S&P Entered High Volatility Phase

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday February 6, 2018.

Stocks fell sharply Monday as traders rushed for the exits in the wake of rising interest rates.  For the day, the Dow Jones industrial average shed 4.60 percent to 24,345.75.  The S&P dropped 4.1 percent to close at 2,648.94.  The Nasdaq composite declined 3.8 percent to 6,967.53.  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 defensive stocks.  After a lackluster 2017 that saw the Consumer Staples Select Sector SPDR ETF (XLP) rose just 10 percent, underperformed the S&P by a wide margin, the ETF sold off sharply this week, down 3.6 percent, slightly outperformed the S&P.  Now the question is whether this week outperformance is a beginning of a new trend or it’s a just a temporary pause prior to new downswing?  Below is an update look at a trade in XLP.

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 – Consumer Staples Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLP bars in green (buy) – see area ‘A’ in the chart.  The ETF had been trending lower in a medium-term correction after the early November 2017 rally ran out of steam near 59.  This week’s massive selloff pushed XLP down to the 100-week moving average, the level that offered support since the ETF broke out in late 2009.  Should the history is any guidance, expect XLP to regroup and rebound soon.  A close below that level will break the long-term uptrend and a test of the more important support near the 50 zone should follow shortly.

XLP has support near 54.  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 Monday session was a break below support at the trend channel moving average.  The S&P closed just above the upper boundary of the green band following recent selloff.  This level was tested several times in August 2017.   This history indicated an important role in terms of support.  Additionally, momentum indicator finally entered oversold zone.  This could help putting a short-term floor under the market.  Perhaps the slightly positive Money Flow measure is the best illustration of the bulls’ case.

Short-term trading range: 2633 to 2716.  S&P has minor support near 2633. Below it, a more significant support lies at 2540.  A close below that level would see a massive pick up in volatility and a test of more important support at the bottom of its short-term trading range should be expected.  The trend channel moving average, currently at 2716, represents key resistance.  A close above that level will turn the short-term trend up.

Long-term trading range: 2600 to 2800.  Unless there is a headline that everyone recognizes as extremely positive or negative, expect S&P to swing within this 120 points range.

In summary, S&P broke several key supports this week as market worked off extreme overbought conditions.  Monday’s massive selloff had finally generate oversold conditions within the framework of the long-term uptrend.  While there is a low probability of a full blow correction we expect increase in near-term volatility as markets establishing a tradable low.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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