Neutral Posture, Financials Entering Wave5 Continuation

We've come to a place where I think its best to be more neutral toward the market. The picture is pretty clear moving forward. The SP500 is now bumping off its downtrend resistance line and is back into substantial overhead resistance. I'm not saying the market can't continue higher from here, but it will have to move above 2,075 if it intends on making higher highs. That's our line going forward. As long as the SP500 Cash remains below 2,075 I don't see a reason to be overly bullish.

SP500 Daily

 Here is what I see at the current moment. Price came right into the multi-month downtrend line drawn from the July, November, and December highs. This has occurred after a 14% rally in about 7-weeks. There are two unfilled gaps remaining above acting as resistance, as well as a lot of trading activity from the November-December consolidation. There are 4 open gaps below current levels that will likely be trade-to targets in the future.

The price action is now becoming more heavy and volatile. During the recent uptrend volatility was very low, but since the "Yellen gap" on 3/30 the movement has been erratic and choppy.

SP500 30 minute 

It appears the last week has at least slowed the uptrend since the mid-Feb breakout. The tendency has been to snap back quickly from any sort of weakness, so keep an eye out for another bear trap scenario. The two levels you should be most concerned with are the high from April 1st at 2,075 and then Thursday's swing low at 2,035.

The most troubling activity I noticed for the bull case was how Friday played out. Following Thursday's big rejection of Wednesday's rally, Friday saw another strong early morning trade. However by mid-day sellers stepped in and took back much of gains for the day leaving a weak setup heading into next week.

With the relentless rally we have seen, there is nothing wrong with some consolidation or pullback. That being said it appears the risk is to the downside from here, especially with the market below its  downtrend resistance. I'm still holding Long positions but also think having a solid Cash reserve and possibly a couple Short positions is a prudent posture currently.

Our Lg-Cap Portfolio is 55% invested with 9 Long positions, 3 Short positions, and 50% Cash.

Long: GE, FB, AEP, PCG, PM, UNH, SHW, MSFT, PEP
Short: GD, and entering AXP, C

Entering Short American Express (AXP)

 If you recall we closed out our successful AXP Short position back in mid-January as our options were due to expire and the stock had declined over 25% in a little over 4-months.

Over the last 8-weeks AXP has rallied more than 20%. It is now back to the declining 20 WMA and prior resistance from 2012-2013. Volume also shows sellers remain in control; big volume on declines and lower volume on rallies.

The Financials remain the weakest sector in the market and AXP appears to be the weakest stock within the group. The risk/reward is also very appealing as we can place our stops at the recent swing high at $61.66 on a weekly closing basis. This means we are only risking $2/share to continue to ride this trend lower. With the market in a precarious position, adding the weakest name in the weakest sector to our Portfolio makes a lot of sense.

Entering Short C

 Citi now appears to be rolling over after its oversold bounce. With the 3-year trading range resolving to the downside, this is very typical trading action. Often the trend will begin to shift prior to breaking support (as we saw from July 2015 to the first week of January 2016). Following the trend change a big flush below support tends to occur. This is followed by a bounce attempt where bottom pickers and mean-reversion traders step in for a pop. As the stock approaches prior support, trapped buyers from the range begin to sell to "get even" and new momentum traders (us) sell the stock short as the downtrend is set to resume lower.

This is another setup with a strong risk/reward. We can set our stops against the weekly swing high near $43.50. A close above the high would be enough to suggest either more consolidation is needed or the stock has in fact bottomed and wants to resume higher.

Financials Entering a Wave5 Trend Continuation

A large part of my thesis for being short the Financials here is the view that the group is beginning is Wave5 decline.

XLF

C

BAC

GS

I'm not a big Elliot Wave enthusiast because its a highly subjective form of analysis. But I do recognize that markets move in cycles based on sentiment and trend. When a pattern is this clear, Wave Theory tends to be quite accurate.

We have seen a substantial rally in the broad markets over the past 6+ weeks, during this time the Financial sector has been able to resolve its oversold condition and is now (along with the broad market) running into strong overhead supply levels.

Trends often persist longer than seems reasonable. When a support violation occurs like we have seen in the major banks it tends to take a long time to resolve that downtrend pressure. All the major banks are now trading below 2 years or more of support and we are seeing lower lows/lower highs within the intermediate trend. This combination is the worst possible scenario for hopeful bulls. I believe the next leg lower is imminent and could be quite violent as 5th Wave continuations tend to be.

If we are wrong and the banks somehow turn higher, we will simply stop out quickly and let the market prove the next direction.


High Praise for SHW

 If I am going to remain aggressively Long a stock in this environment, one behaving like SHW is what I'm looking for. While the market recorded its first down week since the February lows, SHW broke to new all-time highs. I posted on Stocktwits early in the week to watch for a move higher on the short-term charts. We saw the breakout occur on Wednesday and I took an aggressive position against the short-term trend support near 285.50.

With this move to new highs we can trail our stops to the "acquisition day" swing low near $270. After a brief shakeout following the announcement of Sherwin acquiring Valspar, the stock has not looked back.


Bottom Line: It appears the market could be due for a rest after its torrid run over the past two months. There is now some evidence mounting that a pullback or sideways digestion could be about to take place. Financials began a rollover on their recent oversold bounce and appear to be headed for lower prices. When Financials lag it tends to put a lot of pressure on the overall market, so keep this in mind.

As long as the SP500 remains below the 2,075 swing high, a more neutral posture is warranted. Should it rally back through that high I would think there is a good chance we see a move above the prior all-time highs from last summer. This though I feel is the low probability scenario. That doesn't mean it can't happen, but I would protect myself a bit in the meantime.

As always continue to seek out the strongest stocks leading the market and avoid those that are showing weakness and lagging. If we do in fact get a pullback in the broad averages the stronger stocks will hold up better and the weaker names will get crushed. Sticking to relative strength and selling relative weakness will help your portfolio weather the market's storms.

Thanks for reading
-ZT