S&P Vulnerable to some Downside Retracement

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday May 15, 2018.

We’ve noted in the previous Market Outlook that: “S&P has confirmed a breakout above key resistance in a reflection of improved momentums.  Market internals remain supportive of further upside follow-through.  So it seems to us that the rally can be sustained for a few days, potentially allowing for a test of 2750-2800 before a significant pullback unfolds.”  As anticipated, stocks traded higher in early Monday session that saw the S&P traded as high as 2,742.10 before sellers stepped in and pushed prices off the intraday low.  For the day, the bench mark gauge gained 0.1 percent to close at 2,730.13.  The Dow Jones industrial average rose 0.27 percent to close at 24,899.41. The Nasdaq composite advanced 0.1 percent and finished at 7,411.32.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 2.21 percent to close at 12.93.


One of the noteworthy developments in recent days has been the move in frontier markets.  The iShares MSCI Frontier 100 ETF (FM) has been under selling pressure amid an intense appreciation in the US dollar.  Also contributed to the overall weakness was a tighter financial conditions around the globe.  The ETF fell 0.3 percent Monday, down 4.3 percent MTD, underperformed the S&P by a wide margin.  Now the question is whether the recent selloff is a beginning of an end or there’re more pains ahead?  Below is an update look at a trade in FM.

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 Frontier 100 ETF (weekly)

Our “U.S. Market Trading Map” painted FM 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 late January 2018.   The April selloff pushed the ETF below the 4-year moving average, breaking an important support.  This week downside follow-through confirmed the bearish breakout and opened the flood gate toward the 38.2% Fibonacci retracement, around 30.60.  A close below that level had measured move to around 29, based on the 50% Fibonacci retracement.

FM has resistance near 33.  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 neutral.  Last changed May 10, 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 index moved up to test resistance at the lower boundary of the pink band after breaking out above the trend channel moving average last week.  In accordance to the Japanese candlestick pattern recognition, Monday’s narrow range 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.  Although a single bar does not form a trend so this is not a call for a top, rather it is a warning signal, a sign in which the market is telling us that it is ready for a pause.

While seemingly vulnerable to a short-term pullback consolidation, Money Flow measure is still above the zero line, indicating a positive net demand for stocks.  This could help putting a short-term floor under the market.

Short-term trading range: 2700 to 2750.  S&P has support near 2700. A close below that level will bring the trend channel moving average, around 2678, into view.  The index has immediate resistance near 2740.  A close above that level would trigger acceleration toward the March highs.

Long-term trading range: 2500 to 2870.  S&P has key support near 2600.  A close below that level will trigger a major sell signal with downside target near 2500. But it’s not expected this week.  The index has resistance just above 2700.  A sustain advance above that level could trigger acceleration toward the early 2018 highs but for now it looks firm.

In summary, S&P is testing key resistance near 2740.  A failure to climb above key price level means that long-term buying pressure has finally been exhausted.  On balance, we remain near term neutral/negative for S&P as we believe market vulnerable to some downside retracement over the short-to-intermediate term.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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