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Top Technical Shorts to consider after this Run-up

April 8, 2019

Mark Newton CMT, Newton Advisors, LLC

Contact: info@newtonadvisor.com



S&P 500 Cash Index

Support: 2886-8, 2865-7, 2836-7, 2785-9

Resistance: 2899-2901, 2907-9, 2921-2



Summary:  Equity trends remain steadfastly bullish but are now getting stretched, and have arrived at near-term areas where resistance could set in, as early as this week on a very short-term basis. Momentum is nearing overbought territory yet again after one of the best quarters in over 20 years time, while the groups that have led this rally, namely Technology, Consumer Discretionary and Industrials, are now up to levels near prior highs which are thought to be important from a price perspective. While the overall momentum and breadth of this rally from late December 2018 along with ongoing trend remain impressive, markets likely can take a small breather after recent 23% gains from December lows before continuing higher to challenge all-time highs. Given no discernible evidence of any trend damage, it's tough making a larger call for any sort of market peak. However, factors like divergences, upside exhaustion, cycles and sentiment can all be useful in pinpointing areas that are sub-optimal for new long positions, and result in short-term turns, to the downside as well the upside. Some of these concerns will be shared below, and the overall thesis remains that this intermediate-term trend does not look complete, and any dips in the next 2-3 weeks likely turn out to be buying opportunities for a rally to exceed last September highs. Outside of Equities, we have seen some attempts in Treasury yields bouncing in the last week as part of an ongoing decline in yields that got underway back in December of last year, continuing lower this past March. Meanwhile the Dollar index has largely been unchanged most of the year, having closed last Friday at the same number, 1198, where it ended 2018.. 1198.22 on 12/28/2018 in the Bloomberg Dollar index, vs 1198.24 last Friday, 4/5/2019. Thus, despite all the BREXIT worry and minor bounce in Pound vs USD, the broader US Dollar has been quite range-bound thus far for most of 2019. Below i'll discuss some of the concerns about the Equity market at this stage and then review some of my top picks for Technical shorts for the weeks ahead.



Near-term Concerns on this Equity rally:


1) Negative momentum divergence- Gauges of momentum like RSI (Relative strength index) peaked out in late February when SPX was at 2813. Now 80 points higher, RSI has been unable to move back to new high territory. Monthly negative divergence is very prominent, but is more of an intermediate-term concern for next year, not 2019.


2) Former tops are now being challenged in ETFs of sectors like Consumer Discretionary, Technology, Industrials (February highs) Financials (March highs), with 3 of the 4 of these sectors being the top performing thus far of 2019. At a minimum, this should cause some slowdown to this move and has the potential for a mild reversal.

3) Demark indicators as a means for upside exhaustion are now being seen (Or will be present most likely by Tuesday) on Daily charts in NASDAQ Composite, DJIA, SPX, RTY, RIY, NKY, MID, NYA, SHCOMP, SXXE, SX5E, DAX, UKX, AS51, DWCF. (The VIX, meanwhile, has the same but opposite signals (nearing a BUY) which will be complete in the next 1-2 days potentially. Note, given that the weekly signals are still very premature and non-existent at this time, I anticipate this means that any selloff proves minor for now.

4) Recently breadth gauges like McClellan's Summation index, which is a smoothed version of McClellan Oscillator, peaked out in late February. So while the Advance/Decline did move back to new highs, the smoothed gauge of breadth has begun to weaken.


5) SPX and other US indices are up 15-20% YTD thus far and within three weeks of entering May, the typical start of a slowdown in performance. While trends and momentum remain bullish near-term, it's doubtful that the next 3-6 months bring about an equal degree of rally as has been seen since December. Thus, the majority of gains for this year very well could be in place. While near-term trends are now bullish, it makes sense to consider taking profits on stocks nearing former highs and being far more selective at this stage of the rally.




Positives: Reasons for encouragement this year and/or into the Fall

1) Markets have just completed the best quarter of performance since 1998 (SPX) and now are in one of the seasonally strongest months of the year. April has shown gains for the S&P 12 out of the last 13 years and has averaged 1.7% for the month since 1999. Thus any minor pullback likely could still lead to late month strength.


2) Advance/Decline for "All stocks" still at new all-time highs, so despite some waning in gauges like the Summation index since February, the actual "All-Stocks" Advance decline has shown little to no real deterioration


3) Sentiment gauges such as AAII are still only showing readings of +6.75 spread between Bulls and Bears ( the American Association of Individual investors) While other data like Investors Intelligence and DSI data shows more bullishness, the lack of this poll confirming the others is a concern. Also as mentioned last week the BofAML Global Fund Manager survey for March 2019 showed Equities as the biggest underweight and Cash as the biggest overweight


4) Technology has still not really shown much deterioration and just a stalling out at this time. At 21% of the SPX, this is meaningful relative strength from this top sector.


5) Lack of deterioration. Structurally, S&P managed to get back up above former key support that was broken and exceeded meaningful trendlines from last Fall, now trading just 3.5% below All-time highs.


6) Momentum is positive and not overbought on daily, nor weekly timeframes. RSI is mid-range, while MACD is positively sloped on both timeframes

7) Seasonality is bullish in this Pre-Election year stretch, and cyclically this decennial "9th" year of a decade is one of the more positive, third to the 5th and 8th years.


8) Defensive leadership has begun to wane in the last couple weeks, with signs of Consumer Staples breaking down and both Staples and Utilities were lower last week, which would seem to be a positive for Risk assets.


9) Financials outperformed last week , showing 3.3% returns for the week as Treasury yields bounced. While yields remain under pressure and still trending down, this relative strength in Financials is seen as helpful at a time when Technology could stall.

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S&P remains trending higher with prices finally reaching levels that can be considered near-term overbought. Within 2 trading sessions, we'll see the completion of daily Demark exhaustion in all likelihood while 3 different outperforming sectors are all closing in on former important highs that likely cause this to stall out. Overall, the next 2 weeks have the highest likelihood to causing a trend reversal and could be in place by Tuesday/Wednesday. However, given the ongoing trend and momentum, any pullback likely will find support near 2785 in extreme cases, around 100 S&P points lower, before pushing back up and eventually challenging last September's highs.


This week's report focuses on 10 names which look technically vulnerable for the weeks ahead. For those looking at shorting into this move, these stocks look attractive as technically bearish shorts. As always, it's right to utilize tight stops on shorts in the event these turn up for risk management purposes.



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

Short-term (3-5 days): Bearish- Looks like markets are very very close to levels which makes sense to take a stand in thinking this move stalls out and/or shows some minor trend reversal which could happen by Tuesday/Wednesday of this current week. While Monday and potentially Tuesday could still be positive, it's likely that 2905-2915 will have importance early in this week as resistance which could bring about a turn back lower. However, one should consider buying implied volatility and/or awaiting some type of reversal before getting too short, as the overall weekly trend remains in good shape. Thus, this is a very near-term thesis only at this time and one would look to use any pullback to test March lows near 2785 as a chance to cover shorts and/or hedges, expecting that on an intermediate-term basis, there still is more to go on the upside in the months ahead.

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 indices have just completed the best quarter in nearly 10 years time. Historically when 1Q has been higher by greater than 10% over the last 50 years, it has added to those gains into year-end 9 out of the last 10 times with a median gain of 8% (Ryan Detrick) Moreover, the breadth thrust combined with bullish seasonality and lack of complacency combined with lack of Technology deterioration could lead to a bit more gains in April before any real drawdown, and it's thought that pullbacks likely prove minor. While gains at this point likely will prove less robust into Summer/Fall and offer some buying opportunities, we'll need to see some evidence of breadth deterioraiotn and more bullishness to have concern on an intermediate-term basis. After all, Advance/Decline for Equities has pushed back to new all-time high territory, and in both prior bear market peaks, we saw meaningful divergence in Advance/decline before the broader market peaked out. 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.



Attractive Technical shorts to consider after this Run-up

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CME Group Inc. (CME- $170.09) CME looks to be nearing areas to take profits on this bounce and consider shorting for a move back to new lows. Many of the Exchange stocks have been among the weakest in the Financials group in recent months, with CME being the worst performing of all 67 members that make up the S&P 500 Financials index, down -9.58% YTD. As can be seen on weekly charts the trend violation of the uptrend from 2017 alone was a real negative early this year. CME has since bounced 4% in the past two weeks, yet remains underneath both the long-term uptrend that was violated, along with a minor downtrend connecting last year's highs with the bounce attempt into early March. Counter-trend exhaustion hits likely within 2-3 days time, making 172.50-175 an excellent area to consider selling/shorting, expecting CME to pullback down to recent lows. Weekly MACD remains negative, and it's difficult getting too optimistic on CME's chances of making furhter gains given how weak momentum has been along with structure. Overall, it looks right to sell into this recent bounce, and expect CME turns back lower.

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Tilray (TLRY- $59.54) Bearish, and additional losses look likely in TLRY to areas down near $52.81 extending to $50 as a decent area of support to this decline. Overall, despite the gains being seen in many "Pot" stocks this year, TLRY has been a notable laggard. Its undercutting of late December 2018 lows on a close last week does not seem to make this more attractive to buy, but looks more likely to extend lower. Counter-trend exhaustion per Demark is premature on both daily and weekly charts, and this has been consistently weak in recent weeks despite a bounce in most of TLRY"s peer stocks. Bottom line, this still looks early to buy, and is a better near-term short than long, technically until/unless this can get back up above $75.55 which would take a monumental effort. One should avoid buying dips and use minor rallies to sell/short, expecting TLRY likely drifts down to the low $50's which is the first meaningful area to cover shorts.

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Signet Jewelers (SIG-$26.85) SIG remains under pressure, and even with better Adjusted earnings results last week, these still failed to beat comparable year-earlier figures. The stock technically has been under a ton of pressure in the last six months, though arguably, it has begun to try to stabilize at low levels since January. Unfortunately, this treading water along the lows type pattern has failed to participate in any of the strength in this year's early rally, and now looks to be fading in the last couple days. SIG's drop to multi-day lows last Friday looked important and negative, and likely drops this back down to the January lows near $23.80. Unfortunately with a sizable net loss and continued store closings, it matters little whether the stock might "appear" cheap. Technically patterns of this sort tend to be resolved by a move down under the lows of the recent consolidation, and in this case, it looks right to bet on a move down to near $20, whic makes this still very vulnerable. Shorts should use stops on any daily close back over $29, but it honestly should require a rally back over $33 before thinking that the worst is over. Near-term, additional pullbacks look likely and it appears premature to try to buy dips. Avoid and/or short technically.

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Guess? Inc. (GES- $18.55) Bearish and despite a real boom in Retail stocks lately, GES has not participated and now looks to lose further ground given last week's decline on heavier volume. The stock has had a history of showing support right near current levels over the last year. However, the break of the intermediate-term uptrend looks to be a concern three weeks ago and the stock remains lower by over 15% from where it traded just last month. Technically I'm expecting a pullback down under $18 which would result in this likely losing further ground to near $14.50 near last Spring's lows. Until this can get back up above $19.90, this remains one to avoid buying dips and/or considering as a technical short, looking to add on any break of $18.

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Kroger (KR- $23.90) Technically weak, and last week's close at the lowest levels since this same time last year doesn't quite look complete. Additional selling looks likely in the weeks/months ahead with targets down near 2017 lows just under $20. While KR had shown some promise back last Fall with the breakout attempt of the downtrend from 2015, this showed little to no real follow-through and ended up selling off back down to undercut the two-year trend from late 2017. Bottom line, momentum is negatively sloped and not oversold and counter-trend signals of weekly exhaustion are about 2-3 weeks early to signaling any kind of low. Thus, additional weakness looks probable here, and it's right to avoid and/or short until/unless this can regain $26.50 which would be a stop for Shorts.

L Brands (LB- $27.46) Underperformance not encouraging. Look for break under recent lows. LB is yet another Retail stock which seems to be going in a different direction than most of its peers. After having lost over 35% into year end, it's bounce failed to live up to what the market has shown and this has barely gained any ground in 2019, trading range-bound along the lows. Patterns of this sort which fail to appreciate during big market moves often will prove susceptible to weakness on any signs of turn down, and thus it remains right to hold off on expecting this to join its peers, but rather to pullback and undercut recent lows. Near-term technical targets lie at $24.76-$25. Any decline down under $24.76 on a weekly close argues for a more lengthy correction which likely should hit $20 or below, reaching levels this hasn't hit in 10 years. For now, it's right to avoid and/or short, technically speaking, and look to add on a break to new monthly lows.

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Altria Group (MO- $54.77) Bearish, and last week's pullback to new multi-week lows after its 20%+ bounce from January looks to extend in the weeks/months ahead. While MO bounced from $42 to $57, this hasn't broken the downtrend over the last couple years. This bounce puts prices near a level which arguably is a very attractive risk/reward to consider shorting into. While the downtrend hits near $60, this area in the mid-50s was exactly where MO bottomed back in May of 2018. Thus, former lows often can be an attractive spot to sell gains in a stock which has reached this area. Overalll, the move down under the lows of the past few weeks should successfully jumpstart the decline back lower, particularly when Staples has begun to weaken itself as a sector, breaking meaningful trends back lower. Downside targets lie at $47.50, then $42.50 with resistance and stops to gains at $57.85.

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Owens Illinois (OI- $19.23) OI remains a technical laggard, and recent gains should be used to sell/short thinking that a pullback down to test and break December 2018 lows near $15.60 is likely. The downtrend that connects highs going back since January 2014 intersects near $21.50 and is an attractive area to consider shorting. Yet, even at current levels, OI lies around 50% of its all-time highs where this peaked out in January 2014. The stock has barely gained any ground since the market's December 2018 lows, and it looks right to avoid buying here but consider shorting for a move lower in the months ahead. Stops on shorts lie at $22.50 and any gains over that level would postpone the decline.

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Overstock.com Inc. (OSTK- $16.87) Recent deterioration in the last few weeks suggests a further downturn to test former lows before any meaningful bottom is in place. OSTK broke down in mid-March and last week's mild rally attempt failed to reclaim any area of importance which would argue that a rally is underway. Momentum remains negatively sloped, and technically it looks like an attractive risk/reward to bet on a return to $12.33 to test December 2018 lows in the months ahead. Stops on shorts should be placed near $19, with any break of $15.93 being used to press shorts for this pullback to extend another 15-20% lower.

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CBOE Global Markets Inc. (CBOE- $95.85) CBOE joins CME as being one of the weaker stocks within the Financials complex. While markets have gained ground to the tune of 15-20% in recent months, this has largely gone nowhere, treading water in neutral consolidation since late December 2018. Movement down to $90 looks likely initially, with a break of this level leading to a quick decline down to $79 which is the 50% retracement of CBOE's entire rally from 2010-2018. Stops would be placed over $99, but given the structural shape of this pattern since CBOE's peak early last year, technicals suggest a downward bias with a likely break back to the downside. Thus, it looks right to position here with thoughts of adding to shorts on a break of $90.