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Newton Technical Perspective 6/18/2018


As we enter the third week of June, sentiment has steadily gotten more optimistic, with sentiment polls like Investors Intelligence having risen now for the 5th straight week, while Bears have dropped down under 18%.  The net plurality now stands at 35%, which is worrisome given that Equity put/call data has also dipped down to levels last seen in late January when equities peaked.

A lack of bears is often more important than Bulls being at high levels, but the net between the two being over 30% always puts a selloff on watch.  Given the recent deterioration in sectors like Financials, and Aerospace/Defense within Industrials, and a flattening out in breadth last week, this looks even more important to pay attention to.  While buying fear is often much easier than selling complacency, when a number of factors suggest we're getting close to a near-term peak in prices.

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Summary:   For all the potential market moving events this past week, SPX surely failed to show much volatility and by Friday's close, SPX was within 1 point of levels hit the prior Friday's close, despite two Summits, 3 Central bank meetings, the T/TWX merger announcement just to name a few of the events from last week.  Last week was billed as one of the biggest weeks all year with regards to potential market moving events, but just goes to show how little these events often matter in the short run. 

The inaction in the SPX however, didn't quite do justice to the sector rotation that was ongoing, nor to the drawdown in positive breadth while investors continued to pile into call options to take advantage of FANG stocks.  The Equity Put/call ratio has now approached nearly the same low levels which were seen back at the late January highs.   Moreover, while SPX and DJIA, along with TRAN have not joined the NASDAQ at new highs, other more broad based indices have shown even weaker price action lately and the NY Composite index, which includes all common stocks, including ADR's REITS and listings of foreign companies fell to the lowest levels in about 7 trading days last Friday.  

Below I list the 10 concerns that I shared in this past Thursday's Morning Technical Comment, but for the benefit of those who do not receive these reports during the week, here they are:   The combination of these factors suggest upside should truly prove muted in the upcoming weeks, and likely to coincide with equities turning down:
 

1)  Negative momentum divergence is present on intra-day charts  of S&P while weekly NASDAQ and SOX charts have shown negative divergence in momentum.

2) Percentage of stocks trading above their 10-day moving average has reached 85% as of 6/11/18 the highest since April, while the percentage of stocks above their 50-day m.a. reached 75% yesterday, the highest since February.  While momentum is not really overbought on daily nor weekly basis, Overbought conditions have been present on monthly charts for some time.

3) Intermarket divergence is present, as the NASDAQ's push to new highs has NOT been met with similar movement by SPX, DJIA, TRAN, or other indices, and the Russell 2k moving back to new highs might seem encouraging, but it's certainly not a broad-based move among the broader market averages and indices like New York Composite are still below March highs.   NY Composite, as the charts show below, fell to the lowest level in over seven days last Friday, which certainly tells a bit of a different picture. 

4) Price divergence with many of the developed world markets outside the US has also been an issue, as NASDAQ's push to new highs was certainly not followed by Europe's SX5E, SXXP, or most of Asia.  This looks to be another important cautionary market "tell" 

5) Decidedly weaker price action out of Financials (-1.90% last week) which has been lagging nearly for a month now, and Technology also has dropped off meaningfully in the last one and three months.  Technology was barely positive last week and has dropped to third place in 1 and 3 month rankings.  Financials meanwhile is down for the year performance wise and the second to last sector performance wise out of 11 on a three-month basis (-4.81% - S&P 500 Financials index through Bloomberg 6/14/18)

6) Technology has gotten quite overbought, with SOX and NASDAQ near March highs and relative charts of Tech to SPX showing evidence of trying to peak out, not unlike what was seen in March, or last November.   After such a strong run in the SOX and FANG in May, this looked to bring many investors back into the fold while now Tech could underperform

7) Sentiment concerns-  We've seen bullish sentiment per Investors intelligence now rise for the 5th straight week to 55%, above March highs, while Bears lie at 17%.   Ned Davis Research (NDR) Crowd Sentiment poll is the highest they've seen since early February, while Equity put/call data had reached the low 50s as of early last week on its 10-day moving average, the lowest reading since late January when stocks peaked.

8) Seasonality concerns-   June tends to be a very poor month seasonally in mid-term election years the worst of all 12 months, showing an average return since 1950 of -1.7% (SPX) and thus far gains have proven robust in the first two weeks to the tune of over 2% until yesterday.  The last couple weeks could very well help to spoil the Bulls party as mean reversion and bearish seasonality kicks in again this year.

9) Demark signals of exhaustion-  We've seen NDX, DJIA, SPX all signal evidence of counter-trend exhaustion on this rally for the first time since the bounce began in early May.  Now many sector ETF's also show similar signs, and this could grow in nature in the event S&P were to attempt to push back up to 2805-2815 into early next week.  It's unlikely in my opinion that seeing these across many indices and sectors means they should be ignored.  

10) Cycles point to mid-June for a possible turn, and this area lines up with former mid-month peaks that have been seen also in recent months.   When just casually looking at February, March, April and May, weve seen a specific pattern of these indices bottoming early in the month and peaking mid-month.   This looks to potentially be the case in June and also in July of this year. 

 


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

Short-term (3-5 days):   Bearish-   The downturn in Financials lately along with industrials caused breadth to flatten out substantially this last week, a troublesome development when sentiment has gotten back to such bullish levels during a seasonally bearish time.  Technology looks prone to weakening in the upcoming week,  and should cause equities to fall into late June before any near-term bottom.  Given the rally into mid-month, June is likely to play out like the last few months, and produce selling pressure now into end of month before any bottom.   Technically this should be a short-term correction only at this time but a breach of 2740 would allow for a test of late May lows near 2676 while a more extreme pullback likely reaches 2650 before stabilizing. 

Intermediate-term (3-5 months)-  Bearish-  It's thought that markets are nearing an initial inflection point given the seasonal trends combining with other cycles which could allow for gains to be met with solid resistance throughout the back half of June.   An above average pullback looks likely into July, and if sentiment can contract sufficiently, this might warrant a bullish stance into the Fall before cutting back exposure again.  But it's thought that Technology is nearing important resistance and the bounce in some of the other sectors hasn't proven nearly strong enough to combat a slowdown in Tech.  Whereas longer-term uptrends from 2016 are intact  and Advance/Decline is back at new highs, the risk/reward for equities rallying through the balance of June is sub-par, and gains should be used for profit-taking.    However, it's thought that a larger pullback likely should still constitute a buying opportunity for a push higher into the Fall before any larger selloff gets underway.  While short-term support lies at 2740 and then 2675-85, the Intermediate-term support to buy lies down at 2450-2550. 

This week we'll look at some charts of five distinct charts that illustrate some of the troubling technical developments within the Equity market and sectors, followed by five Stock write-ups.  Three bullish, and two bearish.  Stock-wise, TSG, EMN ,and HCA on the positive side, while negative developments and attractive short setups recently in BA and FOSL.

NY Composite- (NYA)-  Far weaker than SPX, NASDAQ

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New York Composite(NYA)-  This index is arguably one of the more broad-based indices that incorporate all NYSE stocks, so when it fails to rally to the same extent of NASDAQ, or SPX of late, its wise to pay attention. NYA fell last Friday to the lowest levels in over seven days' time, and as the daily chart shows, price is lower than May peaks and remains on par with levels hit back in March.  This sideways pattern in the broader market since mid-February is far different from the bullish charts seen in many Technology names and other indices, and shows a far more neutral trend.  This inability to climb back to even retrace 50% of the move down from late January is a bit disconcerting, and will be important to see when this pattern is broken either to the upside or the downside.  Into the end of June and potentially July, it's likely that trendline support down near 12500 is tested.

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XLF/SPX- (Financials vs SPX- Relative) Financials initially peaked out right when the broader markets did in late January and have moved steadily lower since February, violating uptrends vs SPX back in April of this year.  This is a negative development and given signs of Treasuries extending gains lately (Yields pulling back and failing to move back over 2.94%, it's likely that this sector weakens even further in the short run.  One should be quite selective when trying to own the Financials sector.  For those that feel the need to be positioned long, stocks like TCBS, V, CME, AMTD, SCHW, are among the best to own, and many of the Exchange and E-brokers, not to mention Regional banks have acted far better than the Money-center banks of late.  

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Industrials ETF-  (XLI)   Industrials have also fallen out of favor lately, but much of the near-term weakness has occurred within the Aerospace and Defense group, not really the Rails.  While the Airlines have tried to stabilize lately, this group remains a longer-term laggard in performance and should be avoided.  Technical trends from early May show prices having violated the uptrend and now price has given back nearly half of the gain from the May rally.   Overall, the need for selectivity in this group is paramount to success.

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Technology vs SPX-   Tech has shown increasing signs of peaking out in the last week and has been gradually underperforming since early May-  TD Sequential sell signals (13-Countdown) was just triggered last Friday on S&P 500 Information Technology index vs SPX on relative charts, and this shows the extent to which Tech has gone through periods of above-average performance, followed by mean reversion and underperformance.  Last November and this most recent March were both periods where Tech peaked out and fell , and ratio charts suggest this recent Boom in "FANG" stocks has put Tech in a similar position to underperform in late June/July.  

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NYSE Advance/Decline-  The A/D line looks to have peaked out over a week ago, and daily charts show the presence of counter-trend exhaustion indicators having appeared on this key breadth gauge for the first time since bottoming out in February.   The downturn in breadth, with minimal breadth readings of 3/2 positive or even "Negative" breadth, is important during times when equities are trying to mount a rally, and suggest that equities need to be watched carefully in the days ahead for evidence of stronger selling and violation of key support.  

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The Stars Group (TSG- $37.80) -Bullish for move to $40+  This stock looks quite attractive in the short run, following its push back to new weekly highs after having consolidated for the last five weeks at a level right above prior highs in 2014.  The ability of price to have pushed back to new highs the last two days of last week is a real positive and should lead to an upcoming rally back to new high territory.  Weekly and monthly momentum are overbought, yet structurally TSG is in good shape technically after having moved above 2014 highs and consolidated to relieve some of the near-term overbought conditions.  Until this begins to show evidence of giving back its recent consolidation and falling to new multi-week lows, it's right to position long, expecting a push up to over $40.  Under $36.40 postpones the advance.

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Eastman Chemical (EMN- $108.92) Constructive Base bodes well for upcoming breakout-  This pattern is quite bullish given the structure of this chart since March of this year, when EMN began its consolidation following the early year runup from February lows.  As daily charts show, the lowest low happened in April, followed by two successive higher lows, while highs have roughly all occurred near the same levels.  This pattern typically suggests a move back to new high territory and given the constructive price action recently in the Chemicals, EMN stands out as one to own and add on strength.  Key upside areas of importance in this chart lie just above $110 at early June highs.  LastFriday's bullish engulfing pattern make a test of this level likely, and should result in this being exceeded, driving EMN back to test May highs and over.  Overall, this appears like a good risk/reward for longs, despite markets showing some shaky signs of late and long positions recommended, with upside targets near $112, then $115, with a move back under $105 postponing the rally.  

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HCA Healthcare (HCA-$106.51) Bullish Cup and Handle breakout- Despite a looming broader market pullback, HCA stands out as one to own, as the recent Cup and Handle pattern which was exceeded and now challenging January peaks, remains quite bullish and should give way to additional gains in the weeks and months ahead.  Daily charts show the uptrend giving way back in March of this year.  Yet the resulting damage proved minimal and HCA has pushed back to new weekly all-time highs just in the last week.  The recent strength looks to signify a breakout of its larger weekly/monthly Cup and Handle pattern which began back in 2015 (not shown).  Rallies up to $110-$115 look likely in the short run, while a pullback down under $99.48 would be necessary to cancel out the bullish factors in this daily chart.  Overall, long positions are recommended, looking to buy any minor pullback. 

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Fossil (FOSL- $29.49)  Attractive to fade this rally from $29.50-$30.50 early this week.  Overall, the near-term FOSL pattern certainly seems anything but bearish, yet this rally from single digits to near $29 since late 2017, rising over 4 fold, has occurred  after some stabilization following the 90% correction from 2013 into lows late last year.  While the near-term rally is certainly impressive, it will take some time before this can manage more gains off its lows.  To put this rally into perspective, even after this very sharp advance, FOSL has still not even recouped 20% of its entire decline off the 2013 highs.   Now near-term momentum has become quite overbought while counter-trend signals of exhaustion are present for the first time off the lows on daily charts.  This looks to be one case where going against this momentum could pay off in the near-term, and to be on the lookout for evidence of a greater peak in the rally from late last year, thinking any larger rebound off the lows will take time. 

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Boeing (BA- $357.88) - Further weakness likely after having reached the most overbought levels in 30+ years, then breaking down.   In the short run, BA is unattractive at current levels technically, and looks to have begun a short-term correction which started in the last week.  Further downside appears likely in the next 4-6 weeks to near-term technical targets at $336, then $311 which marked the late March intra-day lows and lies just above its 200-day m.a.  Technically, the break of its one-month trend is a concern, along with evidence of bearish momentum divergence after reaching the most overbought levels in over 30 years.  The stock traded down to $102 in early February 2016 before ratcheting up to over $350 in just a bit more than two years time.  Looking back, monthly RSI has only reached above 75 on six occasions in the last 30 years, and four of those six resulted in corrections of at least 50% in the years ahead. (See 2006, 2000, 1996, 1990, 2013, 1986 for examples of stock behavior when momentum grows this overbought for BA.   Overall, the consolidation over the last four months is merely neutral, not bearish, and would take a break of $311, so this is what to look for in the months ahead to think the longer-term pullback is getting underway.  At present, just short-term weakness is expected into late June/July.   
 

Monday am Technical Video, 5 min: https://stme.in/9ltIyVeb4w
 

Last Thursday’s Technical Webinar, 20 min- discussing risks to the equity market, covering SPX, TNX, DXY, sector rotation, Gold, Crude, etc: https://stme.in/L2s6RGiWrJ

 

My Real Vision Discussion, where I advocate Shorting QQQ from last week-  7 min

https://www.youtube.com/watch?v=avnPh7eaXPE&feature=youtu.be

 


As President/Founder of Newton Advisors, LLC, Mark Newton has more than 25 years of buy and sell-side experience in the financial services industry. He formerly worked with Diamondback Capital Management, where he served as a technical analyst and portfolio manager, and prior to that, with Morgan Stanley in New York City as their technical strategist. Before moving to the New York City area in 2004, Mark traded equity options as a market maker/floor trader at the CBOE, and worked in risk management. Mark is a member of the Market Technicians Association, and former member of the CBOE, CBOT, and PHLX. He graduated with a BS in Finance from Virginia Tech in 1991 and obtained his Chartered Market Technician designation in 2002.  His expertise is primarily in using advanced methods of technical analysis to identify stocks, commodities, and currencies with above-average risk/reward characteristics that can maximize returns and minimize risk. In addition to employing standard technical tools to identify trend duration, relative strength, and momentum, Mr. Newton utilizes counter-trend analysis to identify potential trend exhaustion and reversals of trend. He appears frequently on CNBC, Bloomberg, Real Vision, and has done interviews with Fox Business, TheStreet.com and Sina in the past.

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