January 22, 2019
Mark Newton CMT, Newton Advisors, LLC
S&P 500 Cash Index
Support: 2650-3, 2630-2, 2596-8, 2570, 2550-1, 2513-5
Resistance: 2675, 2683-5, 2700-5, 2709-10
Summary: The near-term bullish uptrend in stocks continues, and last week's ability to have recaptured former lows from February, April, October/November in S&P is seen as a structural positive. While a 11% rally in four weeks makes for a tough environment to consider getting back into stocks for those that have been on the sidelines, pattern-wise this IS a definite positive to have reclaimed the former area of the breakdown. In the short run we've seen momentum get ever closer to overbought levels on daily charts while both weekly and monthly remain negatively sloped. The NASDAQ Composite managed to break out of the entire downtrend from October last week, while the SPX and DJIA now lie just fractionally below similar levels, which equates roughly with the 61.8% Fib retracement of our Oct-Dec downtrend in S&P just over 2700. Overall for stocks this remains a counter-trend rally given the downtrend remains very much intact, though the strength in recent weeks is starting to make any retracement less likely to completely retest lows. Meanwhile both WTI, Brent Crude managed their own breakout last week, adding strength to the argument about a possible move in Crude to the low to mid-$60's. (this also should help fuel the Energy trade a bit longer- More on this below) Treasury yields have also begun to turn higher, and what's interesting to note is that the recent positive correlation seems very much intact with regards to Crude, Treasury yields and Stocks. For now, the key takeaway heading into this week, is that the area near November lows which was though to be strong resistance on this recent rally has been surpassed. This has caused both short-covering and momentum buyers to begin chasing this rally, and the big structural area that many investors and the media had all been pointing to, myself included, has been surpassed. Given the long weekend now, earlier cycles had pinpointed 1/17-1/21 as having significance, with the next important area at 1/28. This latter would help Demark indicators to line up and might serve as a stronger area to consider fading this rally. Overall, it's thought that this rally likely comes to an end in the short run within the next week and should begin at least a minimal retracement. Yet it looks right to bet on stocks pushing higher into Spring, not lower. Technically, the call to flatten out thus far looks premature as this rally has continued unabated. While buying into this now looks ill-advised as meaningful resistance looks to be directly above, it's also tough to short this market near-term until tangible signs of reversing course have appeared. Thus, buying implied volatility makes more sense for those wishing to hedge long exposure. We kick things off with the weekly chart below, which shows the SPX having successfully recouped the levels of its prior breakdown- This is certainly positive and getting back above 2630 should have stopped out shorts. Now at 2670, SPX lies just below key Fib retracements, still part of the downtrend from last Fall, while weekly momentum is negatively sloped. A very tough call heading into this week on direction. Until one sees evidence of the downtrend reasserting itself, it's prudent to expect a possible further 3-5 day rally into 2700 or just above. Yet this seems to be a very poor risk/reward until this can be resolved after 10% in 4 weeks time while structurally still in tough shape. The next few weeks will speak volumes. Stay tuned.
Overview: Last week's rally now brings the four-week total of gains up over 10% and in some cases nearly 15% for US indices, but at current levels, markets are at a very difficult juncture. SPX and DJIA remain in bearish downtrends from last Fall's highs, so this remains a counter-trend rally within a downtrend. Furthermore, momentum is negatively sloped on weekly and monthly charts, which carry more weight than daily charts. Meanwhile, prices have just gotten back OVER prior lows that many, including myself, thought would be important. Thus, structurally patterns have improved in the short run, yet look to be close to sell into on intermediate-term charts. (Monday evening Futures are down -.50%, yet have not even come close to undercutting last Friday's lows. Unless 2596 is broken, pullbacks should be used to buy dips)
A few relevant points worth making.
1) Positive correlation remains very much in place on Treasury yields, stocks and Crude oil. Given that these three have largely moved in tandem in recent months, the recent uptick and breakout in Crude and Yields, we still likely are a bit premature to sell into this stock rally
2) Counter-trend exhaustion signals (Demark) which had lined up in unison early last week on many sectors and indices, were not confirmed, and prices managed to continue higher, largely starting a new count. This is also problematic to the bearish case near-term, as near-term rallies might not prove imminent
3) Cycles had shown the area late last week into 1/21 as being important and while prices have extended above this level, there remains a high likelihood of some kind of change of trend between now and 1/28 near last year's January highs.
4) Over 94% of all SPX names are now over their 10-day moving average and more than 72% of stocks are above their 50-day ma. a far cry from a few weeks ago when these were both in Single digits.
5) Put-Call ratio for Equities has pulled back to 0.54, a level that's uncomfortably low given a 10% rally in four weeks as part of an ongoing downtrend.
6) Financials managed to turn back higher relatively speaking while Technology has broken out in Equal-weighted terms of the entire downtrend that's been in place since last June. This is a positive for both groups, and Financials now as a sector is close to its own relative breakout, which would happen on a move above November highs v SPX.
7) Breadth indicators were very strong during the latter part of December/early January, rallying sharply from very extreme low area to very extremely high, in a period of time that's been seldomly seen over the last 100 years. This is definitely seen as an intermediate-term positive.
8) Countering this argument above, breadth has begun to slow in the last week and most of the "up" days were accompanied by just fractionally positive breadth readings (though not negative while momentum has waned on intra-day charts. This last point is partly to blame for having a less than enthusiastic stance in the short run. However, breadth has not turned negative yet, but merely has slowed. This very well could have importance in the days ahead if this starts to turn back lower.
So the cumulative effect of these statements warrants a selective stance here. While shorting might seem premature, it's proper to recognize that our 10% rally has come as part of a downtrend that is still very much intact. Thus, it's important not to get too caught up in the markets ability to carry from low to high right away. This move in all likelihood will need to be digested, and areas of importance in both price and time are coming up in the near future which merits paying attention.
Sector Highlight: Energy
ENERGY SHOULD CONTINUE TO OUTPERFORM SHORT-TERM
This week we revisit our call for Energy outperformance from December and highlight a few charts that serve to reinforce this view, and cover some of the charts of Crude along with the sector itself on both an absolute and relative basis. Last week saw WTI and Brent Crude breakout, while charts of the OIH managed to exceed initial resistance in a manner that should allow this rally to extend.
LONGS to CONSIDER
USO-United States Oil Fund LP-$11.31-Rally to $12 likely, then $12.76
OIH- VanEck Vectors OIl Services ETF- $17.24- Rally up to $19.72 and potentially $21
Crude oil futures WTI- $53.80- Long here with targets at $60, then $63.45
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Mildly bullish into 1/28 and 2700-10, with pullbacks under 2630 reversing this call. Expect early week pullbacks should prove to be buying opportunities (Mon eve Futures -0.50%) and further rallies can happen over the next few days. Largely this optimism is justified given the extension late last week which served to reset the exhaustion indicators, while being short of upside targets. Given that 2630 was exceeded, this will need to be violated again to expect markets are turning down with areas near 2596 being important and would cause a trend violation of the rally from December.. Resistance should come in near 2700-2710 on rallies, and indices are entering a time when this rally could slow/reverse. For now ,the call for flattening out has been proven premature. Shorts cannot be attempted until 2630 is re-broken, and SPX gets back under 2596 on a close.
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 to review- ENERGY- Crude, OIH, Relative charts, Seasonality and 5 stocks which still look like appealing risk/reward longs
Crude oil (WTI- $53.80) Bullish for a continued rise given last week's ability to close at the highest levels since early December. While US inventory levels continue to lift, Crude is entering a bullish seasonal period and momentum has begun to turn sharply higher given the recent breakout. No evidence of any counter-trend signals are in place, and technically a further lift looks likely to levels near $59.50-$60 which represents the first meaningful upside area of importance. This coincides with the 50% retracement of Crude's two month decline, and should be an initial target, followed by the low $60's. USO and/or Crude futures look attractive to buy for the weeks/months ahead, technically with tight stops on a close back under last Friday's lows.
OIH- $17.08- Bullish for further gains to Vaneck Vectors Oil Services ETF broke out of its seven-day range last Friday, rising to the highest levels since early December. Technically speaking this is a bullish move and should be able to help OIH reach $19.72 or even 21 before stalling out. While an 11% gain in Energy thus far isn't normally something to chase, it's worthwhile noting that this sector is undergoing normal mean reversion after being last year's worst performing sector. Momentum turned up sharply early this year and Friday's move cleared a full week of highs, which is normally very positive in suggesting upside continuation. Counter-trend exhaustion signals are premature and momentum is not yet overbought given the consolidation that's taken place. So last Friday's close should still represent an attractive risk/reward to buy for gains in the days ahead.
Relative Chart- OIH vs SPX (Daily) - Energy still bullish and further outperformance likely- Charts of OIH vs SPX in relative terms show the breakout which happened early this year in Energy, which consolidated over recent weeks before turning back higher again last week. This minor relative sector breakout which happened again last week coinciding with Crude's breakout bodes well for additional strength in this group and longs are favored for Energy expecting further outperformance in the months ahead.
Relative Chart- OIH v SPX (Weekly) Energy on weekly relative charts shows a far more subdued picture with ongoing downtrends still very much in place after the breakdown last least year. However, near-term, this rising tide hasn't yet run its course, and technically it's anticipated that the next few months should prove strong for this group and outperformance can continue. While last year's negative January proved to be a harbinger of poor performance for the Energy sector in 2018, it's thought that 2019 could be exactly the opposite. Early strength in momentum coupled with mean reversion and bullish seasonality should be able to lift this sector higher in the short run, and Energy remains an overweight.
Energy seasonality tends to be the strongest between February and June of any given year and Seasonality charts on the Energy Select SPDR ETF show that over the last 5 years this has certainly rung true. Thus, with Energy having pulled out of the gate quickest thus far in 2019, many might be wary about chasing this group. Yet, it still seems likely that Crude's recent strength might bode well for OIH, XLE, XOP and others to show decent outperformance during the winter months, and one should use minor weakness to buy, technically speaking.
5 Stocks to consider buying in Energy for intermediate-term Outperformance
Cabot Oil & Gas (COG- $25.62) While the long-term chart on COG might not initially appear as a technical standout, it's worth noting that COG maintains one of the strongest Relative strength ratings of any of the stocks that make up Energy over the last 3 and 6 month periods. COG has been range-bound since 2016 after its decline from 2014 highs, yet has begun to show real signs of stabilization and minor strength in recent months. Its move from $22 up to $25.62 in recent weeks has helped momentum begin to strengthen, and its near-term progress should help COG make headway up to $29 in the short run, to test highs made back in early 2018. On an intermediate-term basis, this will be the level which needs to be surpassed to allow for a larger move back to test 2013/4 highs. At present, near-term strength looks likely and stops on longs would be placed near $21 which can't be broken without postponing any advance.
Occidental Petroleum (OXY- $67.03) OXY is yet another stock which has faced severe weakness since last Spring, losing over 30% in value before bottoming out near former lows made in the Summer of 2017 which served as decent support. OXY made the list of the 9th best (or least worst) performing Energy name within the S&P 500 Energy index in the last 12 months, with a -11.09% loss and has dropped just 6.77% in the last 3 months. The stock's attractiveness come from last week's gains, which broke out above a downtrend from last Fall, helping this to begin what's thought to be a comeback from the decline from last Summer. At $67, this looks to move into the mid-$70s without too much resistance given this recent breakout, and initial levels come in at $72.25 which is a 50% retracement of the entire drawdown of last year. Additional levels of importance come in at $75.88 which is a 61.8% Fibonacci retracement level and lines up near the initial lows of September 2018. Stops on longs are placed at $62.75 under the lows from two weeks prior.
Phillips 66- (PSX- $95.30) Rally to $101 likely- PSX, likely many others in the space, broke down, severing long-term trends, but now is beginning its recovery which could result in above-average near-term outperformance. The stock has gained over 20% just since December 24, causing weekly momentum to begin to stabilize and try to turn higher. While the trendline break last Fall did cause some intermediate-term trend damage, in the short run, this likely should continue higher given Crude oil's breakout last week. The first meaningful upside target lies just above $101 which represents a 50% retracement of the entire decline. More meaningful resistance comes in at $106-$108.50, which represents its 61.8% Fibonacci retracement as well as former lows from July-September which should now be resistance on gains. Additionally the entire uptrend also intersects this area, so getting above would help the trend out substantially. For now, a long bias is prudent, looking to buy any dips into mid-week for continued gains.
ConocoPhillips (COP- $67.90) COP is attractive given its trend breakout, and should push higher in the weeks ahead with initial targets found near 71.40. COP makes the list for one of the best performing stocks in the last 3 months within Energy, only losing -6.46% and structurally it remains in good shape, within striking distance of former highs. The downtrend from October was exceeded two weeks ago, and has enabled the stock to recoup nearly 50% of the entire decline from October very quickly. While being down 20% off its all-time highs seems substantial, COP is in better technical shape than many in the space and is far stronger technically. This looks like one of the better Energy stocks to own given the degree of strength this has shown of late along with bullish structure, and should result in this getting to $71.40 initially and then over to $74.85. Only a move back under $62 would postpone the advance.
Marathon Petroleum (MPC- $66.09) MPC is likely to continue the recent snapback rally this began last month and should reach targets at $71 and above near $75 that both look important. MPC did suffer a long-term trend break late last year, so the recent bounce will have to be seen as counter-trend until it can get back above $71, which is the first target. Momentum is positive on daily charts but negative on a weekly basis, yet no counter-trend signals of exhaustion are present that would suggest this should be sold right away. Thus, further rallies in MPC look likely and should lead this higher by 5-10% on this Energy bounce in the months ahead. Stops for longs lie at $61