S&P Break Out Will Not Sustain

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday March 7, 2018.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks traded lower in early Tuesday session after a report said that Trump was convinced Cohn would leave the administration if the tariffs proposed by the president were implemented.  The market however, managed to overcome the early weakness and closed higher.  The S&P rose 0.3 percent to 2,728.12 after falling as much as much as 0.4 percent.  The Nasdaq composite closed 0.6 percent higher at 7,372.01.  The Dow Jones industrial average ended 0.04 percent higher at 24,884.12 after briefly falling as much as 166 points.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 1.98 percent to close at 18.36.


One of the noteworthy developments in recent days has been the move in energy and energy related stocks. The groups were under selling pressure as soaring U.S. crude oil production and rising inventories weighed on crude prices.  After falling more than 4 percent in 2017, the Energy Select Sector SPDR ETF (XLE) down more than 6 percent YTD, underperformed the S&P by a wide margin.  Now the question is whether this is a beginning of the end or there’re more pains ahead?  Below is an update look at a trade in XLE.

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 – Energy Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLE bars in red (sell) – see area ‘A’ in the chart.  Over the past few weeks, XLE basing sideways using the 2016 rising trend line as support after the massive February selloff pushed the ETF below the 20-week moving average.  That level was significant when XLE climbed above it mid-2017.  It’s now acting as strong resistance.  Right now the most important to watch is trading behavior near 65.50.  A close below that level on a weekly basis will trigger a new downswing and a retest of the 2016 low, around 50, should be expected.

XLE has resistance near 70.50.  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 March 6, 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”]

As expected, the S&P moved up and penetrated the trend channel moving average after falling below it last week.  That level is significant in charting terms. It provided support for most of 2017.  It’s now acting as strong resistance.  Trading action over the past few weeks represented an orderly low-level consolidation period in the aftermath of late January massive selloff.  Money Flow measure is barely above the zero line, indicating a positive but weak net demand for stocks.  Momentum indicator is not favorable over the near to intermediate term.  These elements suggested the market is setting up for another failure breakout, or second wave down in other words.

Short-term trading range: 2670 to 2740.  S&P has minor support near 2670.  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, the early March’s recovery rally is testing ‘support turned resistance’ near S&P’s 2740.  While the overall technical backdrop remains bullish with the short-term trend pointing upward, daily chart of the S&P has shown significant signs that momentum is waning.  Over the intermediate to long term, the technical suggested that breakouts will not sustain.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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