Short-term Momentum Weakened as S&P Tests Key Support

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday February 1, 2018.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks sold off sharply in late Wednesday afternoon following the Federal Reserve’s decision to keep rates unchanged that saw the S&P traded as low as 2,813.04 before buyers stepped in and pushed prices off the intraday low.  For the day, the bench mark gauge rose 0.1 percent and finished at 2,823.81.  The Dow gained 0.28 percent to close at 26,149.39. The Nasdaq composite advanced 0.1 percent to close at 7,411.48.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 8.45 percent to close at 13.54.


One of the more noteworthy developments in recent days has been the move in homebuilders.  After a strong run of outperformance in 2017 that saw the S&P homebuilders index surged 75 percent, about four times as much as the stock market as a whole, homebuilder stocks have their worst seven-day run since February 2016.  The SPDR S&P Homebuilders ETF (XHB) fell 3.4 percent this week.  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 XHB.

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 – SPDR S&P Homebuilders ETF (weekly)

Our “U.S. Market Trading Map” painted XHB bars in red (sell) – see area ‘A’ in the chart.  This week’s downside follow-through confirmed last week’s bearish reversal signal. A close below 44 this week will trigger a new down leg with target near 42.70.  This level is significant in charting terms.  It offered support since the ETF broke out in late 2016.  Should that support give way, a test of the more important support near the 40 zone is likely.

XHB has resistance near 46.  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 remains 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”]

S&P moved down to test support at the 2820-2800 zone after breaking down below the lower boundary of the red band on Tuesday.  That level roughly corresponds with the mid-January breakout point and the lower boundary of the pink band. Short-term momentum has weakened but does not appear strong enough to generate major breakdowns.  The lower boundary of the pink band is the line in the sand.  A close below it would see a massive pickup in volatility.

Short-term trading range: 2800 to 2850.  S&P has strong support near the 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, short-term momentum has weakened as S&P moved down to test support near the important sentiment 2800 zone.  The longer the index stays near that level, the more vulnerable it is to lower prices.  This is the real danger in the current market.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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