W-shape Pattern Formation in S&P

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday February 12, 2018.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks sold off in the early Friday session that saw the S&P traded as low as 2,532.69 before buyers stepped in and pushed prices higher.  For the day, the bench mark gauge added 1.49 percent to finish at 2,619.55.  The Dow ended the day up 1.38 percent to close at 24,190.90. The Nasdaq composite added 1.44 percent to close at 6,874.49.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 13.15 percent to close at 29.06.


One of the more noteworthy developments in recent days has been the move in retails.  After a weak 2017 that saw the SPDR S&P Retail ETF (XRT) up just 2.5 percent, underperformed the S&P by a wide margin, the ETF attracted some buying supports following the late January massive selloff.  Now the question is whether this is a beginning of a new uptrend or it’s merely a dead cat bounce?  Below is an update look at a trade in XRT.

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 – SPDR S&P Retail ETF (daily)

Our “U.S. Market Trading Map” painted XRT bars in green (buy) – see area ‘A’ in the chart. The ETF had been under selling pressure in recent weeks after the November 2017 rally ran out of steam near the mid 2015 breakdown point.  January correction tested support at the 100-day moving average. There is a distinct possibility that a W-shape pattern is forming in the daily chart of XRT. We’d turn particular bullish if the XRT closes twice above 45.88.  The next stop is the prior high set in late January, just above 49.

XRT has support near 43.  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 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 moved down to test support at the bottom of its short-term trading range after falling below the trend channel moving average earlier last week.  Money Flow measure crossed above the zero line, indicating a positive net demand for stocks.  Momentum indicator shifted higher from near oversold zone, another sign that downward pressure had eased.  This is a positive development.  Right now, the question is: “How far will the market go?”

There is a distinct possibility that a W-shape pattern is currently setting up in the daily chart of the S&P.  This pattern is a formation comprising two lows separated by a peak.  Those lows occurred in February 6 and February 9 at 2593 and 2532 respectively.  The peak occurred in February 7 when the S&P hit an intraday high of 2727 then sold off.  In the W-shape bottom, the S&P would have to move above 2727 and then use that level as the new support level for the uptrend rally continuation.

Short-term trading range: 2540 to 2719.  S&P has 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 but for now it looks firm.  The trend channel moving average, near 2720, represents key resistance.  A close above that level will turn the short-term trend up.

Long-term trading range: 2530 to 2800.  Unless there is a headline that everyone recognizes as extremely positive or negative, expect S&P to swing within this 270 points range.

In summary, there is a distinct possibility that a W-shape pattern is forming in the daily chart of the S&P.  The pattern it is characterized by positive divergences that bode well for a breakout in the days ahead. We would add upside exposure once the S&P clears 2727 because it would affirm the oversold buy signal that is in place per the momentum indicator.


Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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