gone nowhere for most of 2018. The selloff from $140 managed to get down to just under 120 before turning back higher, and its success in getting above Spring highs should help this rally continue. While the last couple days have backed off after an early month surge, the push back above $129 allowed momentum to turn more positive. Weekly MACD has turned bullish and UTX maintains an attractive intermediate-term uptrend which intersects near July lows at $123. As long as this area is not undercut, one should use any dips post earnings to buy UTX, with upside technical targets found near $139 which was hit in early February right when stocks peaked out. Support to buy pullbacks lies initially at $127.50-$128.
New Oriental Edu & Tech (EDU- $93.30) Bearish and pullback to multi-day lows likely allows for a test and break of $90 in the days ahead. EDU has largely traded sideways over the last couple years with a few volatile spikes that have been immediately given back. The last few weeks showed this attempting to rally back after a big decline into early July, but EDU managed just a fractional bounce before rolling over late last week. The larger structure is unappealing and pullbacks look likely to near $88-$90 with under $88 leading to a lengthier decline down to the low $80's. To have any bullish opinion, this would need to reclaim last week's decline and move back up above $95, which looks unlikely technically speaking.
Las Vegas Sands (LVS- $73.85) Heavy volume decline in recent weeks gives reason for concern about further weakness. LVS has been a pretty stellar standout among the casino space over the last couple years, more than doubling off early January 2016 lows, and rising to within striking distance of 2014 peaks. However, the stock began to falter this past Spring, and its higher high into June was not confirmed by a similar move in momentum. Since that time we've seen LVS pullback sharply on heavy volume, and while prices managed to hold the former Spring 2018 lows, this near-term pattern has begun to take on a much different shape than it has in the past. Rallies in the last couple weeks have created a chance to sell into strength, as the stock has largely stalled after this first bounce ahead of earnings. However, after filling this gap from June, LVS looks right to sell strength, expecting a pullback to test its most recent lows. The area at $70 is an important area of support which lines up with the two-year uptrend in this stock. Breaking $70 would constitute the first meaningful long-term trend violation in the last couple years, putting LVS on the list for a good likelihood of more intermediate-term trend damage. At present, the near-term setup is short-term bearish only.
Baxter International Inc (BAX- $75.00) BAX is bullish technically and further gains look likely to the high 70's with additional near-term targets at $80. The art of pushing back up above January highs into mid-June was reason to have confidence in BAX and then the mild consolidation over the last month failed to do much damage, holding above the area of the breakout. Last week's gains then managed to rise to surpass the last four weeks' highs, rising to the highest levels since early June. This kind of mild breakout on the heaviest volume in over a month (last Friday) is very encouraging for BAX to follow through higher, and longs are recommended, looking to buy any weakness given the chance. The area at $73.59 should serve as a trading stop for longs, while upside into the high $70's/low 80s into Fall looks very much achievable, technically.
Align Technology Inc (ALGN- $375.38) Bullish and movement up to near 400 likely before this stalls out. Overall this has been one of the top performers in all of Heatlhcare this year, rising nearly 69% on a YTD basis through 7/20/18. The recent pickup in acceleration in the last few months has helped this start a new parabolic trend, and last week's gains helped to push back up above the prior highs from June. Overall the act of making just a minor consolidation over the last month which then results in highs being reclaimed is normally a very bullish development, and bodes well for this to continue higher in the weeks ahead. Momentum has been overbought on weekly charts for some time, but its the art of holding up near its highs throughout this minor correction into early July followed by a thrust back up to new highs which gives reason to embrace technically. Pullbacks post earnings would be used to buy at $357, or below at $339, neither of which would cause any issues with the ongoing uptrend. Under $332, which isn't immediately expected, would postpone any further rallies.
Amazon.com Inc (AMZN- $1813.70) Short-term correction likely within uptrend- AMZN remains difficult to fade on any timeframe other than a few days given its long-term uptrend and little to no evidence of any deterioration. However, after having gained 12% since late June, or nearly a 200 point rise, we've begun to see the first evidence of this stock starting to rollover within its uptrend. 3-month trendline support intersects near 1735 and could be tested on pullbacks into late July/early August. The key reasons for near-term concern involve near-term overbought conditions where the stock is now beginning to stall out and turn lower, as seen by the minor pullback which started late last week. Counter-trend exhaustion signals are present, while momentum is at lower peaks than what was seen back in June at the former peak. On a longer-term timeframe however, the stock's structure remains quite attractive and despite being overbought , which has been ongoing for some time, AMZN would need to show at least some evidence of undercutting the prior months lows to have the opinion that this might start to slow its rate of ascent. Currently, this intersects at 1635, so minor weakness in the next 3-5 weeks likely should constitute a good risk/reward to buy.
Starbucks (SBUX- $50.91) Bearish- Long-term uptrends have been broken in SBUX as of the month of June, with a heavy volume decline that saw volume spike to the highest levels in over five years on monthly charts. Prices have pulled back under the lows from 2016/2017, and this bounce in recent weeks from $47.50 to $51 should provide an attractive area to sell/short SBUX for a move down to the low $40's. the area at $41.43 would represent the first 38.2% Fibonacci retracement area of the entire rally up from 2008 and is thought to be good initial support. Movement under this could reach $34-$37.50 on an intermediate-term basis, but should set up for a decent risk/reward to buy. For now this stock is unattractive heading into earnings and requires a move back over $55.31 to have any hope of this pullback being complete.