S&P Could Retest the Lows of February

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday March 3, 2018.

We’ve noted in the previous Market Outlook that: “Wednesday’s downside follow-through confirmed Tuesday’s bearish reversal signal.”  As anticipated, stocks closed significantly lower Thursday after the White House said that the U.S. will impose tariffs of 25 percent for steel and 10 percent for aluminum.  The S&P plummeted below the key 2,700 level, dropping 1.3 percent to 2,677.  The Dow Jones industrial average dropped 1.68 percent to close at 24,608.98. The Nasdaq composite fell 1.27 percent to close at 7,180.56.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, soared 13.20 percent to close at 22.47.


One of the noteworthy developments in recent days has been the move in defensive stocks. The groups were under tremendous selling pressure since the start of the year following a lack luster 2017 that saw the Consumer Staples Select Sector SPDR ETF (XLP) added just 10 percent, underperformed the S&P by a wide margin.  Now the question is whether recent selloff a beginning of an end or there’re more pains ahead?  Below is an update look at a trade in XLP.

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 – Consumer Staples Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLP bars in red (sell) – see area ‘A’ in the chart.  Over the past few weeks, XLP has been trending lower after the late February oversold relief rally ran out of steam just below 56, a key technical level.  This week’s selloff pushed the ETF below the 100-week moving average – the level that provided support since XLP reached a major low in 2009.  This is a bearish development, opening the door for a test of 51-50.

XLP has resistance near 55.  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 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 Thursday session was a break below the important sentiment 2700 mark.  Thursday’s massive selloff pushed the index down to the upper boundary of the green band. Right now the most important thing to watch is the retreat and rebound behavior as 2665, the upper boundary of the green band, is tested as support.  We’d turned particular bearish if the index closes twice below that level.  With that said, a break below 2665 will bring the February low of 2532 into view.  While seemingly vulnerable to further short-term weakness, support is strong near the dark-green 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: 2665 to 2736.  S&P has support near 2665.  A close below that level 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, S&P broke several key supports this week as the early February oversold relief bound ran out of steam near the lower boundary of the pink band.  Expect increase in near-term volatility as the lows of February is retested.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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