March 18, 2019
Mark Newton CMT, Newton Advisors, LLC
S&P 500 Cash Index
Support: 2764-5, 2727-31, 2678-81, 2672-5
Resistance: 2815-8, 2824-5
Summary: US Equities have now trended higher in 10 of the last 12 weeks, with SPX gaining nearly 500 points in just under 3 months' time, or +20% since Christmas Eve 2018. Trends which had begun to wither a bit into early February managed to hold support after just minimal drawdowns and then last week regaining all of the prior week's losses. Now the act of having pushed up to new highs on better breadth and momentum this past week keeps the near-term technical situation looking bullish and still difficult to fade, despite the extent of recent gains. While this rally is thought of as one to consider selling into next month, it's important to see signs of Technology starting to turn lower and for S&P to give back the area of its most recent breakout. At present Technology does not seem ready to rollover, and still should be overweighted this week as further gains seem likely.
Outside of Equities, we've seen signs of the Dollar turning back lower, albeit within an uptrend that began in late January. While commodities have tried to stabilize, it still looks a bit early for this to work until February lows in BBDXY index can be breached. Meanwhile, Treasuries have been persistently strong, similar to Equities with yields reaching the lowest levels since January (TNX)
Sector-wise, it was thought that Technology and Industrials would have a difficult time carrying this rally by themselves, as both are showing gains of more than 15% YTD. It was thought that other sectors would need to come to the rescue. This looks to be happening slowly but surely. Just in the last week we've seen measurable signs of Financials and Healthcare starting to outperform. This is not immaterial, as these two sectors combined account for over 25% of the SPX. Thus, there has been a broadening out in this rally that can't be overlooked. The main risks at this point have to do with Tech stalling and rolling over (discussed below with charts) along with counter-trend signs of exhaustion appearing. Meanwhile momentum not rising as quickly to confirm this recent push back to new monthly highs is important. However, the bottom line is.. we'll need to see evidence of index weakness to pay attention, and overall, that just hasn't happened.
As the chart below shows of the MSCI AW World index (EX-US), most of the globe has rallied in lockstep but at a slower pace, after having weathered a much more difficult 2018. Thus, the snapback rally here has not even recouped 50% of last year's drawdown. Yet, the act of exceeding the downtrend does still suggest further gains are possible in indices globally in the months ahead, and it looks premature to fade this rally. Note that last year's pullback got right down to important support which had held prior pullbacks as what happened in early 2016. Thus, it's often important to take a look at charts outside of the SPX to put things into perspective.
TECHNOLOGY- Has this move run its course? Or is there more likely?This week's charts and discussion center on Technology, which has bolted higher to take the lead again this year with very sharp gains in recent weeks.Technically speaking, it looks premature to give up on gains into this week, as it looks very likely that this coming week and potentially the next could be positive. Technology has moved back to new all-time highs on an Equal-weighted basis, while main Technology gauges like S&P 500 Information Technology index are within striking distance of all-time highs and look likely to challenge these areas in the next 2-3 weeks. However, as will be discussed below there are some intermediate-term concerns, largely hinging on momentum having turned down sharply late last year on weekly/monthly charts. This will need to be resolved by continued sharp gains back to new highs on relative and absolute charts. However, some indices like the SOX look to be just below prominent highs and showing negative momentum divergence that likely could make this sector slow. Bottom line, for March, it looks right to be involved with Technology and overweight this group. However, on signs of Tech stalling into April and/or May, it's right to watch for the degree of any consolidation and /or decline before weighing in on the balance of the year and/or next. It's thought that Tech likely does stallout into the Fall of 2019 and might begin a period of underperformance given the monthly charts waning in momentum. But at present, it's tough to give up on this sector until prices begin to weaken materially and one cannot abandon Tech simply because of prices being overbought alone, as plenty of good charts remain in place.
Most Important Technical Developments of the Past week:
1) TNX broke down last week to the lowest levels since January (US 10yr) as did the 2 and 5 year yields. (30 year held up in stronger fashion)
2) Financials began to turn higher and outperform and Regional banks in particular look attractive to outperform. Interestingly enough, this group has worked despite yields turning down sharply
2) US Dollar index turned down over the last couple weeks, and this weakness has helped a bounce in both China and also Emerging markets
3) Momentum and breadth which flattened out a bit into late February, have turned up a bit, with momentum in particular moving up to test levels of late February. For now, momentum is not as high as was seen in late February, so this has created the start of some negative divergence. Yet, until prices turn down, this can certainly continue this current week. Breadth, meanwhile, has improved by the Advance/Decline pushing back to new highs. Yet, momentum on breadth is much lower than in late February.
4) Sentiment looks to have contracted further in the last week, with AAII converging to show just a 1.36% spread between Bulls and Bears. After having widened out into late February to nearly a 20% spread, now this has retreated to near unchanged. Thus, sentiment certainly isn't too complacent right now in a way that would put in a top. (Back in January 2018 this showed over a 40% spread between Bulls and Bears)
5) Demark "Sell Setups" were formed this past week on weekly charts for Value Line Arithmetic, SPX, NASDAQ, DJIA, SX5E, along with many major sectors, including XLK, XLI, XLE, XLY, XLB, XLF. Note that Daily counts however, have been recycled and now are continuing up on different counts. Thus, its thought that when these complete and Daily and weekly are in alignment, this should coincide with at least a short-term peak, likely in late March/early April.
6) Cycles- (time period between 3/20-4) This month brings about an important six-month anniversary to last September's peak, while being 90 days from the late December lows, 270 days from the late June 2018 lows, and 120, 135 days from the November turns, which suggest the following periods could be important: Additionally this rally from late December will be exactly equal in time to the pullback from mid-September as of March 29.
7) Crude oil looks to have made a decent about-face and should push up to $61-$63 in the weeks ahead into April. Meanwhile, Gold and Silver look to have begun at least minor drawdowns in recent weeks and this looks to continue.
8) Sectors like Industrials and materials both underperformed last week, while Technology and Healthcare made sharp gains. This continued rotation into Tech looks important and bullish in the short run.
9) Defensive sectors like Utilities and REITS did manage to both make absolute breakouts in the last couple weeks, though both are nearing areas of resistance on weekly and monthly charts. Additionally, relatively speaking, both lagged last week. It's thought that both sectors should be less likely to continue recent gains.
10) Small-cap outperformance ended quickly in late February and this has been given back sharply in recent weeks. While this isn't necessarily bearish for the overall market, it's important to mention given that the first two months showed very promising strength in this group.
LONG IDEAS within Technology: A, CRM, FLT, GPN, PANW, TEAM, RNG, PCTY, PAYC, PYPL, COUP, CYBR, SPLK, AMZN, NFLX
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Bullish into late March before stalling out- Last week's push above 2825 keeps the near-term trend positive and exhaustion signals are premature for a turn. The combination of these along with the fact that momentum has lessened in its intensity should still allow for additional strength this week. While the week following March Quad-expiration historically has been negative following a positive week, we'll need to see movement back down under 2788 to pay attention. Until then, trends look likely to push even further higher with targets at 2850-60 for this week
Intermediate-term (3-5 months)- Bullish- While monthly momentum remains negative for many indices given our weakness since September and particularly since December, the near-term trend remains positive from late December and the breadth thrust combined with bullish seasonality and ongoing pessimism combined with recent sector emergence (Technology and Financials breakouts) should lead equities higher into the Spring/Summer before any further rolling over happens that causes more intermediate-term damage. The latest strength over the last few weeks has now caused weekly MACD to turn positive and join the Daily momentum in moving up. Thus, it's looking increasingly less likely that an immediate retest of December lows is likely, but something of the sort certainly cannot be ruled out for September/October of this year. Structurally, as has been noted, we have seen technical improvement in US benchmark indices, with prior lows having been recouped along with downtrends from last Fall's highs being exceeded. 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. Overall, it's right to be constructive on 2019 given likely positive January performance combined with bullish cyclical trends for this year, and expect that the larger bear market likely gets postponed until 2020.
10 important Technology Charts heading into this week, sector, index charts and then 3 attractive stocks to consider
Technology relative to SPX- Bullish for further gains to test 2018 highs.Relatively speaking, this chart of S&P 500 Information Technology index v SPX shows the recent breakout last month that helped Technology start to accelerate and outperform in a big way. This strength helped Tech regain the top spot for 2019 performance, and this move does not yet look complete. Daily charts of Tech/SPX still argue for another 1-2 weeks of outperformance, and given the sharply upward nature of momentum recently, this looks to get near former highs from Summer 2018 before slowing. Until there is evidence of Technology stalling out, it's right to be long/overweight, expecting further near-term relative strength, and likely a lack of any market correction until late March.
Technology (S&P 500 Information Technology index) Bullish, but faces a tough task after rallying to near 2018 highs. Technology as seen on monthly charts began to turn up sharply back in 2016 and accelerated faster once prices got up above former highs from 2000. Often the first breakout above a former high should allow for some upward follow-through. While the last three months have been higher this year after last year's drawdown, it's imperative for Technology to reach and exceed last year's highs to keep this chart in good shape. The slowdown in momentum from last year remains a concern on an intermediate-term basis for Technology, so it's thought that Tech faces its first real test in the next 2-3 months after this recent run-up. Bottom line, movement back up over 1338.90 sooner than later would be a very good sign. More likely, however is that Tech stalls out this Spring slightly under this level and consolidates. Movement back under 1162.76, or February 2019 lows, would be problematic for Tech for this coming Summer and Fall, so this is what to watch for that could be an issue for Technology and for the market as a whole.
NASDAQ vs SPX relatively-No signs of this turning back lower. Along with keeping a close eye on Technology, watching the relative performance of the NASDAQ itself is often useful as it's Tech and Biotech heavy in weighting, and the start of relative out/underperformance can often give early warning signs about Technology along with turns in the broader market. As this relative chart shows above, the NASDAQ/SPX chart peaked out last June, providing a three-month warning on when the broader market topped out. The decline undercut its lengthy uptrend in early October 2018, coinciding with the start of more substantial market weakness which lasted through December. In similar fashion, the turn back higher managed to exceed downtrends from last Fall earlier than the broader market accomplished this. Thus, an early warning on market strength occurred which preceded the larger advance in the broader market. Overall, relative chart of the NASDAQ to broader market can be helpful to watch closely. For now these are still pointing to a bit more strength over the next 1-2 weeks.
NY FANG index (Bloomberg)- FANG looks to be breaking out. As relayed last week in "Newton's Notes" , The FANG stocks look to have exceeded a meaningful area of trendline resistance that has served as resistance for this group since last Summer. This goes a long ways towards explaining some of the underperformance earlier in the year. The last week of strength, however, seems to argue that this part of Technology is now trying to play "catch-up" after the lengthy consolidation.
Semis look to be nearing resistance & likely stall by the end of March -The Philadelphia Stock Exchange Semiconductor Index (SOX) has strengthened up to an area of important resistance stretching back since mid-2017. In the short run, this is likely to provide some solid near-term resistance at 1425-1450 that likely holds prices. However, in the event this is surpassed, prices likely would trend up to 1500-25, which should constitute a strong area to sell. Given the 18 month consolidation and downturn into last December, this recent rise has had little effect on momentum which has been much weaker than what's been seen back in late 2017. Thus, the start of negative momentum divergence looks to be a serious challenge for the longevity of this advance, if and when prices push up to new highs. Bottom line, the next 3-5 days look to be positive for Semis, but one should expect a stalling out, and the next 2-3 years might prove difficult to achieve the kind of gains which occurred in 2016-7 given the slowdown in momentum.
Equal-weighted Technology vs SPX (SPXEWIN index-Bloomberg) v SPX- Near-term bullish for Tech, as the breakout now has managed to exceed former highs from 2018 and looks poised to push up further this coming week. When looking on an equal-weighted basis for Technology, relative to the SPX (SPXEWIN index vs SPX) the breakout late last year provided a "green light" for Tech outperformance, as this equal-weighted index had exceeded a key downtrend going back since last Summer. At present, we've seen some stalling out, but now in the last two days, this ratio has begun to turn higher yet again. Overall, movement back to new highs over the next 2-3 trading days looks likely, which should translate into further Technology outperformance into late March, and a continued market rally. Once this begins to stall out and reverse, some clues about SPX and its turn back lower will be evident. For now, it pays to stay the course this coming week, anticipating further gains.
Apple Inc (AAPL- $186.12) AAPL is growing close to resistance, which could come about between $188-$190 this coming week. The combination of near-term overbought conditions coupled with prices having risen above its upper Bollinger Band and within 2 days of counter-trend exhaustion all makes this a less than perfect risk/reward technically at this juncture in the near-term. While the breakout happened earlier last week near $176-8, at current levels it doesn't have as much appeal. However, the intermediate-term picture given the upward shift in momentum over the last few months is still attractive. Thus, for traders, one would look to sell into gains between Wednesday and Friday this coming week, looking to buy dips. On any weakness back to $178-$180, this present attractive buying opportunities between April and September.
Salesforce.com Inc. (CRM- $161.51) Attractive to buy for a test/breakout of late February highs. The consolidation in CRM proved mild over the last couple weeks and resembles a Cup and Handle pattern to the chart pattern since last September. Movement back higher looks to have started late last week and it's right to lean long, expecting a test of $166.87 around $5 higher. Movement above this on a weekly closing basis would argue for a push up to $180 as this would constitute a breakout of this six-month bullish base. For now this latter part might prove premature, but heading into this current week, longs are recommended technically, with thoughts of an upcoming challenge of former highs. Any movement back down under $157 would stop out shorts.
Palo Alto Networks (PANW- $239.72) PANW is attractive for further gains to near $260 in the near future. Its quick rally back to challenge and briefly exceed last Fall's highs looks important technically. This level also was important based on the prior highs hit back in 2015 when PANW made it slightly over $200, a significant high, albeit at a slightly lower level. Overall, further near-term gains look likely to 260, with gains over this level leading quickly up to near $280. Only a pullback under $222 disrupts this rally potential, leading to consolidation before gains can occur.
Agilent Technologies Inc. (A-$81.10) Bullish as the last few weeks have exceeded the highs of a lengthy bullish base that began back in early 2018. Last week's recovery of the pullback attempt on weekly charts is constructive for a bit more rally in the near future. While weekly Demark indicators are close to completion, this likely will not be in place until early April to signal any sort of upside exhaustion. In the short run, movement up to $85 looks likely, with movement above that taking Agilent up to $90. This lengthy bullish base shown on weekly charts from early 2018 was important when exceeded last month. While the stock has rallied somewhat since that time, the full extent of the rally cannot be called complete, and this pattern remains constructive for further gains. Only under $75 would the advance be postponed.