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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday February 9, 2018.

We’ve noted in the previous Market Outlook that: “so far the oversold rebound has proved nothing as far as its staying power or as a possible trend reversal.”  As anticipated, a jump in interest rates sent stocks lower Thursday that saw the S&P undercut Tuesday’s reversal low.  For the day, the bench mark gauge dropped 3.75 percent to 2,581.  The Dow Jones industrial average fell 4.15 percent to 23,860.46.  The Nasdaq composite fell 3.9 percent to close at 6,777.16.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped 20.66 percent to close at 33.46.

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One of the more noteworthy developments in recent days has been the move in telecoms.  After a weak 2017 that saw the iShares Dow Jones US Telecom ETF (IYZ) fell nearly 15 percent, underperformed the S&P by a wide margin, the ETF extended the losing streak, falling nearly 8 percent YTD.  Now the question is whether recent selloff is a beginning of an end?  Below is an update look at a trade in IYZ.

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 Dow Jones US Telecom ETF (weekly)

Our “U.S. Market Trading Map” painted IYZ bars in red (sell) – see area ‘A’ in the chart.  Over the past few weeks, IYZ has been basing sideways after the November rally ran out of steam near the 20-week moving average.  This level is significant in charting terms.  It acted as strong resistance since the ETF broke down in early 2017.  This week massive selloff pushed IYZ below the November rising trend line, signify a breakdown and bearish reversal.  The next stop is the 38.2% Fibonacci retracement of the 2008-2017 uptrend, near 24.50.  That level roughly corresponds with the 2015-2016 lows.

IYZ has resistance near 29.50.  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 shifted to bearish.  Last changed February 8, 2018 from slightly bearish (see area ‘A’ in the chart).

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

S&P sold off undercut support at Tuesday’s recovery low after the oversold relief rally ran out of steam near the trend channel moving average.  Money Flow measure crossed below the zero line, indicating a negative net demand for stocks.  Momentum indicator shifted lower from near oversold zone, indicating an internal weakness. These elements increased the probability for a test of the 2540-2500 zone.  This is a very strong support zone so it should not be surprising to see the index regroup and rebound from near 2500.

Short-term trading range: 2500 to 2640.  S&P has minor support near 2540.  Below it, a more significant support lies near 2500.  This creates a strong band of support between 2540 and 2500.  A close below that level would see a massive pick up in volatility and a test of more important support near the 2350 zone should be expected.  The upper boundary of the green band, near 2640, represents key resistance.  A close above that level will turn the short-term trend up.

Long-term trading range: 2530 to 2780.  Unless there is a headline that everyone recognizes as extremely positive or negative, expect S&P to swing within this 250 points range.

In summary, S&P broke several supports this week.  When key supports broke it means that long-term buying pressure has finally been exhausted.  The stronger the resistance level, the more powerful the selloff.  Nevertheless, support is strong near the 2540-2500 zone.  This could help minimize downside follow-through and widespread breakdowns.

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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