S&P Bearish Engulfing Pattern Signaled Trend Reversal

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday May 1, 2018.

We’ve noted in the previous Market Outlook that: “we wouldn’t look too much into Friday’s trading action as it kept the S&P within the short-term trading range. Momentum has strengthened as S&P moved up to test resistance near the 2700 zone.  Nevertheless, this area is too big and too important to fall quickly.   The bulls must hurdle and sustain above that level to strengthen their case.  The longer the index stays below 2700, the more vulnerable it is to lower prices.”  As anticipated, stocks traded higher in early Monday session that saw the S&P traded as high as 2,682.92 before sellers stepped in and pushed the market lower.  For the day, the bench mark gauge fell 0.8 percent lower at 2,648.05.  The Dow Jones industrial average fell 0.61 percent  to close at 24,163.15. The Nasdaq composite closed 0.8 percent lower at 7,066.27.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 3.37 percent to close at 15.93.


One of the noteworthy developments in recent days has been the move in homebuilders. The group was under selling pressure Monday following report that Pending Home Sales rose just 0.4% MOM, missing expectations of 0.7% MOM, and prior months sales also revised notably lower, February down to 2.8 percent from 3.1percent. The SPDR S&P Homebuilders ETF (XHB) fell 2.01 percent, bringing its YTD lost to 12 percent, underperformed the S&P by a wide margin.  Now the question is whether Monday selloff is a beginning of an end or there’re more pains ahead?  Below is an update look at a trade in XHB.

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 Homebuilders ETF (weekly)

Our “U.S. Market Trading Map” painted XHB bars in red (sell) – see area ‘A’ in the chart.  The first dominant feature on the chart is the rising trend line starting in early 2016.  The second dominant feature of the chart is the downward trend since early February 2018.  The April selloff pushed the ETF below the 50-week moving average and the 38.2% Fibonacci retracement of the 2016-2018 upswing, breaking an important support based on Fibonacci levels.  This is a bearish development, suggesting that XHB might have to move to a much lower level to attract new buyers.  Over the next few days, traders should monitor trading behavior as last week’s pivot low of 38.68 is tested as support.  A close below that level has measured move to near 35, based on the 50% Fibonacci retracement.

XHB has resistance near 40.  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 30, 2018 from neutral (with a negative bias) (see area ‘A’ in the chart).

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

Once again, S&P sold off after the early rally attempt ran out of steam near the trend channel moving average.  In accordance to the Japanese candlestick pattern recognition, Monday’s massive bearish engulfing bar is a clear indication of buyers losing momentum.  Technically speaking, when this pattern formed after an upswing in the market, it can be an indication of a trend reversal.  Perhaps the lagging Money Flow measure, which peaked in November 2017 and printed series of lower highs as prices ascending, is the best illustration of the bears’ case.  Over the next few days, traders should monitor the retreat and rebound behaviors as last Wednesday’s breakout gap is tested as support.  That level roughly corresponds with the upper boundary of the green band, near 2640.  A close below that level has measured move to 2600.

Short-term trading range: 2600 to 2700.  S&P has minor support near 2640. A close below 2640 has measured move to 2600. The index has a strong band of resistance between 2686 and 2710.  A breakout above 2710 would trigger a new buy signal but for now it looks frim.

Long-term trading range: 2580 to 2830.  S&P has key support near 2580.  A close below that level will trigger a major sell signal with downside target near 2460. But it’s not expected next week.  The index has resistance near 2700.  A sustain advance above that level could trigger acceleration toward the March high but for now it looks firm.

In summary, Monday’s massive bearish engulfing bar suggested that suggested that S&P is at or very close to a significant short-term top. Near-term risk is to the downside.  Traders should consider buying downside protection on winning positions.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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