S&P in Digestion Period

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday April 2, 2018.

We’ve noted in the previous Market Outlook that: “the fact that the S&P is basing sideways rather than bouncing higher as market digested Tuesday’s massive selloff indicating an internal weakness. Nevertheless, we’re expected the S&P to shift to an orderly low-level consolidation period prior to new downswing as the 2600 zone is too big and too important to fall quickly.”  As expected, the S&P closed higher Thursday as technology stocks rebounded following steep declines seen in recent sessions.  For the day, the bench mark gauge gained 1.4 percent to 2,640.87.  The Dow Jones industrial average rose 1.07 percent to 24,103.11. The Nasdaq composite advanced 1.6 percent 7,063.44.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, tumbled 12.68 percent to close at 19.97.


One of the noteworthy developments in recent days has been the move in transports. The group attracted strong buying support Thursday that saw the iShares Transportation Average ETF (IYT) surged 2.03 percent to 187.03, bringing its YTD loss down to 2.4 percent, slightly underperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in IYT.

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 – iShares Transportation Average ETF (weekly)

Our “U.S. Market Trading Map” painted IYT bars in green (buy) – see area ‘A’ in the chart.  The first dominant feature on the chart is the rising trend started in early 2016.  The second dominant feature of the chart is the downward trend starting in late January 2018.  Last week’s selloff retested support at the 50-week moving average.  That level was tested in early February.  So far this week oversold rebound has proved nothing as far as its staying power or as a possible trend reversal.  Over the next few days, traders should monitor the rally and retreat behaviors as the 190 zone is tested as resistance.  A close above that level has measured move to 206, based on the early 2018 highs.

IYT has support near 117.  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 neutral.  Last changed March 29, 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”]

As expected, the S&P bounced off support at the lower boundary of the green band.  The big picture remains the same. There is a consolidation within the confines of the green band, which represents digestion period.  The lower boundary of the green band, around 2600, is the line in the sand.  A failure to hold above that level would see an unwelcome pickup in downside volatility and bring the February lows back into view.

Short-term trading range: 2590 to 2690.  S&P has support near 2590.  Below it, a more significant support lies at 2560.  This creates a strong band of support between 2590 and 2560.  A close below 2560 will open the flood gate toward 2400.  The index has resistance near 2690.  A close above that level could trigger acceleration toward the trend channel moving average but for now it looks firm.

Long-term trading range: 2560 to 2820.  S&P has key support near 2560.  A close below that level will trigger a major sell signal with downside target near 2400.  The index has long-term resistance near 2820.  A trade above that level often marked significant market tops.

In summary, so far the upswing that started off the March low of 2585 on the S&P has proved nothing as far as its staying power or as a possible major upswing.  That’s being said, until proven otherwise, current advance is a short-term oversold bounce, which should be over sooner rather than later. Although, we would reclassify it as something stronger if we see a more constructive pattern on the S&P chart.


Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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