Triangle Formation in S&P

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 May 3, 2018.

We’ve noted in the previous Market Outlook that: “while the April recovery rally appeared to have run out of steam, the short-term uptrend pressure remains up and the charts are still building on encouraging formations. Though there just isn’t enough bullish power to fuel a significant push upward from here. With all that said, the market needs some sorts of positive catalysts and a good consolidation to build up the needed energy for a new leg higher.”  As anticipated, stocks initially popped after the FED made its announcement on monetary policy that saw the S&P traded as high as 2,660.87 before sellers stepped in and pushed prices lower.  For the day, the bench mark gauge fell 0.7 percent to 2,635.67.  The Dow Jones industrial average fell 0.72 percent to close at 23,924.98.  The Nasdaq composite dropped 0.4 percent to close at 7,100.90.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 3.10 percent to close at 15.97.


One of the noteworthy developments in recent days has been the move in consumer staples.  Defensive names along with higher dividend yields have fallen out of favor in 2018 as rising bonds yields makes them less attractive to investors, who can get a similar yield from bonds without the higher risk that comes with equities.  The Consumer Staples Select Sector SPDR ETF (XLP) is down nearly 14 percent YTD, underperformed the S&P by a wide margin.  Now the question is whether recent selloff is a beginning of an end or there’re more pains ahead?  Below is an update look at a trade in XLP.

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 – Consumer Staples Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLP 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 2009.  The second dominant feature of the chart is the downward trend since early February 2018.  The late April selloff pushed the ETF below the 4-year moving average.  The last time the ETF broke below that level was during the 2008 financial crisis.  This week’s massive selloff pushed XLP below the 23.6% Fibonacci retracement of the 2009-2018 major upswing.   Technically speaking, when strong supports broken it means that near-term buying pressure has finally been exhausted and that the ETF might have to move to a much lower level to attract new buyers.  We’d turn particular bearish if XLP closes twice below 50.   Next support is at the 38.2% Fibonacci retracement, around 44.

XLP has resistance near 51.50.  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 slightly bearish.  Last changed May 2, 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”]

Following the February 2016 to January 2018 massive rally that saw the S&P gained more than 1000 points, the bench mark gauge has been coiled into a tight trading range as it worked off excessive optimism. Over the next few days, traders should monitor trading behavior as the important sentiment 2600 mark is tested as support.  A close below that level has measured move to 2550-2530, or the February-April lows.  The bearish perspective is that a close the February lows signify that the 2018 massive tringle pattern has resolved itself into a new downswing that projects to 2500 at minimum but with an overshot target near 2200.

Short-term trading range: 2600 to 2700.  S&P has support near 2600. A close below 2600 has measured move to 2550-2530. The index has a strong band of resistance between 2650 and 2710.  A breakout above 2710 would trigger a new buy signal but for now it looks frim.

Long-term trading range: 2480 to 2710.  S&P has key support near 2600.  A close below that level will trigger a major sell signal with downside target near 2480. But it’s not expected this 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, there is a distinct possibility that a massive triangle pattern is currently setting up in the daily chart of the S&P.  There is a high probability of a period of consolidation activity between S&P’s 2600 and 2700 that may last several days.  This consolidation band provides a rally and retreat trading environment for traders.  However, market is volatile and tight stops are advisable.

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.