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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday January 31, 2018.

We’ve noted in the previous Market Outlook that: “momentum deteriorates as S&P moved down to test key level.  The index could signal a downward trajectory, depending on how it closes over the next few days.  Key support is defined by the lower boundary of the red band.  If it closes twice below that level, the next leg is likely lower and we’re looking at 2800-2780.”  As anticipated, stocks sold off sharply Tuesday that saw the S&P fell more 1 percent to close at 2,822.43. The Dow Jones industrial average dropped 1.37 percent to finish at 26,076.89.  The Nasdaq composite fell 0.9 percent to close at 7,402.48.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged 6.86 percent to close at 14.79.

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One of the more noteworthy developments in recent days has been the move in European financial markets.  After a strong run of outperformance in 2017 that saw the Vanguard FTSE Europe ETF (VGK) surged more than 23 percent, the ETF pulled back this week, bringing its YTD gains down to 5.6 percent.  Now the question is whether recent weakness is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in VGK.

The graphics below are from our “U.S. Market Trading Map”, show the near-term technical bias and trading ranges.  As shown, the underlying is in a short-term bullish trend when the price bars are painted in green.  The underlying is in a short-term bearish trend when the price bars are painted in red.  The yellow bars identify period of neutral or sideways trading pattern.  Additionally, the light-blue shading represents the short-term trading range.  A move above or below that range is considered overbought (as represents by the red shading) or oversold (as represents by the dark-green shading).  Readings above or below the red and green shaded areas are considered extremely overbought or extremely oversold.

Chart 1.1 – Vanguard FTSE Europe ETF (weekly)

Our “U.S. Market Trading Map” painted VGK bars in red (sell) – see area ‘A’ in the chart.  VGK has been on a tear in recent months after the October correction found support near the 20-week moving average.  The late December rally pushed the ETF above the prior high set in 2014.  The ETF traded as high as 63.60 before sellers stepped in and pushed prices down.  This week’s selloff signify a bearish reversal. Right now the most important thing to watch is trading behavior near 61.50.  A close below that level will confirm the bearish signal and a test of support near the 60 zone should be expected.

VGK has resistance near 63.60.  Short-term traders could use that level as the logical level to measure risk against.

Chart 1.2   – S&P 500 index (daily)

Short-term technical outlook shifted to bearish.  Last changed January 30, 2018 from neutral (see area ‘A’ in the chart).

[Note: for more details analysis, please take a look at our “US Market ETF Trading Map”]

Key technical development in Tuesday session was a close below the lower boundary of the red band –the level that offered support since the index broke out in early January.  This is a negative development, signify a bearish reversal.  Momentum indicator shifted lower from overbought zone, another sign that upward pressure has been abated.  While seemingly vulnerable to further short-term weakness, support is strong near the 2800 zone so it should not be surprising to see the index regroup and rebound from that level.

Short-term trading range: 2790 to 2850.  S&P has strong support near the 2790-2800 zone.  A close below that level would see a massive pick up in volatility and a test of more important support near the 2700 area should be expected.  The lower boundary of the red band represents key resistance.  A close above that level has measured move to 2950, based on the upper boundary of its short-term trading range.

Long-term trading range: 2800 to 2950.  Unless there is a headline that everyone recognizes as extremely positive or negative, expect S&P to swing within this 150 points range.

In summary, S&P broke key support Tuesday, signify a bearish trend reversal with downside target near 2800.  Nevertheless, it will be important to monitor the retreat and rebound behaviors over the next few days to determine whether breakouts are decisive.

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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