Markets – Macro – Technicals

Shifting Gears

We closed our last $SPX short scale in overnight weakness recognizing further downside risk remains hence we have maintained our remaining $NDX and $RUT shorts. But we’re also cognizant of various technical and seasonal factors here and hence we are looking to shifting gears toward tactical longs for a few days and I’ll outline in detail as to the why.

Before we go into charts a couple of macro comments about the larger backdrop here.

The larger economic data continues to disappoint. Retail sales and CPI came in weak on Friday and the Atlanta Fed again took down their Q1 GDP estimates. Time and time again the larger bearish view remains the correct one. Yes bulls can scream optimism all they want, but if you come into the quarter with a 3.4% GDP growth forecast and end up at 0.5% then something is off anyway you cut it or slice it:

This week earnings season is off in earnest peaking next week:

As I outlined before it is now about forward expectations. Part of the weakness in recent weeks is due to expectations being reduced:

But any weakness has been extremely modest and the $SPX is not even 4% off of the March highs and stocks remain highly expensive historically speaking:

So in my mind earnings outlooks will require to show serious expansion to justify the high valuations.

So we have uncertainty in growth and in earnings outlooks that have held stocks back here now. Show me is the mode of this market.

Now we are right in front of OPEX and as we all know OPEX has the magic ability to ignore everything and just follow its standard program and for the month of April this is bullish. Indeed the entire week tends to be bullish here. And the recent weakness we have seen actually fits with the standard April seasonality script.

Take the $NDX. Peaked in early April and has sold off since, indeed down pretty much every day last week:

well, here’s typical April seasonality:

Tough to short or stay short into such seasonality.

Especially considering we see some sectors now oversold. Take financials:

$GS now has an RSI of 29. Any new lows will see a positive RSI divergence and likely find support near the .382 fib and/or gap fill:

That’s the next support potential IF we make new lows. $XLF shows a similar message although we have this gorgeous H&S pattern here, but we’re already at an RSI below 30:

So you see it’s not a comfortable spot here. Yes we could flush lower and perhaps we will, but with OPEX, positive seasonality and already oversold readings a short term bounce is very much in the offing if earnings come in ok.

Lest not forget that $VIX is also overbought here. Can it still spike into 17/17.5? Yes. In fact ideally I still like to see the trend line tag first, but it may not happen until after a reconnect with the 200MA:

Indeed we now can use the 200MA pivot as a spot to attempt at reloading on shorts.

Finally on signals we can note positive divergences and further oversold readings kicking in.

$BPSPX is nowhere near a bottom, but it shows a short term positive divergence:

$NDX, now down several days in a row has 51% of its components below the 50MA, kinda the range where we’ve seen recent bottoms occur:

Does any of this make me bullish? No, I’m just being practical here.

Actually $SPX just broke support on Friday:

We also closed the week below several key MAs and the RSI has room to go lower. Hence we are keeping some shorts in play for the possibility of further downside to come.

And let’s be clear: Further downside will get the RSI to oversold readings, and potentially tag support in form of fibs, gaps and MAs when it reaches oversold. The bottom line: A bounce is in the playbook this week and we want to play for a long and then look to re-add short.

What is the immediate downside?

The monthly 5 EMA is of interest:

The quarterly 5 EMA as well:

I don’t know if these are in the offing this week or not. My sense is new lows today will likely get bought. But note the confluence of support in the 2242-2280 $SPX range:

Any move to this range now would be very well defended. So were we to get a flush to there we’d close our remaining shots and play long for a bit.

In fact, ideally I would like to see a large rally this week to add back into larger shorts into next week.

While earnings releases will be abundant next week the political arena will be in full combat mode. Congress is coming back, the 100 day market for Donald Trump will be dominating the news as will the debt ceiling. April 29. Government shut down or will they extend the debt ceiling, you know the very thing Republicans have complained about every time Democrats had to do it?

I know hypocrisy is the big thing and anything goes consequence free, but like it or not this is the business model of USA Inc.:

I suspect they have no choice but to extend it, what else are they going to do?

The political fall out then? Who knows. A core of political support does not seem to be affected by changed positions from the campaign.

Bottom line: Details remain missing on everything from health care, to taxes, infrastructure, wall spending etc.

No idea how it will play out.

On North Korea: I obviously don’t have any intel insight, but the blown up rocket launch this weekend was the perfect solution for both sides to save face and not engage in military action for now. Kim Jong Un can claim that the US didn’t push him into submission and he still launched a missile. By the missile blowing up the US can’t claim an immediate threat and so has no reason to attack. And the US can claim that the show of force caused him not to test a nuclear device. Everybody wins. Funny how these things play out.

In any event, North Korea will continue to hang over the world as Trump is tweeting about it every day now it seems. But he’s golfing more than sitting in military crisis meetings so take that as a message as well.

Bottom line, there is tons of political uncertainty in the weeks ahead.

For now we have booked profits last week and today and can choose our next spot to get engaged.

Th $ES appears to ignore the election lows and is working off of the pre election low which puts overnight lows at the .236 fib from that zone:

The broken trend line is sitting near 2338/39 at the moment with the .382 fib at 2278 and support at 2299/2300. We’re inclined to try a long on $SPX with aim to reload short later this week/month if we get the bounce & the $VIX crush.

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Categorised in: Daily Market Brief, Market Analysis

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