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5 of the most important charts to watch for September

September 3, 2018

Contact: info@newtonadvisor.com

S&P 500 SPDR ETF Trust- SPY
283.59-284, 281.62, 280.16, 279, 278.19      Support
291.17-292, 292.40                                   Resistance

 

Summary:  No change :Technically it's likely that the next 1-2 weeks brings about a short-term peak that causes a 4-5% correction in stocks for the month of September.  While intermediate-term trends are very much intact for the US, and the Advance/Decline is at new highs along with many other indices, the divergences have grown striking, which as explained below, is occurring on multiple fronts and is not just about US vs overseas performance.   Furthermore, Interest rates on the long end have been quite low, representing not just ample global liquidity but also perhaps a concern about economic growth in the years to come.  However, the resilience of stocks during time of very negative news flow is something to cheer, not fret about, and the US continues to be the "best house in a bad neighborhood" with regards to global stock market performance for 2018.    While technical factors could coincide with weakness next month (which many will blame on Tariffs and political drama), it's likely that stock market corrections overall prove to be minimal in scope for now.   Betting on anything more given resilient uptrends in place coupled with mass uncertainty is almost always ill-timed and requires sufficient proof.   Below we highlight the SPX having pushed yet again back to new all-time highs by a thin margin, but yet likely will face resistance here and not get to 3000 right away.  Bottom line: Pullbacks down to 2750 should come before 3000, and while not intending to voice "doom and gloom" or ignore the records being set by US indices, it's right to have a sober, honest perspective about both the positive and negatives to try to sort things out.  
 

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Overview:  It's difficult to present something fresh and original on the heels of last week's comments, which are still very much relevant and have real importance for the month of September.   While corrections have not played out yet in US markets, they certainly have globally, and this weakness has real significance to the duration and longevity of how long our own rally can continue uninterrupted.   While a couple of the negatives have dissipated, others have grown more pronounced which we'll discuss below.  Bottom line, this is a month to pay attention, and no time for complacency as the threat of increasing tariffs, geopolitical threats and political drama, all which have grown more intense in the last two weeks.  Initially, it's right to delve into some of the new developments that have occurred over the last five days.

1) S&P Futures joined SPX cash index back at new all-time high territory, above late January highs before stalling at channel resistance

2) NASDAQ Composite and NDX both accelerated last week after exceeding their own "Ascending Triangle" patterns, and are both now at the top of the channel from late January

3) DJIA lagged on the week, and remains under January highs, having NOT confirmed the move in many of the other indices

4) Europe dropped over 1% last week as per EuroSTOXX 50 and remains a huge underperformer to the US, as does Asia

5) US Dollar index bottomed after hitting support and looks to bounce in the days/weeks ahead

6) Emerging markets look to have taken a leg down after their initial bounce, and many of the currencies were even more hard hit than the equities:  Turkish Lira down over 10%, Russian Ruble and also S. African Rand to name a few.  This looks to continue near-term

7) Long-term Treasury yields backed down and are in striking distance of breaking the entire consolidation since January (which if violated, would be a Head and Shoulders pattern, sending yields down to near 2.60%

8) Despite the push higher last week, most of this was Technology and Discretionary focused, with Healthcare also making nearly a 1% gain.  But important sectors like Financials and Industrials were barely positive, just eking out  +0.30-0.50% gains

9) The Defensive trade seems to be waning, not gaining speed, and this has reversed in the last couple weeks, with Utilities, Staples and Telecom all losing ground last week

10) NYSE New 52-week highs have been dropping again, which is a concern as stocks are moving higher.  This finished at 85 New highs last week, down from 140 back on 8/21 and well off the 178 level seen in mid-June.

11) US indices are now officially overbought on daily charts, while on intra-day we've seen strongly overbought levels on 60, 120, 240 min charts before the minor pullback late week.

12) Demark indicators have now completed TD Sequential and TD Combo patterns on NASDAQ, while S&P, IWM, MID, SML, DJIA show TD Sequential, but combo not yet in place and would take another couple days

13) Last, but not least,   Healthcare broke out to new all-time high territory last week, and we've seen a notable uptick in relative performance from this group, making this one to favor among the "risk-on" sectors. 

Now let's list the Concerns we highlighted last week, with an "INCREASED" or "DECREASED" right next to this in bold, highlighting the degree that this problem as gotten worse, or dissipated a bit.  

1) The divergence with US stocks and the rest of the world has grown to be the largest we've seen in years.    (INCREASED)
2) Technology has begun to slow noticeably in the last month, along with Financials, which combined represent more than 40% of the SPX.  Both have underperformed on a one-month basis. ( DECREASED-  Arguable about Financials, but Tech has definitely bounced
3) The VIX has begun to diverge positively with prices, holding up over 10% above where it was in early August. (INCREASED)
4) The divergence of DJIA to hit new highs like the DJ Transports has, and also S&P Futures and NASDAQ 100 are not yet at new high territory is something to watch. ( DJIA still diverging- NASDAQ and S&P FUTURES AT NEW HIGHS)
5) Negative momentum divergence on daily charts of DJIA, SPX and NASDAQ-  Prices have moved to new highs, but momentum has not and actually lower. (DECREASED)
6) The Defensive trade remains in place despite underperformance last week.  Utilities have performed better than Financials, or Industrials this year and have performed better than Technology in the rolling 30 days.  (DECREASED
7) Breadth has improved in a mild fashion since mid-August, yet McClellan's Summation index , the smoothed version of Advance/Decline, still shows this year's peak occurring in June  (SAME)
8) Seasonality in markets for mid-term election years historically shows both August and September to be sub-par  (SAME- Concern for September has increased given that August was positive
9) Sentiment indicators like Investors Intelligence have widened out to a Bull/Bear spread of nearly +40 in the last week, (August 22) with Bulls at 57.7% and Bears at 18.3%, the highest Spread since January.  (INCREASED) 
10) Only 103 stocks in the NYSE were at new 52-week highs, way down from 176 in mid-June and well below the 340 level seen in January of this year  (This ISSUE has gotten worse-  so Increase in problem, new highs are lower
11)  Last, but not least, Demark's TD Sequential and TD Combo indicators are now flashing exhaustion signals on daily charts for the SPX, DJIA, NASDAQ, IWM, MID and will show more signals if the market is able to rally into Wednesday of this week.  The VIX is also showing downside exhaustion at the same time as market indices are showing upside.  (INCREASED)  

Bottom line, the improvement out of Tech has been impressive, but yet now NASDAQ and NDX are at the top of their respective trend channels and we're seeing Demark counter-trend exhaustion on these to match what's been seen on many other indices.  Combining excessive bullish sentiment with overbought conditions, Demark exhaustion and bearish monthly seasonality while US shows huge divergences to Global equities makes for a poor risk/reward in the weeks ahead.  While this uptrend is still intact for SPX, NASDAQ, DJIA  (and yes the trend is the MOST important factor) I'll go out on a limb and say that this should turn down sometime this week, with Monday/Tuesday important as well as Fridayfor a change of trend cyclically.    

LONG/SHORT TECHNICAL STOCK IDEAS-   5 TOP LONGS, 5 TOP SHORTS


LONGS:   TLT, NEP, EXC, NRG, MPC
SHORTS:  TUR, LVS, WHR, BWA, MHK




SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:

Short-term (3-5 days):  Peak expected by Friday of this week- Trend bullish from Aug 15, but some signs of staling and a downturn looks near given the dropoff in New highs while Financials and industrials have waned a bit in the last week.    As was stated just above, combining excessive bullish sentiment with overbought conditions, Demark exhaustion and bearish monthly seasonality while US shows huge divergences to Global equities makes for a poor risk/reward in the weeks ahead.   Treasury yields have threatened to break key 2.80% which looks like a Giant Head and Shoulders pattern.  However, as always,  it's proper to actually await this break before calling it as such.   Overall, it's right to stick with a defensive tone for September.  Selectivity is key, and one should consider owning implied volatility for either hedging, or speculation purposes.

Intermediate-term (3-5 months)-  Bullish-  (No change) While there remain ample reasons for concerns in the short run, now that markets have nearly finished August with little to no evidence of any real downturn, the period between now and end of year will likely only suffer minor pullbacks between now and into early October before rallying into end of year, postponing the larger decline yet again.  Specifically, the fact that Advance/Decline for All-stocks pushed back to new all-time highs into early July is thought to be a bullish factor.   The fact that Small-cap and Mid-cap indices have rallied back to new highs is also thought to be constructive, as most bear markets start with a serious dropoff in Small and mid-cap performance.  Though some of that did indeed happen in July with the Russell2k, most intermediate-term chart patterns remain constructive.    Overall, the 2 month bias is more negative for a 3-5% drop.  However, on a 4-5 month timeframe, it's likely yet again that markets exhibit seasonal strength.  so given that markets have been able to absorb the relative underperformance in Tech lately with little to no damage, we'll need to see S&P drop under 2700 to have any real concern, and given the tariff taunts which have been ongoing, the sentiment is likely to reflect fear much faster these days than normally which bodes well for the bulls into year end.

Overview:  It's difficult to present something fresh and original on the heels of last week's comments, which are still very much relevant and have real importance for the month of September.   While corrections have not played out yet in US markets, they certainly have globally, and this weakness has real significance to the duration and longevity of how long our own rally can continue uninterrupted.   While a couple of the negatives have dissipated, others have grown more pronounced which we'll discuss below.  Bottom line, this is a month to pay attention, and no time for complacency as the threat of increasing tariffs, geopolitical threats and political drama, all which have grown more intense in the last two weeks.  Initially, it's right to delve into some of the new developments that have occurred over the last five days.

1) S&P Futures joined SPX cash index back at new all-time high territory, above late January highs before stalling at channel resistance
2) NASDAQ Composite and NDX both accelerated last week after exceeding their own "Ascending Triangle" patterns, and are both now at the top of the channel from late January
3) DJIA lagged on the week, and remains under January highs, having NOT confirmed the move in many of the other indices
4) Europe dropped over 1% last week as per EuroSTOXX 50 and remains a huge underperformer to the US, as does Asia
5) US Dollar index bottomed after hitting support and looks to bounce in the days/weeks ahead
6) Emerging markets look to have taken a leg down after their initial bounce, and many of the currencies were even more hard hit than the equities:  Turkish Lira down over 10%, Russian Ruble and also S. African Rand to name a few.  This looks to continue near-term
7) Long-term Treasury yields backed down and are in striking distance of breaking the entire consolidation since January (which if violated, would be a Head and Shoulders pattern, sending yields down to near 2.60%
8) Despite the push higher last week, most of this was Technology and Discretionary focused, with Healthcare also making nearly a 1% gain.  But important sectors like Financials and Industrials were barely positive, just eking out  +0.30-0.50% gains
9) The Defensive trade seems to be waning, not gaining speed, and this has reversed in the last couple weeks, with Utilities, Staples and Telecom all losing ground last week
10) NYSE New 52-week highs have been dropping again, which is a concern as stocks are moving higher.  This finished at 85 New highs last week, down from 140 back on 8/21 and well off the 178 level seen in mid-June.
11) US indices are now officially overbought on daily charts, while on intra-day we've seen strongly overbought levels on 60, 120, 240 min charts before the minor pullback late week.
12) Demark indicators have now completed TD Sequential and TD Combo patterns on NASDAQ, while S&P, IWM, MID, SML, DJIA show TD Sequential, but combo not yet in place and would take another couple days
13) Last, but not least,   Healthcare broke out to new all-time high territory last week, and we've seen a notable uptick in relative performance from this group, making this one to favor among the "risk-on" sectors. 

Now let's list the Concerns we highlighted last week, with an "INCREASED" or "DECREASED" right next to this in bold, highlighting the degree that this problem as gotten worse, or dissipated a bit.  

1) The divergence with US stocks and the rest of the world has grown to be the largest we've seen in years.    INCREASED
2) Technology has begun to slow noticeably in the last month, along with Financials, which combined represent more than 40% of the SPX.  Both have underperformed on a one-month basis. ( DECREASED-  Arguable about Financials, but Tech has definitely bounced
3) The VIX has begun to diverge positively with prices, holding up over 10% above where it was in early August. (INCREASED)
4) The divergence of DJIA to hit new highs like the DJ Transports has, and also S&P Futures and NASDAQ 100 are not yet at new high territory is something to watch. ( DJIA still diverging- NASDAQ and S&P FUTURES AT NEW HIGHS)
5) Negative momentum divergence on daily charts of DJIA, SPX and NASDAQ-  Prices have moved to new highs, but momentum has not and actually lower. (DECREASED)
6) The Defensive trade remains in place despite underperformance last week.  Utilities have performed better than Financials, or Industrials this year and have performed better than Technology in the rolling 30 days.  (DECREASED
7) Breadth has improved in a mild fashion since mid-August, yet McClellan's Summation index , the smoothed version of Advance/Decline, still shows this year's peak occurring in June  (SAME)
8) Seasonality in markets for mid-term election years historically shows both August and September to be sub-par  (SAME- Concern for September has increased given that August was positive
9) Sentiment indicators like Investors Intelligence have widened out to a Bull/Bear spread of nearly +40 in the last week, (August 22) with Bulls at 57.7% and Bears at 18.3%, the highest Spread since January.  (INCREASED) 
10) Only 103 stocks in the NYSE were at new 52-week highs, way down from 176 in mid-June and well below the 340 level seen in January of this year  (This ISSUE has gotten worse-  so Increase in problem, new highs are lower
11)  Last, but not least, Demark's TD Sequential and TD Combo indicators are now flashing exhaustion signals on daily charts for the SPX, DJIA, NASDAQ, IWM, MID and will show more signals if the market is able to rally into Wednesday of this week.  The VIX is also showing downside exhaustion at the same time as market indices are showing upside.  (INCREASED)  

Bottom line, the improvement out of Tech has been impressive, but yet now NASDAQ and NDX are at the top of their respective trend channels and we're seeing Demark counter-trend exhaustion on these to match what's been seen on many other indices.  Combining excessive bullish sentiment with overbought conditions, Demark exhaustion and bearish monthly seasonality while US shows huge divergences to Global equities makes for a poor risk/reward in the weeks ahead.  While this uptrend is still intact for SPX, NASDAQ, DJIA  (and yes the trend is the MOST important factor) I'll go out on a limb and say that this should turn down sometime this week, with Monday/Tuesday important as well as Fridayfor a change of trend cyclically.    

LONG/SHORT TECHNICAL STOCK IDEAS-   5 TOP LONGS, 5 TOP SHORTS


LONGS:   TLT, NEP, EXC, NRG, MPC
SHORTS:  TUR, LVS, WHR, BWA, MHK




SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:

Short-term (3-5 days):  Peak expected by Friday of this week- Trend bullish from Aug 15, but some signs of staling and a downturn looks near given the dropoff in New highs while Financials and industrials have waned a bit in the last week.    As was stated just above, combining excessive bullish sentiment with overbought conditions, Demark exhaustion and bearish monthly seasonality while US shows huge divergences to Global equities makes for a poor risk/reward in the weeks ahead.   Treasury yields have threatened to break key 2.80% which looks like a Giant Head and Shoulders pattern.  However, as always,  it's proper to actually await this break before calling it as such.   Overall, it's right to stick with a defensive tone for September.  Selectivity is key, and one should consider owning implied volatility for either hedging, or speculation purposes.

Intermediate-term (3-5 months)-  Bullish-  (No change) While there remain ample reasons for concerns in the short run, now that markets have nearly finished August with little to no evidence of any real downturn, the period between now and end of year will likely only suffer minor pullbacks between now and into early October before rallying into end of year, postponing the larger decline yet again.  Specifically, the fact that Advance/Decline for All-stocks pushed back to new all-time highs into early July is thought to be a bullish factor.   The fact that Small-cap and Mid-cap indices have rallied back to new highs is also thought to be constructive, as most bear markets start with a serious dropoff in Small and mid-cap performance.  Though some of that did indeed happen in July with the Russell2k, most intermediate-term chart patterns remain constructive.    Overall, the 2 month bias is more negative for a 3-5% drop.  However, on a 4-5 month timeframe, it's likely yet again that markets exhibit seasonal strength.  so given that markets have been able to absorb the relative underperformance in Tech lately with little to no damage, we'll need to see S&P drop under 2700 to have any real concern, and given the tariff taunts which have been ongoing, the sentiment is likely to reflect fear much faster these days than normally which bodes well for the bulls into year end.


5 of the most Important charts to watch for September, and ETF's to buy to play the move
 

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Technology waning would be a big deal to stocks-  Short XLK this week, and consider shorting SMH for Short Semi exposure given lackluster charts and performance out of MU, AVGO and others.  In the last week we've seen XLK stage a decent comeback, and move right to the higher end of its trend channel.  Now momentum is overbought, while counter-trend exhaustion is present for the first time since early this year.  If XLK turns down to break $72.15, this would be a big deal for the broader market, given Tech's weight in SPX.  For now, the sector rotation seems to have shown a move back into Tech, but i'm skeptical this can continue given where Tech is trading now.  Technology appears like a poor risk/reward for September, and it's right to take down exposure technically and wait for corrections before buying back.

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Treasury yield breakdown seems near-  Buy TLT, or 10-year US Treasuries, sell TBT-  US 10-Year Treasuries breaking 2.80% in yield terms would also likely be troublesome for stocks.   Yields seem to have continued their recent drop, despite markets having priced in over 90% Hike chances for September (which seems like a forgone conclusion)  Meanwhile the odds for December are still over 60% while yields have not quite signaled the same comfort zone with the FOMC's plans.  Sentiment seems unanimously convinced that rates are moving higher as per the CFTC data, which still shows -530k short Futures by Non-Commercial "Specs" nearly the highest on record.  Yet the technical pattern in TNX argues that yields very well could continue lower in the weeks/months ahead.  The giant consolidation seen since early this year appears like a Head and Shoulders pattern, which would be confirmed on a break of 2.80%.   This is thought to be problematic for two key reasons.  First, Financials would likely underperform in this environment.  Second, yields dropping sharply might cause the Fed to Second guess their pace of rate hikes, as the yield curve would invert much more quickly.. Yields have also tended to lead equities over the last couple years, and while this has diverged somewhat lately, it's still important if yields make a big breakdown.   Overall, this chart is very important to keep an eye on in the weeks ahead. 

 

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McClellan's Summation Index-  Watch for when this turns down- Now seemingly at resistance- This smoothed version of Advanced/Decline often gives a solid warning as to when stocks start to weaken, as a serious deterioration in breadth typically happens before stocks turn down , and vice versa.  Lately, we saw the Summation index peak out in June and also in late January, while recently having staged a bounce to levels just below July highs.   Momentum indicators on the Summation index itself have gotten overbought, while Demark indicators are now flashing TD Sell setups with a possible TD Combo 13 Countdown sell this week, similar to what happened at the highs in January and also buys right at the lows in February.  Overall, it's important to watch for when this starts to weaken, and this now has risen to levels which should mark technical resistance where this kind of thing could happen.  Bottom line, any staling in breadth or weakening in the next few days would see this turn down, likely coinciding with a broader market correction over the next few weeks. 

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VIX breakout seems imminent- Buy Implied volatility and/or consider ETF's which allow one to profit as the VIX goes higher for the next 3-5 weeks.   Watch implied volatility carefully as a warning for when stocks might rollover. The CBOE Volatlity index, or VIX,  has had a compelling record lately as a warning sign for market weakness when it begins to exhibit positive correlation with the SPX.  Just in the last year, when we've seen a 10-day correlation top 0, from negative territory, turning positive, this has happened prior to at least minor setbacks in stocks.  Yet again, we've seen the VIX start to turn higher in recent weeks, and at current levels is nearly 12% greater than where this bottomed in early August.  Technically the fact that its managed to make higher lows into August and then turn higher late last week makes this very constructive looking technically, and has gotten stronger, despite not yet having broken out.   One should be on the Lookout for when its current intermediate-term downtrend is violated, as this would coincide with a probable rapid escalation in implied volatility for the month of September.  

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JP Morgan Emerging Market Currency index-  Buy USDRUB, USDTRY, USDZAR for next 3-5 weeks, or sell EEM, and hold off on buying until late September/early October.  The downturn to new lows in Emerging market currencies very well might coincide with Equity weakness in the weeks ahead, as the US Dollar stabilization and Tariff/trade stress might put further pressure on Emerging market currencies. Last week brought about a 12% decline in the Turkish Lira, and signs of both Ruble and Rand weakness and this follows a very rapid depreciation in the Argentinian Peso and ongoing carnage in Venezuelan Bolivar.  Emerging markets seem to have turned down again, for what could be a 3-5 week pullback throughout September, and the EEM along with this index, the FXJPEMCI index in Bloomberg, should be eyed carefully for signs of downward acceleration, or in any attempts at stabilizing.  Evidence of some positive divergence is now present in this index, while Elliott structure shows this to be likely the final pullback of this current 10-year decline.  However, given the recent breakdown, this has begun to pick up speed, and the skittishness in Emerging markets seems important to highlight as a negative factor for stocks.