S&P’s 2565 is the Line in the Sand

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

We’ve noted in the previous Market Outlook that: “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.”  As expected, stocks tumbled out of gate Monday that saw the major indices fell more than 1 percent following steep rally seen in previous session.  For the day, the S&P dropped 2.2 percent to 2,581.88 and re-entered correction territory.  The Dow Jones industrial average fell 1.90 to close at 23,644.19.  The Nasdaq composite dropped 2.7 percent to 6,870.12.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged 18.28 percent to close at 23.62.

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One of the noteworthy developments in recent days has been the move in Chinese tech stocks. The Guggenheim China Technology ETF (CQQQ) fell 2.39 percent on Monday after China’s announcement that it is imposing tariffs on 128 kinds of U.S. products in response to U.S. duties on steel and aluminum imports unveiled last month. Beijing said in March that those products had an import value of $3 billion in 2017.  This is definitely a negative sign going forward. Below is an update look at a trade in CQQQ.

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 – Guggenheim China Technology ETF (weekly)

Our “U.S. Market Trading Map” painted CQQQ bars in red (sell) – see area ‘A’ in the chart.  The first dominant feature on the chart is the rising trend started in late 2016.  The second dominant feature of the chart is the trading bound trading pattern between 57 and 67 since late 2017, which represents the digestion period.  The late March downswing pushed the ETF below the 50-day moving average.  After Monday selloff, CQQQ is barely above the 200-day moving average.  This level had been successfully tested in early February.  Should this support give way, a test of 55, based on the 38.2% Fibonacci retracement and the February lows, is highly likely.

CQQQ has resistance near 62.  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 bearish.  Last changed April 2, 2018 from neutral (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 down to test support at the bottom of its short-term trading range, as represents by the dark-green band in the chart, after last week’s rally attempt ran out of steam near the upper 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 in the after math of the February-March massive selloff.  Money Flow measure and momentum had been deteriorated following recent selloff, indicating an internal weakness.  These elements suggested that S&P might have to move to a much lower level to attract new buyers.  The lower boundary of the green band, around 2565, is the line in the sand.  A failure to hold above that level would see an unwelcome pickup in downside volatility and a test of the more significant support in the 2500 zone should be expected.

Short-term trading range: 2565 to 2690.  S&P has support near 2565.  A close below 2565 will open the flood gate toward 2500.  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, recent trading actions leaving the S&P in what looks to us like a back-and-forth consolidation of the February-March massive selloff. Monday’s decline pushed the index slightly below the lower boundary of its 1-week trading range. Nevertheless, it will be important to monitor the retreat and rebound behaviors over the next few days to determine whether breakouts are decisive.  We’d turn particular bearish if the S&P closes below 2565 on a weekly basis.

 

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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