May 13, 2019
Mark Newton CMT, Newton Advisors, LLC
S&P 500 Cash Index
Support: 2825-7, 2800-1, 2785-9
Resistance: 2900-1, 2921-2, 2952-4
This week we discuss important charts of assets which might be winners and losers in this increasingly real Tariff escalation. Steel and Aluminum are thought to be the "winners" in a steadily increasing Tariff filled world, and increasingly look much more attractive from a risk/reward basis after the extent of the decline since last Spring. Automakers, on the other hand, are thought to be potential underperformers. However, as charts show below, both F and GM are looking increasingly better given the short-term improvement from last December as part of ongoing long-term bases. One thing that's not arguable, charts of US Agriculture remain in tough shape, bearish, accelerating lower and no meaningful signs of bottoms in sight. Canada also looks to be rolling over, and given its status as the largest exporter of Steel and Aluminum, looks to be in a tough spot technically after the extent of the rally off December lows. Overall, these charts will try to showcase a few potential winners and a few potential losers of this Tariff battle.
Important Developments of this past week (Shown in Bullet form)
SPX near-term trend is bearish, yet with some above-average signs of stabilization late last week, largely on little to no news regarding Trade. Momentum has grown oversold only on hourly charts, though definitely not oversold on daily nor weekly. Until 2900 is exceeded, it's right to stay the course in expecting possible weakness to 2800.
The last 2 days of last week, SPX closed well up off early lows which is seen as a sign of strength. TD Buy setups are within 3-4 days of forming, and look to occur ABOVE the TDST line. In plain English, this means that a bottom to our selloff should occur this coming week in all likelihood, barring a severe pullback that undercuts 2775.
Emerging markets were hit hard in the last week, with declines in EEM, along with many Latin American indices/gauges like ILF, EWZ, EWW,
Fear gauges like the Intra-day Put/call Ratio on Equities jumped sharply late last week, coinciding right with the low late morning on Friday.
Tech was the worst performing sector last week while Defensive sectors ruled. While all 11 sectors were negative for the week, We saw Consumer Staples and Utilities along with Real Estate, turn in performance better than 7 other sectors, all in the top quartile, while Energy bounced after recent underperformance.
US 10-Year Treasury yields declined for the fourth consecutive week, with yields pulling back to just 12 bps above March lows.
The US Dollar has been largely range-bound in recent weeks after April gains vs both EURUSD and GBPUSD.
Commodities have now sold off for five straight weeks, with gauges like the CCI index hitting the lowest levels since 2016
Both Gold and Crude oil showed some relative outperformance within the Commodity space, stabilizing while others fell sharply, like Cotton, Sugar, Coffee, and the Grains.
Style-wise, Growth has NOT really faltered much at all during this pullback and has been on a steady climb since mid-April.
Percentage of stocks above their 10-day ma fell to 35%, while those over their 50 day ma were down to 56%.
Key Conviction ideas heading into this week
Look to cover shorts and buy US Equities on any pullback down to 2800 with idea areas of support at 2775-2800. For now, trends remain bearish and right to still be defensive.
Treasuries should still be favored near-term as this TNX decline is still above targets and could reach prior lows near 2.33% in yield before any bottom. TLT and other ETF's like TMF, TMV should be favored for gains
The US Dollar's breakout has consolidated sufficiently and this looks to be an attractive risk/reward to sell into both EURUSD and GBPUSD, expecting declines in the weeks and months ahead. If May lows are broken, than "all bets are off" and this would likely signal a larger US Dollar decline.
Small caps should be favored near-term after the strength seen in April. Movement over prior highs near 159.75 in IWM were consolidated last week and should represent a good risk/reward between 150-154 for buying weakness for a move back higher over 161.
Gold is getting very close to a breakout of its recent three-month downtrend which would argue for additional strength in Gold back up to the low to mid- 1300 range. Last week's Weekly mentioned Gold turning more positive above 1280 and this has to be watched carefully now for evidence of accelerating higher. As has been mentioned previously, 1375 is the larger "line in the sand"
Outside of the Metals, it still looks early by 1-2 months to take a stab at buying commodities, and any hint of Dollar gains in the next few weeks would prolong this even longer. For now, commodity benchmark indices have plummeted, largely based more on lack of potential future demand from China rather than any real Dollar strength. Overall, it looks early to expect lows in commodities.
SPX trend remains bearish after the break of 2900 last Tuesday which served as the first warning sign, followed by the break of 2877, mentioned in the last Weekly Technical Perspective. While the last two days managed to close up meaningfully off the lows, there hasn't been sufficient strength to argue that lows are yet in place. The area at 2775-2810 looks important on further weakness this week, representing both the first meaningful Fibonacci retracement area of the advance from December. Additionally we see that TD Buy setups could be in place on further weakness in the next 3-4 trading days. This area of TDST support lies at 2798 and should provide a cushion if reached sometime mid-to-late this coming week. For now, trends would require a move back up over the area of the prior breakdown, at 2900-1 before being able to turn bullish. Such a move likely would help lead S&P back up to 2950 which for now looks premature.
SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:
Short-term (3-5 days): Bearish under 2901, Bullish over. This past week's breakdown resulted in a quick move down to 2825, new four week lows, causing a further erosion in near-term momentum which failed to reach minimum downside targets to think the decline had run its course. While 2840 was important mid-week in Futures, the counter-trend exhaustion counts have not yet been triggered and momentum is not officially oversold on daily charts. Some evidence of fear on the rise late last week with intra-day Equity Put/call data, but until this materializes on a closing basis and we see prices start to push back higher, with stabilization in Technology in particular, it remains tough to be too positive here in the short run just yet. The back to back movement off the lows last Thursday and Friday DO look encouraging, but yet given an absence of rebound in prices above key levels and lack of any progress in trade negotiation, trends near-term remain negative.
Intermediate-term (3-5 months)- Bullish- The nearterm weekly momentum remains positive for SPX and not overbought after S&P completed the best quarter of performance since 1998 and through April, the best four-month kickoff to a year in over 30 years. While near-term momentum has rolled over a bit and breadth has faltered since late February, we haven't seen much damage, if at all, to the larger trend thus far. The one "Elephant in the Room" with regards to a giant Technical Negative remains Monthly momentum which is negatively sloped and at far lower levels than last Sept/October when looking at RSI, and even on this market bounce, this did not push back to highs. For now, this won't be a concern until more breadth divergence starts to happen on daily/weekly charts. 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 into the Summer/early Fall 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 deterioration 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.
10 charts of assets potentially affected by further Tariff hikes
SLX-VanEck Vectors Steel ETF-Attractive from a counter-trend standpoint. Steel companies could potentially prosper in the wake of higher tariff prices, both by higher steel prices, along with being forced to buy more domestically. Weekly charts of SLX show the steady slide of Steel stocks since peaking out last February. While SLX is down more than 25% from last year's peak, (and still down over 65% from its all-time high peak in 2008, the progress it's made from 2016 is somewhat encouraging technically. The entire consolidation from last year still lies within the upper 1/3 of the range in the last two years. Furthermore, the mild downtrend was exceeded in late 2017 which has helped intermediate-term momentum to stabilize. The pattern resembles the making of a bullish base, which would grow far more bullish over $52 for a larger move back to former highs. Downside should be limited in this case to former lows at $33.66, but looks like a good risk/reward given the potential upside, as well as being able to buy into this 25% cheaper than last year. When the Dollar starts to turn down more aggressively, this should also be a benefit to Steel.
US Steel (X- $15.66) Pullback to long-term support should offer an attractive entry point. Looking back at the last 10 years of trading, X has bottomed out on multiple occasions near this level, starting back during the low following the 2007-2009 bear market in 2009. During 2011-2013, US Steel bottomed out between 16 and 18, while briefly undercutting this in 2016. Monthly momentum is nearly oversold again, and the decline in Steel on looks to be very overdone, with signs of TD Buy Setups now in place (9 consecutive closes under the close from four months ago) Overall given the downtrend from last year, it will make sense to keep size small until X can at least make a new monthly high. But this clearly looks to be an interesting risk/reward here given the extent of the decline while tariffs look to be increasing, not going away.
Alcoa (AA- $25.04) Alcoa might also stand to benefit, as the aluminum industry would also be able to charge even higher prices and expand production. This stock has also been very hard hit of late, dropping nearly 60% from highs made around this time last year, just 13 months ago in April 2018. Technically trends started to weaken last Summer as AA began to lose ground and this stock accelerated lower to below 50% absolute retracement levels. Then a four month sideways period of consolidation started before this broke down again in the last few weeks, closing last week at the lowest level since late 2016 just ahead of the election. Weekly charts will show counter-trend exhaustion this coming week as a "buy" using the TD Combo indicator from Demark (not confirmed) but signs of the Aluminum industry rebounding "should" be good for stocks like Alcoa.
Century Aluminum (CENX-$7.88) Increasing stabilization here in recent months after enduring an even more precipitous drop than AA in the last year. CENX traded up near $25 last Spring and has fallen to under $10, a huge 66% decline. Momentum on weekly charts has begun to improve in recent months on the decline flattening out, yet still no real signs of this turning higher. Movement back up over $9.91 would bring about an above-average intermediate-term gain for CENX, and should allow this to recoup at least 1/3 to 1/2 of its prior decline. The area at $5.40 should prove to be maximum support on pullbacks, so the risk/reward here is quite attractive in risking $2 on the downside for a chance to get back to the $20's.
Ford (F- $10.38) Ford is looking increasingly more attractive from a counter-trend perspective, despite this having traded lower in a very symmetrical downtrend for the last five years. The last major swing peak happened near $18 back in 2013/4 and ever since, this has seen a steady slide. Since the beginning of 2019 however, Ford has pushed higher from $7.41 up over $10 and still could reach $11.50-$12 without too much trouble before this stalls out. The ability of F to reclaim $12.15 would be a major victory in surpassing this long-term downtrend, arguing for much higher prices. For now the long-term monthly chart pattern since 2001 looks like a giant long-term base in the process of being built. Thus, when many speak of US automakers losing out given the amount of Steel in their cars, technically it's fair to say that this very well might be the case of "sell the rumor" buy the news, and that tariffs might prove to be rolled back, given how interesting the charts on the Automakers are starting to appear on long-term charts. Yet, it's right to hold off on getting too enthusiastic just yet until verifiable progress has been made in exceeding $12.15. But such a move would likely lead to Ford climbing at least 50% technically, so this is worth monitoring closely.
General Motors (GM- $37.89) Attractive to take a stand from a counter-trend perspective after its recent drop from over $40 and would be right to buy dips unless this gets under $36.25 which would likely allow for a final washout down to near $34 before this bottoms. Similar to Ford Motor Co, GM has been forming a lengthy base for some time, most recently from the highs made in 2017 in the mid-$40's. While its near-term trend is negative, Automakers like GM are thought to have different issues besides just Steel rising in price due to tariffs. After all, these stocks have languished in range-bound consolidation during a multi-year decline in Steel. Thus, a mild uptick in Steel prices likely wouldn't be the factor that causes these to remain under pressure in the months ahead. Weekly momentum has been upward sloping and rising since last December, and it's thought to be wise to try to get involved with stocks like GM and F which have already been beaten up badly and likely would not suffer the same degree on any market pullback. Movement back over $41.50 would be a very bullish move for GM, while it's recent pullback has given investors a better risk/reward to try to buy dips.
Soybeans - Grain charts remain bearish and tough to bottom pick-Soybean charts continue to be a major source of focus during these Trade talks given that not only China is dependent on US Agriculture, but also Canada to the immediate North. Given that Canada imports ~$25 billion in agricultural products each year from the US, if tariffs are put into place that end up harming Canada, they likely could choose to retaliate. Technically speaking, the decline in Grains has been seemingly relentless over the last seven years since peaking in 2012. The breakout attempt in Beans in early 2018 proved to be very much the "Head Fake" The subsequent breakdown caused this entire pattern to be viewed as a symmetrical triangle that could lead to a more substantial decline. (False patterns tend to be important sometimes in their velocity) Last week's close has now brought prices to the lowest levels since 2007. Weekly momentum has gotten oversold but yet countertrend measures still look to be 3-5 weeks away. Furthermore, from a monthly standpoint, the larger charts still look quite unattractive and require some real improvement in getting back over 900 before paying much attention. In the short run, additional losses here look likely.
Canada -SPTSX-(S&P/TSX Composite Index ) Increasingly unattractivehere with prices seemingly having stalled out near highs of a long-term trend channel going back since 2007. It's been thought that Canada could be one of the largest losers in the event that tariffs continue to be hiked. Canada is by far the largest exporter of foreign Steel and Aluminum coming into the US, and despite having rallied over 15% from last December lows, weekly charts show this area to be very strong resistance, having held on numerous breakout attempts going back over the last 10 years. Prices violated the four month uptrend in the last two weeks, and Demark exhaustion is present on weekly charts at recent highs which has coincided with peaks in price historically, when looking back in 2014/5, 2011, and also in 2007. While getting over 17,000 would negate any negative thoughts, the risk/reward seems to suggest selling into gains and awaiting the outcome in the next 4-6 months, given a poor technical risk/reward above 16,200. Intermediate-term support lies near last year's lows at 13776, which can't be violated without severing the entire uptrend from 2009.
USD/CAD - Dollar/Loonie intermediate-term breakout has since started to stall. Looking back, the pattern became far more bullish for US Dollar vs Canadian Dollar back in 2013 when the breakout occurred above this long-term trendline. Movement up to 2016 occurred, but since has proven very choppy and uneventful. Technically speaking it's still worth being long US Dollar vs Canadian barring a move down under 1.3275 initially, which would arouse suspicion. Further declines that undercut 1.3069 would argue for some meaningful Canadian dollar strength, indicating that tariffs likely had been avoided. For now, this is too premature to call and still likely that additional losses happen for the Canadian Dollar (shown as gains on this chart v USD) Movement back above 1.3661, while not expected immediately, would be very bullish for US Dollar /Canadian Dollar cross, causing a move up to the low 1.40s range. Overall this is important to monitor, but for now does not give a clear cut message given the last few months of trading.
Crude oil's decline looks to be close to stabilizing near-term but yet still bearish on the trendline break. While the break of $63 was definitely seen as a bearish development, there hasn't been sufficient strength to think any type of meaningful low is yet at hand. Looking back, Crude's breakdown along with Treasury yields occurred just before Equities started to weaken (interesting given that both bottomed on the same day back in December 2018) While the Venezuelan and Iranian tension might eventually drive Crude back higher to retest recent highs, the extent of the breakdown in prices on daily and weekly charts looks more serious than anything we've seen in the last four months. Pullbacks to $58.50-59 look possible and this should allow for a better risk/reward situation to buy into. If prices turn up this week and get back above $63, then any further decline is postponed and a larger bounce to the mid-to-high 60s should get underway.