Momentum Weakened as S&P Tests Key Resistance

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday March 8, 2018.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, after falling near 1 percent in early Wednesday session, the S& regained most of the early lost and closed just below breakeven at 2,726.80.  The Dow Jones industrial average fell 0.33 to close at 24,801.36.  The Nasdaq composite closed 0.4 percent higher at 7,396.65.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 3.27percent to close at 17.76.


One of the noteworthy developments in recent days has been the move in semiconductors. The VanEck Vectors Semiconductor ETF (SMH) reached an all-time intraday high Wednesday, up about 12 percent YTD and 42 percent gain in 2017, outperformed the S&P by a wide margin.  Now the question is whether the rally has more legs?  Below is an update look at a trade in SMH.

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 – VanEck Vectors Semiconductor ETF (daily)

Our “U.S. Market Trading Map” painted SMH bars in green (buy) – see area ‘A’ in the chart.  SMH has been on a tear in recent days after the late January correction found support near the 200-day moving average.  That level is significant in charting terms. It offered support since the ETF reached an interim low in early 2016.  Wednesday’s upside follow-through confirmed Tuesday’s bullish breakout above the early 2018, signify a bullish resumption of the multi-year upswing with upside target near 125, which we’ve determined using the 127.2% Fibonacci extension and projected it upward.

SMH has support near 104.  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 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”]

S&P basing sideways after last week’s recovery rally ran out of steam near trend channel moving average.  General speaking, the index is little changed since last Monday.  That’s actually not a bad sign considering the damages done over the past weeks.  Money Flow measure hoovering near zero line, indicating a lack of commitment among the bulls.  This is a negative development, suggesting further backings and fillings likely.

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, we wouldn’t look too much into Wednesday’s trading action because it keeps the S&P within its short-term consolidation phase. Momentum has weakened as S&P moved up to test resistance near the 2740 zone.  The longer the index stays below that level, the more vulnerable it is to lower prices.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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