S&P near Critical Tipping Point

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday April 9, 2018.

We’ve noted in the previous Market Outlook that: “market internals do not appeared strong enough to generate widespread breakouts. Over the short-to-intermediate term, market vulnerable to some downside retracement.”  As expected, stocks fell sharply on Friday after Donald Trump tweeted that he has asked the United States Trade Representative to consider $100 billion in additional tariffs against China.  For the day, the Dow Jones industrial average fell 2.34 percent to 23,932.76. The S&P declined 2.2 percent to 2,604.47. The Nasdaq composite dropped 2.3 percent to close at 6,915.11.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged 13.46 percent to close at 21.49.


One of the noteworthy developments in recent days has been the move in health care. The group was under selling pressure in recent days as investors scrambled for cover over fears that almost every sector and multinational company could suffer some collateral damage if trade war tensions rise.  The Health Care Select Sector SPDR ETF (XLV) fell 2.4 percent Friday to 79.88, bringing its YTD loss up to 3.4 percent, underperformed the S&P by a slight margin.  Now the question is whether the recent selloff is a beginning of an end or there’re more pains ahead?  Below is an update look at a trade in XLV.

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 – Health Care Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLV bars in red (sell) – 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 started in early February 2018.  The late March massive selloff pushed the ETF below the 4-year moving average – the level that offered support since XLP broke out in early 2017, signify a bearish reversal.  Last week’s downside follow-through confirmed the bearish signal.  XLV has support near 77, based on the 50% Fibonacci retracement.  A close below that level has measured to 73, or the 61.8% Fibonacci retracement.

XLV has resistance near 82.  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 4, 2018 from bullish (see area ‘A’ in the chart).

[Note: for more details analysis, please take a look at our “US Market ETF Trading Map”]


After rallying more than 100 points from the early April low of 2553 and meeting anticipated resistance at the upper boundary of the green band, S&P retreated as Friday selloff pushed the index down to lower boundary of the green band, near the important sentiment 2600 zone. Money Flow measure and momentum had been deteriorated following recent selloff. This will give the bulls more pressure than they have already had.  Over the past few days, traders should monitor trading behaviors as the lower boundary of the green band is tested as support.  This level was tested several times over the past months.  A failure to hold above it means that near-term buying pressure has finally been exhausted and the index has to move to a much lower level to attract new buyers.


Short-term trading range: 2565 to 2700.  S&P has support near 2565.  A close below that level will open the flood gate toward 2450.  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: 2450 to 2700.  S&P has key support near 2580.  A close below that level will trigger a major sell signal with downside target near 2450.  The index has resistance near 2700.


In summary, S&P’s oversold rally is showing signs of buyer’s fatigue, noting a struggle for the index to get past 2700.  A failure to move above key resistance means that most of the potential buyers at this level had already placed their bets. The next batch of buyers typically sits at a much lower level.  This is the danger in the current market.


Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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