S&P Vulnerable to some Downside Retracement

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.


Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday April 19, 2018.

We’ve noted in the previous Market Outlook that: “our near-term work on price structure and momentum suggested strongly that the S&P might take a breather from its recent thrust to multi-week highs.  As for strategy, traders should consider purchase stocks during declines in the market rather than chasing breakouts.”  As anticipated, stocks closed mixed Wednesday as traders digested a fresh batch of mixed earnings reports.  For the day, the S&P added 0.08 percent to close at 2,708.64, while the tech-heavy Nasdaq climbed 0.2 percent to finish the session at 7,295.24. The Dow Jones industrial average fell 0.16 percent to close at 24,748.07.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped 2.30 percent to close at 15.60.


One of the noteworthy developments in recent days has been the move in commodities. Raw materials have rallied sharply this week on escalating global political tensions and fears of Russian supply disruptions after the recent U.S. sanctions.  The PowerShares DB Base Metals Fund (DBB) soared nearly 10 percent MTD, outperformed the S&P by a wide margin. Now the question is whether the rally has more legs?  Below is an update look at a trade in DBB.

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 – PowerShares DB Base Metals Fund (weekly)

Our “U.S. Market Trading Map” painted DBB bars in green (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 since late February 2018 which represented the digestion period.  The correction tested and held support at the 4-year moving average.  This week’s upside follow-through confirmed last week’s bullish breakout above the February falling trend line and opened up for a test of the 61.8% Fibonacci retracement of the 2011-2016 downswing, near 20.30.  A close above that level on a weekly basis has measured move to 25-26.

DBB has support near 18.  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”]

The S&P continues basing sideways near resistance at the mid-March breakdown gap.  The index traded in its narrowest range since broke down in mid-March.  Technically speaking 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.  Over the next few days, traders should watch for consolidation and a potential retreat and retest of the trend channel moving average, near 2687, as a support level.  A close below that level would trigger another large scale selloff.

Short-term trading range: 2687 to 2720.  S&P has support near 2687.  A close below that level has measured move to 2645.  The index has a strong band of resistance between 2710 and 2720.  A close above 2720 could trigger acceleration toward the March high but for now it looks firm.

Long-term trading range: 2590 to 2850.  S&P has key support near 2590.  A close below that level will trigger a major sell signal with downside target near 2460.  The index has resistance near 2700.

In summary, the S&P turned indecisive as traders wondered whether more gain is warranted given the massive advance over the past few weeks.  Although the near-term momentum is currently tilted toward short-term weaknesses, the overall technical bias remains positive, suggesting that path with least resistance remains to the upside.  As for strategy, a pullback will present a buying opportunity, while selling into strength may not be the best strategy in a market considered likely to bounce back.


Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

© All rights reserved and actively enforced.
Note: This is a free edition of The Market Outlook, a daily CEM News subscriber newsletter. To get this column before market opens together with hundreds of technical trading ideas (including stocks and ETFs) every month, please click here.
Subscribe to CEM News to receive more in-depth research from Capital Essence.