S&P Outside Reversal Bar Warns of Potential Trend Shifts

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday April 16, 2018.

We’ve noted in the previous Market Outlook that: “our near-term work on momentum and price structure suggested that the late March oversold relief rally can be sustained for a few days, potentially allowing for a test of 2700 before a significant pullback unfolds.  Nevertheless, traders should consider taking profits into short-term rallies as market internals do not appear strong enough to generate sustain breakouts.”  As anticipated, stocks traded higher in early Friday session that saw the S&P traded as high as 2,680.26 before sellers stepped in and pushed prices lower.  For the day, the bench mark gauge fell 0.29 percent to close at 2656.30.  The Dow Jones industrial average gave up 0.50 percent to close at 24360.14. The NASDAQ composite fell 0.47 percent to 7106.65.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 5.84 percent to close at 17.41.


One of the noteworthy developments in recent days has been the move in emerging markets. After an impressive ran that saw the iShares MSCI Emerging Markets ETF (EEM) surged more than 34 percent in 2017, the ETF peaked in late January 2018 and rolled over along with the broader market amid growing concerns about potential trade wars and overvaluation.  Now the question is whether recent selloff is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in EEM.

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 MSCI Emerging Markets ETF (weekly)

Our “U.S. Market Trading Map” painted EEM 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 2018.   The March selloff pushed the ETF below the 6-month moving average, the level that offered support since EEM broke out in early 2016.  Trading actions over the past few weeks, represented an orderly low level consolidation.  Expect the ETF to resume the January downtrend as soon as it worked off excessive pessimism.  The level to watch is 47.  A failure to hold above that level will bring the 4-year moving average, around 45.60, into view.  A close below 45.60 has measured move to around 43, based on the 38.2% Fibonacci retracement of the 2016-2018 upswing.

EEM has resistance near 48.20.  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 10, 2018 from slightly 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 index moved up to test resistance at the trend channel moving average after climbed above the upper boundary of the green band earlier last week.  In accordance to the Japanese candlestick pattern recognition, Friday’s outside reversal bar was a clear indication of supply overwhelming demand.  This pattern is often associated with key turning point particular when it formed near important price level. Money Flow measure fell below the zero line, indicating a negative net demand for stocks.  Momentum shifted lower from just above oversold zone, indicating an internal weakness.  Right now, the most important to watch is trading behavior near 2650.  A close below that level will invalidate last week’s breakout signal and bring the February-April lows into view.

Short-term trading range: 2650 to 2700.  S&P has minor support near 2650.  A close below that level has measured move to 2600.  The index has a strong band of resistance between 2690 and 2710.  A close above 2710 could trigger acceleration toward the March high 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, Friday’s outside reversal bar together with the fact that the S&P is facing strong technical resistance after rising more than 120 points in just 2 weeks warns of potential trend shifts.  A close below 2650 will confirm the bearish signal and a retest of the early April low should be expected.


Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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