Day Hagan Tech Talk, July 19. 2016

DAY HAGAN TECH TALK

BREAKOUT

SUMMARY

In 2015 a handful of stocks led the U.S. equity market. Since the February 2016 low, the broad market has been participating. Until breadth divergences develop, this provides a supportive domestic equity market backdrop.

WRITTEN BY

Art Huprich, CMT

POSTED

July 19, 2016

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KEY LEVELS

  • S&P 500 (SPX/2166.89) – Tactical support: 2135 to 2130, 2120 (previous breakout points, all short term), and 2074 (closest pullback low). Additional support levels exist (2036, 2000/1991) but initially focus on the first ones listed. Resistance (due to new highs, all levels are theoretical but at least provide a guidepost going forward): approximately 2225 (upper channel line), 2400+ (13-month+ staircase price target based on the depth and length of the intermediate-term base that was completed).
  • Russell 2000 (RUT/1208.16) – Support: 1200, 1190 and 1172. 1132 is the closest price low, and 1090 to 1086. Resistance (selling pressure): 1250, 1275 and 1296.
  • 10-Year Treasury Note Yield Index (TNX/15.87 [1.58 percent]) – Support: 14.59 (1.45 percent – very minor), 14 to 13.36 (1.40 percent – 1.33 percent). Resistance: between 16.50 and 17.48 (combination of breakdown levels, upper Bollinger Band and previous high).

TECHNICAL SUMMARY

S&P 500 Price Trends: The short term (days to weeks) is bullish, but overbought. Intermediate term (weeks to months) is bullish, as the internal price action confirmed the topside breakout. Chart below. Also, while past performance doesn’t guarantee future results, according to Ned Davis Research Group, “following new highs after S&P 500’s one-year stretch without a new high and a small drawdown (<20 percent), the index has risen 12.2 percent one year later, on average.” In other words, while the S&P 500 is dramatically stretched above its rising 50-DMA and a pullback could occur at any point, the burden of proof is now on the bears. Please continue to diligently manage risk on a case-by-case basis.

Relative strength trends continue to dictate the following: 1) a dominant U.S. weighting. Emerging markets, however, continue to exhibit improving relative strength. 2) Big picture favors large cap, but small cap has been outperforming since February, a positive guidepost. 3) Value relative trend is stronger than Growth. As these relationships adjust and our models dictate, we will allocate accordingly.

Momentum: Strong advancing versus declining volume readings following the “Brexit low” implies that the odds favor a floor has been established under the domestic equity market. Also, while weekly MACD readings have been positive since late February, the monthly figures are close to turning positive.

Breadth (Advance – Decline Lines): Contrary to 2015, during which ahandful of stocks led the domestic equity market (“FANG” stocks), since the February 2016 low the broad market has been participating. Trading moves aside, until breadth divergences develop, this provides a supportive backdrop for domestic equities.

S&P Macro Sector Analysis (relative strength analysis): As suggested in past reports, and what has aided in avoiding a significant decline by the major domestic equity indices this year, rotation within the S&P macro sectors continues. Currently and with the exception of the U.S. Telecommunications ETF (IYZ), defensive sectors are starting to lag. Within this context, the Industrial Select SPDR (XLI) continues to move up the leadership scale. As it currently stands, XLI is nearly three standard deviations above its 50-DMA. This means we start to look for a near-term “mean reversion” move. In other words, a pullback is buyable.

Sentiment (secondary indicator that is difficult to use as a timing vehicle): Despite recent technical developments (bullish), individual investor sentiment is not excessively bullish. According to the American Association of Individual Investor readings (AAII), individual investors have been downcast for all of 2016. While we would say short-term individual investors are getting more bullish, based on the AAII readings, bullish sentiment is still below what can be historically considered “excessive.” Willie Delwiche recently stated, “. . . in an environment of record low interest rates, investor optimism would likely need to become . . . more widespread before presenting a risk to the bullish trend. . . .” Chart below.

While stocks can and WILL pullback, the current technical character of the SPX is different than it was in 2015.
S&P 500: Traditional "wave analysis" is broken down into 5 distinct waves - 3 up and 2 down.
SPDR S&P 500 vs. AALL Percentage of Bullish minus Bearish Investors

WHAT I AM WATCHING

Copper: carving out a tactical bottom.

Copper - Continuous Contract with Rising 150-DMA Chart

Have a great week.

Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

–Written 07.18.2016 (after 4:00PM EDT). Charts courtesy of the following: Stockcharts.com and GriffinHagan.com.

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