Day Hagan Tech Talk: July 5, 2016

DAY HAGAN TECH TALK

OBSERVATIONS: PAST AND FUTURE

SUMMARY

On multiple occasions the S&P 500 has failed to break above resistance. To reclassify its neutral intermediate-term trend, a new closing high is needed, accompanied by bullish internal tape readings. Until then...

WRITTEN BY

Art Huprich, CMT

POSTED

July 5, 2016

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Day Hagan Tech Talk, July 5, 2016

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KEY LEVELS

  • S&P 500 (SPX/2102.95) – Support: 2036 (gap), 2000, 1991 (two consecutive 90% upside days, during which advancing volume on the NYSE was 90% of the total advancing and declining volume, makes 1991 an important support level). Resistance (selling pressure): 2113, a layer between 2120 and 2135. 
  • Russell 2000 (RUT/1156.77) – Support: 1086 (critical). Resistance (selling pressure): 1172, 1190 and 1205.

Coming off a volatile first six-month period and a holiday weekend, here are some observations as we enter the back half of 2016:

  • The S&P 500 (SPX) has made multiple attempts to break out above resistance between 2120 and 2135 over the past twelve-plus months. Each time it has failed. In order to reclassify the SPX’s neutral intermediate-term trend, a new high needs to be recorded, coupled with bullish internal tape readings.
  • Relative strength trends continue to dictate a dominant U.S. weighting. However, select emerging markets’ equity proxieshave been exhibiting bullish and/or improving relative trends. One area not previously discussed is Indonesia. As these relationships adjust and our models dictate, we will allocate accordingly.
  • While the SPX remains in a neutral intermediate-term trend, shorter-term opportunities in non-equity related asset classes have existed during the first half of 2016. I believe the odds favor this will continue during the second half of the year. As these relationships adjust and our models dictate, we will allocate accordingly. Chart below.
  • Relevant to the point directly above, due to a variety of unsupportive and supportive global and domestic economic, fundamental and technical data points, I expect the relative strength trends of the S&P macro sectors to rotate, sometimes violently, into the fall. As these relationships adjust and our models dictate, we will allocate accordingly. Charts below.
  • Within the context of their ability to move up and down in their normal volatility range, the dominant downtrend of interest rates continues, with no signs yet of changing. Near term, having just retested long-term support, a bounce up in rates shouldn’t be surprising. Chart below.
  • While election year machinations and global events will continue to affect the volatility of the equity markets, the summer months into the fall have a historical propensity to be very volatile. There is no reason to expect it to be any different this summer. Chart below.
  • Due to loan loss provisions, credit spreads and sentiment, it is important to be aware of Crude Oil’s near-term support and resistance levels. Chart below.

Between 6/28/16 and 6/30/16 (three trading days), the S&P 500 was up almost 5%. This 3-day rate-of-change is the highest since February and, prior to that, August 2015. One instance was part of an “exhaustion move,” and the other was part of a strong rally period. However, in both instances a “low” was established. Near term, given SPX’s proximity to resistance and an overbought short-term condition, the market could use a pause for a few days. Consistent with the bullet points above, please remain alert and very nimble.  


Number S&P 500 52-Week Highs: Largest since late 2014
GCC relative to S&P 500 Chart. Continuous Commodity Index Fund with rising 50-DMA (blue line) and 200-DMA (green line)

The relative strength charts shown below compare the one-year performance of the sector against the SPDR S&P 500 ETF (SPY). A rising line indicates that the sector is outperforming the S&P 500, while a downward sloping line depicts sector underperformance. I expect these relative strength trends to rotate, sometimes violently, into the fall.


Relative Strength Charts for Utilities, Consumer Staples, and Health Care. This compares the one-year performance of the sector.
Relative Strength Charts for Technology, Consumer Discretionary, and Financial. This compares the one-year performance of the sector.
Relative Strength Charts for Basic Materials, Energy, and Industrials. This compares the one-year performance of the sector.
Relative Strength Charts for Telecommunication and REITs. This compares the one-year performance of the sector.

10-Year U.S. Treasury Yield Index (TNX) weekly chart
S&P 500 Seasonal 37 Years Chart
Light Crude Oil - Continuous Contract with Rising 150-DMA chart

WHAT WE CONTINUE TO WATCH

European/International Banks (weekly charts): J.P. Morgan noted, “Banks are the key—banks are the transmission mechanism through which discrete events take on ‘macro’ proportions and sustainably depress sentiment… US banking system possess[es] enormous amounts of capital... however, doubts exist around Europe’s banks… healing confidence there will take time.” At some point these charts will warrant our attention, but not until after a lengthy basing and testing period.

European and International Banks Weekly Charts for Deutsche Bank, Barclays PLC, and HSBC Holdings PLC
European and International Banks Weekly Charts for ING Groep NV ADR, Lloyds TSB Group PLC, and Credit Suisse Group
European and International Banks Weekly Charts for Royal Bank of Scotland, Banco Santander SA, and BNP Paribas SA

U.S. Dollar Index: While I could totally confuse you by discussing the mixed trends of this index (short, intermediate and long-term), suffice it to say that a close at 97 or above would have bullish near-term implications. A rising 50-DMA, which will marginally change each day, currently offers support at 94.60. The DB U.S. Dollar Index Bullish Fund (UUP/$24.76) has a similar chart pattern to the U.S. Dollar Index but may be easier for some to follow. Similar levels for UUP are $25.06 and $24.50 respectively.

Have a great week

Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

—Written 07.04.2016. Charts courtesy of the following websites: Stockcharts and Seasonalcharts.   

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