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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday March 1, 2018.

We’ve noted in the previous Market Outlook that: “Tuesday’s massive bearish engulfing bar suggested that the late January oversold relief rally has come to an end.”  As anticipated, stocks closed lower Wednesday with the S&P fell 0.9 percent to close at 2,713.83.  The Dow Jones industrial average dropped 1.50 percent to close at 25,029.20. The Nasdaq composite ended 0.8 percent lower at 7,273.01.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, soared 6.78 percent to close at 19.85.


One of the noteworthy developments in recent days has been the move in energy and energy related stocks. The groups were under selling pressure Wednesday as oil prices fell after official data showed a larger-than-expected increase in U.S. crude inventories.  After falling more than 10 percent in 2017, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) extended the downward trend, dropped more than 11 percent YTD.  Now the question is whether recent losing streak is a beginning of an end or there’s more pains ahead?  Below is an update look at a trade in XOP.

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 Oil & Gas Exploration & Production ETF (weekly)

Our “U.S. Market Trading Map” painted XOP bars in red (sell) – see area ‘A’ in the chart.  Over the past few weeks, XOP has been trending higher in a short-term counter trend rally after the late January selloff found support near the 2016 rising trend line.  There is a distinct possibility that a bear flag formation is currently setting up in the weekly chart of XOP.  Over the next few days, traders should monitor trading behavior near 31.  A close below that level suggests that the multi-week bearish flag formation had resolved itself into a new downswing with a downside target around 22.

XOP has resistance just below 36.  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 28, 2018 from bullish (see area ‘A’ in the chart).

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

Key technical development in Wednesday session was a close below the trend channel moving average.  That level was significant when the index climbed above it last week. This is a negative development, signify a bearish reversal.  Momentum indicator shifted lower from below overbought zone, another sign that downward pressure has been increased.  While seemingly vulnerable to further short-term weakness, support is strong near the 2680 zone and Money Flow measure is still above the zero line.  These elements could help minimize downside follow-through and widespread breakdowns.

Short-term trading range: 2680 to 2800.  S&P has support near 2700.  Below it, a more important support lies at 2680. This creates a strong band of support between 2700 and 2680.  A close below 2680 will bring the early February lows into view. The index has resistance near 2800.  A close above that level could trigger acceleration toward the January highs.

Long-term trading range: 2540 to 2820.  S&P has major support near 2540.  A close below that level will trigger a major sell signal with initial downside target near 2400.  The index has long-term resistance near 2820.  A trade above that level often marked significant market tops.

In summary, Wednesday’s downside follow-through confirmed Tuesday’s bearish reversal signal.  Nevertheless, it will be important to monitor the retreat and rebound behaviors over the next few days to determine whether breakouts are decisive.  We’d turn particular bearish if the S&P closes below 2680 on a weekly basis.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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