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10 Technical Shorts to Consider after this bounce

January 14, 2019

Mark Newton CMT, Newton Advisors, LLC

Contact: info@newtonadvisor.com



S&P 500 Cash Index

Support: 2400-2, 2376, 2355-7

Resistance: 2583, 2600-2, 2630-1, 2687



Summary:  Stocks remain trending higher in the short run, in what appears to be a bounce as part of an ongoing downtrend from last September and more recently, from December highs. While the breadth on our recent lift has been encouraging, indices are now approaching key areas of resistance at areas near where prices broke down that should represent strong overhead resistance to this initial bounce. Specifically for the S&P this is thought to intersect between 2630-50 and could be important this week. Bonds meanwhile have begun to turn back higher after just a few days of selling and the downtrend for Treasury yields remains intact and should bring about an upcoming decline in TNX down to 2.50-5% before any stabilization, but this area remains attractive to sell Treasuries into a move of this sort. The Dollar has begun to rollover and now nearing its own key support near a multi-month support trendline. Crude oil and Gold meanwhile are both showing some evidence of stalling out after their recent run-up, and given the close positive correlation between Crude, TNX and SPX, watching movement in Crude is increasingly more important. Overall, it doesn't appear like global assets have rebounded sufficiently to prevent the next wave down from unfolding and in fact this should be likely as markets approach mid-week for cyclical and Demark exhaustion reasons.

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Overview: To recap, in the last 12 trading days, S&P has risen 10.4%. My Weekly Technical Perspective from 12/24/18 reviewed some of the reasons why I thought indices might rally. They were as follows:



1) Bearish sentiment- Sentiment has turned quite negative lately. The Equity Put/call ratio is now as high as we've seen in two years' time, challenging the 2016 peaks, while many traditional sentiment polls have inverted their Bull/bear status



2) Oversold conditions- Daily charts show RSI to have pulled back under 25, as oversold as early October (which was actually lower) Yet the percentage of stocks trading above their 10 and 50-day moving averages have dropped to single digits



3) Counter-trend exhaustion (Demark)- The NASDAQ along with S&P is within 2 days of possibly recording the first evidence of exhaustion per TD Sequential and TD Combo signals since early December. These worked well in September at the top as Sells, and now they'll arrive this week on a bit more weakness. My thinking is they could signal a temporary low



4) Cycles- The peak in September is now at a key 90 day juncture to this time in December, along with being 45 days from early November peaks, and 315 calendar days from February 2018 lows. This likely should result in some type of pause to this decline



5) Bullish seasonal trends- We remain in a seasonally very positive time, so a -12% decline in December certainly hasn't lived up to this standard. But in general the period from now until next Spring should allow for a counter-trend rally in stocks before the seasonality turns negative again, and for now, it's still right to consider that January- May could be positive, not negative.



Now the easy part is done. and the Hard part awaits. As daily S&P charts show above, prices have rallied right back into this area which has been very strong as former support/current resistance to this rise. The lows from late November at 2630 up to 2650 which also lie just directly above the former lows from both February and April. S&P has in fact gotten back over this area at 2581-3 which marked the low close around this time last year. However, the key upside area of importance lies near this 2630-50 area which marks the bottom of the move down into late November right near the US Thanksgiving holiday. Getting above that would truly change the technical picture. For now though this is not expected, so upside should prove minor this next week and rallies should prove brief before turning lower for a retest.



The following are technical reasons to expect that prices peak out and turn down, with the greatest likelihood between 1/15-1/17, with 1/21 also having importance.



1) As mentioned, prices have bounced sharply but are now right near the area of the breakdown as part of the bearish downtrend from last September. Structurally the area at 2630-50 is very important over the next 1-2 weeks



2) Near-term momentum has neared overbought territory on daily charts while weekly and monthly are bearish. This is a concern towards thinking prices should extend given the negative intermediate-term momentum



3) Counter-trend signs of exhaustion on SPX, NDX, INDU, Crude Oil and other assets are within 3-5 days of lining up after this bounce. Given that these were important at former highs and at lows (as Buys) it's important to pay attention then they line up after a 10%+ rally.



4) Financials have begun to rollover technically when eyeing relative charts of XLF to SPX. this group still makes up 13% of the market and has decisively broken down in the last week after a mild bounce.



5) Cycles from both 12/3 and 10/17 highs in 2018 that project into this coming week, with others from 3/13/18 and 1/26/18 also being very prominent as the one-year anniversary of last year's late January peak.



6) Treasury yields, Crude and Equities have all shown a remarkable degree of positive correlation of late. Now Crude oil is showing signs of upside exhaustion after its rise , after hitting the highs of the daily Bollinger band while TNX is also near the edge of its downtrend after rallying from 1/3. In both cases, both look to peak out in the short run and turn lower in the next few days. It's thought that given the recent correlation, equities should also peak.




SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX



Short-term (3-5 days): Early week pullbacks likely are buyable until S&P can reach 2630, barring a close UNDER 2572. This would mean the pullback has begun. For now, first 2-3 days of this coming week are likely bullish technically as exhaustion signals per Demark are not complete and prices are shy of upside targets which stand out as resistance . However, an early week surge would likely drive money into markets at a time when it's right to be selling into this move. The risk/reward of taking down risk on this first bounce is quite appealing given the larger bearish structure. Entering this week, there hasn't been signs of early weakness persisting on a close that would matter.



Intermediate-term (3-5 months)-  Bullish- While the trends have turned negative on an intermediate-term basis for many indices given our weakness, it's thought that a rally should be near that provides a bounce to this decline before any larger bear market continues. While the average stock is now officially in a bear market, most market indices are not, and many arithmetic charts still show the uptrends for market indices to be intact. Momentum is a different story, as long-term momentum indicators like MACD have turned negative, while RSI has not reached oversold territory (and is nowhere near oversold on a monthly basis) This suggests that any spring rally should likely constitute an excellent time to cut down on risk, and diversify into dividend rich investments and avoid the Growth stocks and Small caps. Overall, we'll leave some of our larger thoughts for the 2019 Annual report, but suffice to say, this pullback doesn't suggest to me just yet that the next 3-5 months should be negative at a time when everyone is saying the economy should now turn down.


10 Charts which offer attractive technical risk/reward opportunities for shorting

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Emerson Electric (EMR $62.02) Bearish, and recent bounce should prove to be a shorting opportunity for movement back to recent lows. The 12% bounce in EMR over the last few weeks has carried EMR up to near downtrend line resistance as well as getting this closer to an area of key resistance to sell into. As weekly charts show, EMR broke a two-year uptrend back in December, dropping down to its 61.8% retracement area of the 2-year rally. However, at $62, this has very little appeal technically as this rally has occurred completely within the framework of the existing downtrend. No evidence of exhaustion is present on weekly charts to suggest the recent low should have all that much credibility and rallies now should present opportunities to sell into. While EMR could trend higher on a 2-3 day basis early this coming week, the area at $63.50-$64 should be ideal from a risk/reward basis to sell into, expecting a pullback down to the mid- $50's. Key support lies near 12/26 lows at $55.38.


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American Airlines (AAL- $31.80) AAL looks ripe for stalling out and turning back down to lows after barely any rally in the recent market bounce. While NYSE ARCA Airline index XAL has rallied more than 10% off the lows from late December, AAL has shown precious little ability to follow suit. This has consolidated near recent lows while not giving much indication of any sort of meaningful low. Given that AAL has been one of the biggest laggard in this space, there needs to be more indication that this is ending before continuing to avoid and/or underweight this stock. An upcoming move back under $29.75 is likely in my view and this should be used to add to shorts for a move down to test 2016 lows in all likelihood which lie just above $25.

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Celanese Corp (CE- $94.76) Structurally this stock remains in poor shape and rallies should be used to sell, ideally at $98-$100 with pullbacks back lower to $82 likely in the weeks ahead. CE had a very bad break on an intermediate-term basis, with prices undercutting lows going back since the early part of 2017. Its snapback rally has temporarily gotten back over October lows, but yet this remains a giant reversal pattern from 18 months ago and it's thought that upside likely is minimal before turning back lower. Prices would require a move back up over $102 to change this thinking back to bullish, but for now, an $11 rally in recent weeks as part of a negative overall pattern is reason to sell into.


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Seagate Technology (STX- $40.67) Look to sell into strength this week for a move back lower. Most of the Disk drive makers have enjoyed sharp rallies as part of ongoing downtrends, and STX stands out as one continuing to show a very negative overall pattern and has rallied up to test the highs of its most recent Bollinger Band and Ichimoku cloud after a sharp counter-trend rally. Yet, the area from $40-$42 is important and likely represents an attractive area to sell into strength for movement back lower. Weekly and monthly momentum remain quite negative and STX has not broke out above the downtrend that's guided this stock lower over the last year. The next 2-3 days should represent an opportune time to consider selling into this for a move back lower.

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Roper Technologies (ROP- $273.16) ROP's 10% rally over the last 12 trading days has carried this back to appealing levels to sell into on this bounce. Trading patterns remain negatively sloped from September and the area at 279-81 would be ideal to consider shorting ROP for a move back to test and break recent lows near $245. The stock appeared to have broken out of a giant reversal pattern stretching back since early last year. It's recent bounce has helped daily momentum carry back to neutral territory while weekly and monthly remain negatively sloped. One should consider selling into gains given the ongoing negative structure, expecting a pullback in the weeks ahead.


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Overstock (OSTK- $15.27) OSTK's bounce over the last few weeks should represent an excellent opportunity to sell into gains for a move back lower in the weeks ahead. OSTK remains trending down over the last year, having lost nearly 85% in the last year. However, given the shape and structure of the bounce attempt from December, it looks unlikely that OSTK has truly bottomed out. No counter-trend evidence of exhaustion is present, and the move from December has been largely more sideways than a sharp rally of Five waves higher. Thus, it's likely that this stalls between $15.25-$16.50 and turns back lower to undercut $12.33 at least one more time before any serious low is at hand. Breaks of $14 on a daily close should likely lead to $12.33 and breaks of that could lead to a maximum near $10 before this starts to stabilize and then try a more serious rally. For now, buying here looks premature and right to sell into and use rallies to short in the days ahead.

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Vodafone (VOD- $19.70) VOD stabilization since October hasn't served to change the broader downtrend in place for VOD, and the small bounce attempt since December and from earlier last week is miniscule given the degree to which the market has rallied in recent weeks. This disappointing bounce should serve as an opportunity to sell into gains given the lack of any downside exhaustion in place on multiple timeframes and should allow for rallies to hold $20-$20.50 for a move back lower to $17.90-$18.25 . For now this looks like an appealing stock to consider fading in its consolidation attempt for another pullback to new lows before this has bottomed.


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Las Vegas Sands (LVS- $56.96) It looks right to sell into the bounce in LVS and other casino stocks in recent weeks as this group has been one of the weakest since last Summer when many peaked out in late June. LVS gave up nearly 70% of the rally from 2016 before reversing course and bouncing sharply in the last three weeks. However, prices still remain below highs from early December and counter-trend exhaustion on weekly charts remains premature. So after nearly a 20% bounce in three weeks, LVS is now up to prior highs from the last few months and maintains a larger downtrend. Even in a basing process, this will likely require some consolidation and additional base-building before this can start to trend higher. Near-term, shorting this rise looks prudent heading into this week technically at $56.96 up to $59, expecting a trend reversal and move back lower to under $50. Failure to break lows from three weeks ago might turn out to be an early warning sign about a possible bottom. For now, this is early and fading this rise looks like the right move.


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CBOE Global Markets (CBOE- 91.39) CBOE remains the weakest technically of the major exchanges, and given the recent drawdown in this group, the stock has fallen from $115 to near $91 over the last few months to test prior lows. While a bounce attempt happened into early January, this proved futile and the stock turned back lower. Overall, weekly exhaustion remains premature and momentum is negatively sloped. Last week's decline undercut all of last year's weekly closes putting this at the weakest since mid-2017. Additional drawdowns here look likely given the rollover in the Financials space and can get down to the mid 80s with idea targets near $78. Trends will remain bearish unless price gets back up over the highs from two weeks ago near $99.50 which looks unlikely in the near future but would be a stop for shorts.


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Apache (APA- $31.10) Bearish and the rally over the last few weeks has carried up to an attractive risk/reward area to sell into this bounce. Overall, the breakdown in APA into end of year managed to violate both March 2018 and also Jan 2016 lows. thus, the breakdown has taken this to the lowest levels since 2002 before the rally attempt in recent weeks. While a 23% rally over 12 days is nothing to sneeze at, structurally this remains in very poor shape. Prices remain under these prior lows and momentum is now nearing overbought levels while weekly and monthly momentum are negatively sloped. Additionally, counter-trend exhaustion is not in place at the lows of weekly or monthly charts to suggest a low of any magnitude. Meanwhile daily charts now show upside exhaustion of TD SELL SETUPS as of last Friday . (9 consecutive closes above the close from four days prior) This likely will allow for a slowdown in this stock and reversal this coming week. Shorting APA looks prudent technically on this rally, from $31 up to $33 with expectations of a pullback to test and break recent lows at $25.