Oversold Rally Could Take S&P near 2700 before Significant Pullback Unfolds

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday April 4, 2018.

We’ve noted in the previous Market Outlook that: “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.”  As expected, stocks closed higher Tuesday as tech stocks recoup losses from the previous session. For the day, the S&P gained 1.3 percent to close at 2,614.45.  The Dow Jones industrial average added 1.65 percent to close at 24,033.36.  The Nasdaq composite advanced 1 percent to 6,941.28.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, dropped 10.67 percent to close at 21.10.


One of the noteworthy developments in recent days has been the move in consumer staples stocks. The Consumer Staples Select Sector SPDR ETF (XLP) attracted some buying support in recent days as fears of a global trade war pushed traders towards defensive names. China recently announced that it would be implementing new tariffs on 128 U.S. products, including fruit and meat, in response to the U.S.’ own set of levies on steel and aluminum.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLP.

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 – Consumer Staples Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLP bars in green (buy) – see area ‘A’ in the chart.  The first dominant feature on the chart is the rising trend started in early 2009.  The second dominant feature of the chart is the downward trend started in early February 2018.  The March massive selloff pushed the ETF below the 2-year moving average – the level that offered support since XLP broke out in early 2010, and down to the 5-year moving average.  Last week’s bullish reversal suggested that an important near-term low has been established the XLP is in an early stage of a new upswing.  Over the next few weeks, traders should monitor trading behaviors as the 54 zone is tested as resistance.  A sustain breakout above that level will bring the early 2018 highs back into view.

XLP has a strong band of support between 51-50.  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 remains 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”]

Once again, S&P bounced off support at the lower boundary of the green band as traders reacted to oversold conditions. That level is significantly in charting terms.  As shown, the index rallied nearly 250 points in about 3 weeks after a briefly fell below that level in early February.  Momentum indicator shifted higher from near oversold zone, allowing additional upside probing.  These elements increased the probability for a test of resistance around the 2700 zone.  Resistance stands in the way of continue rally is at the upper boundary of the green band, around 2650.

Short-term trading range: 2565 to 2700.  S&P has support near 2565.  A close below 2565 will open the flood gate toward 2500.  The index has resistance near 2700.  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, based upon recent trading action, an important near-term low had been established and the S&P index is in an early stage of a snap back bounce.  Our near-term work on momentum and price structure suggested that the relief rally can be sustained for a few days, potentially allowing for a test of 2700 before a significant pullback unfolds.


Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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