S&P Approaches Critical Tipping Point

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday March 6, 2018.

We’ve noted in the previous Market Outlook that: “while the near-term technical bias remains somewhat bearish as S&P’s testing key price levels, more backings and fillings would not be a surprise.  What this means is that as the index inches into the area of key supports, aggressive buyers will most likely dips in their toes to see how the market reacts.”  As anticipated, the S&P closed higher Monday, rose 1.1 percent to 2,720.94 after briefly trading lower.  The Dow Jones industrial average closed 1.37 percent higher at 24,874.76.  The Nasdaq composite advanced 1 percent to close at 7,330.70.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 4.39 percent to close at 18.73.


One of the noteworthy developments in recent days has been the move in automakers. The groups were under selling pressure after Donald Trump has escalated the threat of a trade war with Europe, warning that the US will slap a tax on cars made on the continent if the European Union (EU) retaliates against tariffs on imports of steel and aluminum.  After surging nearly 23 percent in 2017, the First Trust NASDAQ Global Auto ETF (CARZ) fell about 2 percent YTD, slightly underperformed the S&P.  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 CARZ.

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 – First Trust NASDAQ Global Auto ETF (weekly)

Our “U.S. Market Trading Map” painted CARZ bars in red (sell) – see area ‘A’ in the chart.  CARZ moved down to test support at the prior low set in early February after the recovery rally ran out of steam just above 43.  That level was significant when the ETF fell below in in late January.  Last week’s massive bearish engulfing bar is a clear indication of supply overwhelming demand.  Right now the most important to watch is trading behavior near 41.  A close below that level on a weekly basis will confirm the bearish signal and a test of the more important support near the 39-37 zone should follow shortly.

CARZ has resistance 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 slightly bearish.  Last changed March 2, 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 moved up to test resistance at the trend channel moving average after falling below that level last week.  Momentum indicator shifted higher from above oversold zone, indicating an internal strength.  This is a positive development but resistance is strong near the 2740 zone.  We’d turn particular bullish if the index closed twice above that level. With that said, consecutive daily closes above 2740 would set the stage for a retest of the early 2018 highs, with only minor resistance around 2800.

Short-term trading range: 2668 to 2740.  S&P has minor support near 2668.  A close below that level will bring the early February lows into view. The index has resistance near 2740.  A close above that level could trigger acceleration toward the early 2018 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, recent trading actions leaving the market in what looks to us like a back-and-forth consolidation of the late January massive selloff.  As the S&P approaches critical tipping point, we’re watching the next entry point.  The index could signal an extended upward or downward trajectory, depending on how it closes over the next few days.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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