S&P 2800 too Big and too Important to Fall Quickly

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday February 2, 2018.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, S&P closed slightly lower Thursday, declined 0.1 percent to close at 2,821.98, amid concerns about rising interest rates.  The Nasdaq composite fell 0.4 percent to 7,385.86.  The Dow Jones industrial average closed 0.14 percent higher at 26,186.71.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 0.52 percent to close at 13.47.


Stock prices of many of the largest health care companies fell heavily this week on the news that Amazon, JPMorgan Chase and Berkshire Hathaway would team up to create a company that would address health care for their employees.  The Health Care Select Sector SPDR ETF (XLV) fell 3.7 percent this week, bringing its YTD gains down to 6.6 percent.  The ETF gained nearly 20 percent in 2017.  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 XLV.

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 – Health Care Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLV bars in red (sell) – see area ‘A’ in the chart.  The ETF had been on a tear in recent months after the October correction found support near the 20-week moving average.  The late December rally pushed XLV up against key technical resistance at the 127.2% Fibonacci extension of the 2009-2015 upswing.  This week’s massive bearish engulfing bar is a clear indication of supply overwhelming demand.  A close below 88 on a weekly basis will confirm the bearish signal and has measured move to 84-80.

XLV has resistance just below 92.  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”]

Looking at the eight-month daily chart of the S&P, we can see that there is currently a test of support near the important sentiment 2800 zone.  Momentum indicator shifted lower from just below overbought zone, indicating an internal weakness.  Adding to concerns is the lagging Money Flow measure.  As shown, a clear bearish divergence has been building between Money Flow measure and price.  Money Flow measure peaked in November and printed a lower high in January as prices broke out to new highs.  These elements suggested that the support might not hold for long and S&P has to go to a much lower level to attract new buyers.

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, the fact that the S&P is basing sideways rather than bouncing higher as market digested Tuesday’s massive selloff indicating an internal weakness. Nevertheless, the 2800 zone is too big and too important to fall quickly so it should not be surprised to see more backing and fillings over the next few days.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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