S&P 2593 is the Line in the Sand

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday February 8, 2018.

We’ve noted in the previous Market Outlook that: “current price structure suggests that market is in a process of establishing a near-term support plateau from where a new up-leg will base and climb in the days ahead.”  As anticipated, S&P pulled back 0.5 percent to 2,681.66 after rising as much as 1.2 percent in early Wednesday session.  The Dow Jones industrial average closed 0.08 percent lower at 24,893.35.  The Nasdaq composite dropped 0.9 percent to 7,051.98.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 7.51 percent to close at 27.73.

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One of the more noteworthy developments in recent days has been the move in Chinese stocks.  After a strong 2017 that saw the CSI China Internet ETF (KWEB) soared more than 68 percent, outperformed the S&P by a wide margin, the ETF has been under selling pressure in recent days amid ongoing worries on trade issues after Donald Trump imposed tariffs on some China exports to U.S.  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 KWEB.

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 – CSI China Internet ETF (weekly)

Our “U.S. Market Trading Map” painted KWEB bars in red (sell) – see area ‘A’ in the chart.  Over the past few weeks, KWEB has been trending lower in a short-term corrective mode after the December rally ran out of steam near the 127.2% Fibonacci extension of the 2017 upswing.  This week’s downside follow-through confirmed last week’s bearish signal and pushed the ETF down to the 20-week moving average, just below 60.  That level was tested in late 2017.  A close below 59.60 will break the 2017 uptrend and a test of the more important support in the 53-54 zone should be expected.

KWEB has resistance near 64.  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 slightly bearish.  Last changed February 6, 2018 from bearish (see area ‘A’ in the chart).

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

As expected, S&P moved up to test resistance at the trend channel moving average after recent pullback found support near the 2600 zone.  The trend channel moving average was significant when the index fell below it on Monday.  Momentum indicator shifted lower from near oversold zone, indicating an internal weakness.  Money Flow measure is still positive but it’s on a verge of falling below the zero line.  In accordance to the Japanese candlestick pattern recognition, Wednesday’s bearish shooting star is a clear indication of supply overwhelming demand.  These elements suggesting that recent rebound is unsustain and the index might have to go to much lower level to attract new buyers.

Short-term trading range: 2593 to 2718.  S&P has support near 2593. This is a line in the sand.  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 2719, 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 200 points range.

 

In summary, so far the oversold rebound has proved nothing as far as its staying power or as a possible trend reversal.  While there is a high probability that the late-day selloff will momentum but an undercut below S&P’s 2593 is needed before there is any real prospect of a change in the short-term upward pressure.

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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