March 25, 2019
Mark Newton CMT, Newton Advisors, LLC
S&P 500 Cash Index
Support: 2795-6, 2780, 2753-5, 2727-31
Resistance: 2812-3, 2826-7, 2858-9
Summary: Trends remain bullish, though last Fridays decline was sufficient to put some "Wear and Tear" into momentum and breadth that likely should begin a topping process for the Equity market in the near-term. While this doesn't preclude Equities moving higher this week to end the month and quarter, it does mean that upside likely will prove limited in all likelihood for the month of April and we will finally see some evidence of selling pressure in April after 3 sharp months of rally. Treasuries moved sharply higher with yields now down to 2.41% in the 10year and dropping under the 3-month yield for the first time since 2007. Readers might remember this happened back in 2006 about a full year ahead of the crisis and was something to keep note of. Meanwhile the Dollar has temporarily stabilized and bounced in recent days, but Gold has managed to push higher anyhow. It's thought that Dollar strength likely proves temporary into April before turning back down, and Gold might begin to finally make a move towards the more important 1375 area of "neckline" resistance. Defensive sectors gained ground last week as Technology showed some meaningful reversal signs right near former highs.
Looking back, equities showed their first ~2% decline since the end of December as prices fell sharply with six sectors falling more than 2% and breadth finishing down around 3.5/1 negative. That's a big change from the kind of price action and sector performance we've seen lately. However, it's worth noting that given the extent of Thursday's gains, Friday only finished down around 3 points under Thursday's lows. However, with Tech having gotten to right near prior highs, it's thought that Tech likely cannot rebound too meaningfully in the weeks ahead before consolidation. What's considered a real negative, is the extent to which Treasury yields are dropping precipitously. The bond market seems to have lost any sense of confidence for US economic growth. As for positives, structure is still in OK shape, and we've seen a heck of a rally the first few months, which tend to be positive for the year historically. Additionally, sentiment is a bit subdued, and Demark Exhaustion is still EARLY to form, and will require a move back to test highs.
Overall, the base case is that last Friday was potentially a tipping point for momentum and breadth , but yet we'll see signs of prices trying to claw back this coming week to help the quarter finish out on a good note. Breadth however, is unlikely to match on the Upside what it did on the downside last Friday. Thus, we still face a troubling situation heading into April in the short run that likely means at least a minor pullback is going to begin in April. However, it's thought that this won't erase even 50% of the move up from December and should turn out to still be a buying opportunity for stocks in the months ahead. As has been mentioned, it's still likely that the brunt of any real selling could be pushed off until the Fall and certainly next year likely is setting up to be Sub-par, both technically and economically. For now, we'll use last week's Friday dip to try to buy for a push higher this week.
S&P pulled back sharply, but this largely just erased what had been a pretty stellar move last Thursday. Prices did undercut the 10-day m.a. and as of Futures trading pre-open Monday morning have broken the uptrend from December. Bottom line, it's thought that this first pullback is buyable, but one should now look to be selling rallies over the next week on any gains. Key areas of support are found at 2796 down to 2780. Below that lies 2753-6 and then 2727 the March 8 lows. Until/unless those early March lows are violated at 2727, this pullback should be buyable in the next couple weeks. Seasonality and intermediate-term momentum remain positive, so despite some breadth falloff and price weakness, any short-term peak given the 3 month rally we've enjoyed, likely will take some time and some Backing and filling before even a meaningful short-term top.
New Technical Longs/Shorts to Consider technically for the next 2-3 weeks:
LONGS: GDX, VZ, TMUS, NEE, EXC, XLU
SHORTS; BBBY, NWL, TPR, OSTK
A more thorough stock writeup will be given once I return on some of the more appealing technical setups being seen. Note, for those on Twitter, follow me on @NewtonAdvisors where i post Long and short stocks every trading day with brief analysis. My Videos are being posted on YouTube and also on my blog at http://newtonadvisor.com/blog While my travel might prohibit these from being updated as quickly this recent week, I appreciate your patience and things should return to normal by this coming Wednesday.
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Looking to buy early week weakness Monday/Tuesday, thinking a final push higher is likely into end of quarter before markets experience some consolidation in April. After such a lengthy run of 3 months, it's tough to call the top based on 2 days of pullback. My thinking is that we experience some "backing and filling" and rallies into end of week are better to sell, than with S&P under 2800. So both in S&P and also in Europe in SX5E, one should look to buy this initial dip.
Intermediate-term (3-5 months)- Bullish- While monthly momentum remainsnegative 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.
The most important charts from last week
Technology looks to be stalling after having rallied right to near the prior trendline that had been broken along with getting up right near prior highs. While a possible further retest cant be ruled out for this coming week, upside should prove limited for Technology and this shouldn't be the sector to overweight for April. It's thought that profits should be taken on most Tech names on a 2-3 week basis and rotating into Defensives makes sense, particularly on any early week rallies.
Treasuries have rallied very sharply in the last couple weeks, with yields now down under 2.45%. (TNX) This shows the markets lack of conviction in the economy to stay on track, and suggests a possible washout in Yields to near 2.25% before things stabilize. Overall, one has to keep a close eye on Treasuries as prices rise but this looks to be one of the better patterns and should not be faded just yet. On signs of this pulling down under 2.30%, one can consider shorting Treasuries. For now, this move has happened very quickly and signs of exhaustion are now still absent. TLT looks to be a long, and would use any minor pullback to still buy dips.
Utilities look to be one of the better sectors to favor in the short run to overweight. As written up the March 11 Weekly Technical Perspective, this group has turned higher and has outperformed in the short run. While the longer-term pattern shows XLU to have a lot of resistance up at $60.50-61, the near-term shows a very good likelihood that this can be met. Last week's gains helped prices get up to and over prior highs on a daily close, and likely help to spur on price gains to $60 at a minimum into mid-April before any peak. So Utilities along with REITS, and Consumer Staples, & Telecomm, the so-called Defensive trade, should work in the next few weeks. In this case above, XLU should be owned and recent stocks mentioned in the Daily reports such as PNW, SRE, EIX, NEE should be favored as Utes that could show better than average relative strength.
The US Dollar - Minor gains this week should be right to sell into given larger pattern. The Dollar decline has reversed course as of late last week, but technically it's right to look to sell into gains over the next 1-2 weeks, favoring a pullback under recent lows that should drive the Dollar lower in the months to come. This larger consolidation pattern has been at work since May of last year, and the choppy action just in the last couple months following the October 2018-January 2019 decline argues for lower prices on an intermediate-term basis, not higher. So while a bit more strength is possible given last Thursday's reversal and attempted push higher above the minor downtrend from two weeks ago, this should create opportunities to sell US Dollar and buy Pound Sterling and Euro.
Gold's pattern has turned more bullish lately with the bounce attempt after having broken down from its most recent failed test of 1340-6. Given that the US Dollar has attempted to stabilize and bounce over the last couple days, this resilience in the face of Dollar strength is impressive. However, much of this Gold strength is happening as rates plummet, which some might view as more plausible. Near-term, technically, one would expect resistance on this rise anywhere from 1327-1346 again in the weeks to come. This minor bounce hasn't completely washed away the technical negative of having broken the three-month trend from last November's lows. Until there are more concrete signs of the US Dollar turning down, this could still take some time for Gold. However, on a breakout above 1375, this would be the real signal that argues for a larger advance to unfold. The broader trend since last Summer has indeed improved, so it's thought that a larger move higher should be in the process of getting underway. Near-term, however, it's a must to have patience until prices can clear former highs that have proven to be so challenging over the last few years. Once this trend starts to get underway higher, one can have a more material bullish intermediate-term thesis without worrying as much about the near-term swings.
McClellan's Summation index (A smoothed version of the McClellan Advance/Decline oscillator ) shows breadth having tapered off in recent weeks. As seen above, Breadth has actually been worse than expected in recent weeks despite the market's lift. Thus, last Friday's downturn coupled with a potential Monday follow-through could be important in signaling the start for Equities to gain some much needed consolidation. This will be something to monitor closely in the days and weeks to come. For now, the minor pullback isn't all that damaging, but simply a warning sign for a possible pullback sometime in April as breadth is not cooperating with price action. Divergences in charts like these can often be important in signaling a chance in trend. As the bottom part of this chart showed in December vs January, momentum oscillators ON breadth itself made a higher low in October compared to December/January, which was a key positive in suggesting the Equity decline should be near exhaustion. For now, any bounce attempt back to last week's highs this week likely should be viewed with suspicion given the degree of breadth falloff in recent weeks.