S&P Setup for Snapback Bounce

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday April 25, 2018.

Stocks closed lower Tuesday after the 10-year Treasury yield broke above 3 percent for the first time since January 2014.  For the day, the Dow Jones industrial average fell1.74 percent to 24,024.13.  The S&P fell 1.3 percent to 2,634.56. The Nasdaq composite declined 1.7 percent to 7,007.35.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged 10.28 percent to close at 18.02.


One of the noteworthy developments in recent days has been the move in industrials.  The group was under selling pressure Tuesday after Caterpillar hinted that economic growth may slow later in the year.  The Industrial Select Sector SPDR ETF (XLI) fell 2.8%, bringing its YTD lost to 3 percent.  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 XLI.

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 – Industrial Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLE bars in green (buy) – 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 early February 2018.  The late March selloff pushed the ETF below the 20-week moving average, the level that offered support since XLI reached an interim low in 2016. Over the past few weeks, XLI has been basing sideways using the 23.6% Fibonacci retracement as support.  Momentum has been deteriorated following recent selloff, suggesting that the support might not hold for long. A close below 72 has measured move to 68, based on the 32.8% Fibonacci retracement.

XLI has resistance just near 76.  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 slightly bearish.  Last changed April 20, 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”]

As expected, the S&P moved down to test support at the upper boundary of the green band after the early Tuesday’s rally attempt ran out of steam near the trend channel moving average.  That level was significant when the index fell below it in March.  Last week’s failure breakout is a clear indication of supply overwhelming demand, suggesting that the path with least resistance is lower.  Perhaps the negative Money Flow measure is the best illustration of the bears’ case.

Over the next few days, it’s important to monitor the retreat and rebound behaviors as the 2600 zone is tested as support.  That level is significant in charting terms. The short-term oversold condition is another near-term plus for the bulls.  So it should not be surprising to see at least an attempt to rally tomorrow.

Short-term trading range: 2600 to 2688.  S&P has a strong band of support between 2630 and 2600.  A close below that level has measured move to 2460 but for now it looks firm.  The index has resistance near 2688.  A close above that level will bring last week’s pivot high, around 2717, into view.

Long-term trading range: 2460 to 2700.  S&P has key support near 2580.  A close below that level will trigger a major sell signal with downside target near 2460.  The index has resistance near 2700.

In summary, while several indicators remain supportive of further pullback, S&P is short-term oversold following Tuesday’s massive selloff.  Like a rubber band, stocks tend to snap back to the mean if they have dropped too far from the “fair” value. With that said, if lower stock prices create some values for investors, then, given everything being equal, the market should be able to find some buyers.  S&P has 2600 to trade against. If that were to break, we could see 2460 next but it’s not expected tomorrow.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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