S&P Vulnerable to Some Downside Retracement

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday April 6, 2018.

We’ve noted in the previous Market Outlook that: “S&P cleared key technical resistance, breaking out from the two-week downward trend…As for strategy, traders should consider taking down exposure into additional strength.”  As expected, stocks closed higher but off intraday highs Thursday following reports that the United States may negotiate a resolution to a trade dispute with China.  For the day, the S&P gained 0.7 percent to close at 2,662.84.  The Dow Jones industrial average rose 0.99 percent to close at 24,505.22.  The Nasdaq composite advanced 0.5 percent to 7,076.55.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, dropped 5.58 percent to close at 18.94.


One of the noteworthy developments in recent days has been the move in bank stocks. The group attracted some buying interest in recent days as traders looked past the trade wars concerns and positioned for higher interest rate environment.  The iShares US Financial Services ETF (IYG) jumped 0.96 percent Thursday to 132.31, bringing its MTD gain up to 1 percent, slightly outperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in IYG.

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 – SPDR S&P Retail ETF (weekly)

Our “U.S. Market Trading Map” painted IYG bars in red (sell) – see area ‘A’ in the chart.  Over the past few months, IYG has been trending lower in a medium-term corrective mode after the early February rally attempt ran out of steam just below the late January high.  The late March selloff pushed the ETF below the 20-week moving average, the level that offered support since IYG broke out in late 2016.  The early April correction found support near the 23.6% Fibonacci retracement of the 2016-2018 upswing.  That level roughly corresponds with the 3-year moving average.  So far, the oversold rebound has proved nothing as far as its staying power or as a possible trend reversal.  Expect sellers to step back in sooner rather than later.  IYG has support near 127.  A close below that level has measured move to 115, based on the 38.2% Fibonacci retracement.

IYG has resistance near 134.  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 April 4, 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”]

After falling about 250 points from the early March peak of 2801 and meeting anticipated support at the lower boundary of the green band, S&P rebound has taken market above key technical resistance near the 2650 zone. Thursday’s rally pushed the index above the upper boundary of the green band and toward the closely watch 2700 zone, that level roughly corresponds with the trend channel moving average.

In accordance to the Japanese candlestick pattern recognition, Thursday’s narrow range (or neutral) bar indicates uncertainty – traders refuse to press hard one way or the other just because they are not very sure about the near-term direction.  This explains why market often uses neutral bar to change direction.  Perhaps, the lagging Money Flow measure is the best illustration of the bears’ case.  Momentum has been strengthened but does not appeared strong enough to generate widespread breakouts.  These elements suggested that S&P is vulnerable to some downside retracement over the short-to-intermediate term.

Short-term trading range: 2600 to 2700.  S&P has support near 2600.  A close below 2600 will bring the February lows back into view.  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, S&P has confirmed a breakout above key resistance in a reflection of improved momentums.  Nevertheless, market internals do not appeared strong enough to generate widespread breakouts. Over the short-to-intermediate term, market vulnerable to some downside retracement.


Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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