S&P Could Shift to Low Level Consolidation Phase

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday February 5, 2018.

We’ve noted in the previous Market Outlook that: “the fact that the S&P is basing sideways rather than bouncing higher as market digested Tuesday’s massive selloff indicating an internal weakness.”  As anticipated, stocks fell sharply on Friday after a stronger-than-expected jobs report suggested that the FED needs to raise interest rate faster.  For the day, the Dow Jones industrial average dropped 2.54 percent to close at 25,520.96.  The S&P fell 2.1 percent and finished at 2,762.13. The Nasdaq composite plunged 1.96 percent to 7,240.95.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, soared 28.51 percent to close at 17.31.


One of the more noteworthy developments in recent days has been the move in emerging markets.  After a stellar 2017 that saw the iShares MSCI Emerging Markets ETF (EEM), an ETF tracking the performance of the MSCI Emerging Markets Index, outperformed the MSCI Developed Markets Index by 14%, EEM has been under selling pressure in recent days. 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 EEM.

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 – iShares MSCI Emerging Markets ETF (weekly)

Our “U.S. Market Trading Map” painted EEM bars in red (sell) – see area ‘A’ in the chart.  The ETF had been on a tear in recent months after the November correction found support near the 20-week moving average.  The late December rally pushed EEM above key resistance at the 2011 highs, just above 50.  Last week’s massive selloff pushed EEM below 50, signify a bearish reversal.  Right now follow-through is the key.  A close move below 49 this week will confirm the bearish signal and a test of support near 47-44 should be expected.

EEM has resistance near 52.  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”]

Key technical development in Friday session was a close below the lower boundary of the pink band –the level that offered support since the index broke out in November 2017.  This is a negative development, signify a significant trend shifted. Nevertheless, momentum indicator is much closer to oversold zone than overbought zone following recent selloff. Money Flow measure has been trending lower but still above the zero line, indicating a weak net demand.  These elements suggested that the market might shift to an orderly low-level consolidation period in the coming days.

Short-term trading range: 2700 to 2800.  S&P has minor support near 2750. Below it, a more significant support lies at 2700.  This creates a strong band of support between 2750 and 2700.  A close below that level would see a massive pick up in volatility and a test of more important support near the 2600 area should be expected.  The lower boundary of the pink band, around 2800, represents key resistance.  A close above that level has measured move to 2900, based on the upper boundary of its short-term trading range.

Long-term trading range: 2700 to 2840.  Unless there is a headline that everyone recognizes as extremely positive or negative, expect S&P to swing within this 140 points range.

In summary, S&P broke key support last week.  When strong support is broken it means that near-term buying pressure has finally been exhausted. A deeper pullback would be constructive in that it would generate oversold conditions within the framework of the long-term uptrend.  While there seems to be room to go lower, we expect market to shift to an orderly low-level consolidation period prior to new downswing.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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