S&P in Reflexive Bounce

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday February 13, 2018.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks closed higher Monday with the S&P gained 1.4 percent to finish at 2,656. The Dow Jones industrial average added 1.70 percent to finish at 24,601.27.  The Nasdaq composite advanced 1.6 percent to close at 6,981.96.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 11.87 percent to close at 25.61.


One of the more noteworthy developments in recent days has been the move in defensive stocks.  After a lack luster 2017 that saw the Utilities Select Sector SPDR ETF (XLU) added just 8.5 percent, underperformed the S&P by a wide margin, the late January selloff pushed the ETF below its 2017 lows, down more than 7 percent YTD.  Now the question is whether this is a beginning of an end or there’ll be more pains ahead?  Below is an update look at a trade in XLU.

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 – Utilities Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLU bars in green (buy) – see area ‘A’ in the chart. The ETF had been under selling pressure in recent weeks after the latte 2017 rally ran out of steam just above 57.  The December correction tested support at the multi-year rising trend line.  This level was tested several times in the past few years.  This history indicated an important role in terms of support.  This week upside follow-through confirmed last week’s bullish reversal signal with an initial upside target near 53, based on the 20-week moving average.  A close above that level has measured move to 57-60, which we’ve determined using the upper boundary of the multi-year upswing and projected it upward.

XLU has support near 47.  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 bullish.  Last changed February 12, 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”]

S&P rebounded nicely after recent selloff found support at the dark-green band, or extreme oversold zone. Money Flow measure trended higher 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.  These elements increased the probability for a retest of resistance at the trend channel moving average, currently at 2719.  This level is significant in charting terms.  A close above that level will complete the bullish W-shape bottom and trigger acceleration toward the range top.

Short-term trading range: 2540 to 2719.  S&P has support near 2644.  Below it, a more significant support lies near 2540.  This creates a strong band of support between 2644-2540.  A close below 2540 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, currently at 2719, represents key resistance.  A close above that level will turn the short-term trend up.

Long-term trading range: 2540 to 2800.  Unless there is a headline that everyone recognizes as extremely positive or negative, expect S&P to swing within this 260 points range.

In summary, the S&P tested and held support at the dark-green band, or extreme oversold zone.  Our near-term work on price structure and momentum suggested that the index is in a reflexive bounce.  Traders will be looking for the index to close above the trend channel moving average before getting aggressively long again.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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