S&P Oversold Relief Rally Failed at Formidable Resistance

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.


Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday February 28, 2018.

Stocks fell sharply Tuesday after the new Federal Reserve Chair Jerome Powell signaled that the option for more than three rate increases remains open.  The Dow Jones industrial average fell 1.16 percent to close at 25,410.03. The S&P fell 1.27 percent to finish at 2,744.28.  The NASDAQ composite fell 1.23 percent to close at 7,330.35.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged 17.66 percent to close at 18.59.


One of the noteworthy developments in recent days has been the move in emerging markets.  After posting an impressive gains of 34 percent in 2017, outperformed the S&P by a wide margin, the iShares Core MSCI Emerging Markets ETF (IEMG) has been under selling pressure in recent weeks as investors digested prospect of higher interest rates.  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 IEMG.

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 Core MSCI Emerging Markets ETF (weekly)

Our “U.S. Market Trading Map” painted IEMG bar in red (sell) – see area ‘A’ in the chart.  Over the past few weeks, IEMG has been trending higher after the early February correction found support near the 20-week moving average.  That level is significant in charting terms.  It was tested several times throughout 2017.  This week’s bearish engulfing bar is a clear indication of supply overwhelming demand.  This is a negative development, suggesting that IEMG might have to go to a much lower level to attract new buyers.

Over the next few days, it’s important to monitor trading behavior near 57.65.  A close below that level on a weekly basis will bring the January lows back into view.  That level roughly corresponds with the 50-week moving average.

IEMG has resistance near 61.  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 bullish.  Last changed February 23, 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 printed a massive bearish engulfing bar after recent rally attempt ran out of steam near the lower boundary of the pink band, a key technical level.  Momentum indicator shifted lower from below overbought zone, indicating an internal weakness.  This is a bearish development, increased the probability for a retest of the trend channel moving average.  That level is significant in charting terms.  A close below it will invalidate Monday’s bullish breakout signal and bring the J February lows back into view.

Short-term trading range: 2700 to 2800.  S&P has minor support near 2734.  Below it, a more important support lies at 2700. This creates a strong band of support between 2734 and 2700.  A close below that level will confirm Tuesday’s bearish reversal signal and a retest of the early February lows should follow shortly. The index has resistance near 2800.  A close above that level could trigger acceleration toward the January highs.

Long-term trading range: 2540 to 2840.  Unless there is a headline that everyone recognizes as extremely positive or negative, expect S&P to swing within this 300 points range.

In summary, Tuesday’s massive bearish engulfing bar suggested that the late January oversold relief rally has come to an end.  S&P’s 2700 is the line in the sand.  If the index fails to hold above it this week, then the next stop will be 2550 with the possibility of a brief breakdown below that level.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

© All rights reserved and actively enforced.
Note: This is a free edition of The Market Outlook, a daily CEM News subscriber newsletter. To get this column before market opens together with hundreds of technical trading ideas (including stocks and ETFs) every month, please click here.
Subscribe to CEM News to receive more in-depth research from Capital Essence.