S&P in High-level Consolidation Period

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday May 21, 2018.

We’ve noted in the previous Market Outlook that: “market is in holding pattern as traders are watching to see whether or not the S&P can close the week above 2700.  A failure to hold 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.”  As anticipated, the S&P closed lower on Friday as tensions between the U.S. and China weighed on trading sentiment.  For the day, the bench mark gauge fell 0.3 percent to 2,712.97.  The Nasdaq composite declined 0.4 percent to 7,354.34. The Dow Jones industrial average bucked the negative trend, closing just above the flat line at 24,715.09.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 0.07 percent to close at 13.42.


One of the noteworthy developments in recent days has been the move in financials.  The group was under selling pressure as long-term rates slipped back after recent gains.  The benchmark 10-year note yield closed at 3.06 percent after climbed to the highest level since 2011.  The Financial Select Sector SPDR ETF (XLF) dropped 0.82% to 27.95, bringing its MTD gains down to just 1.8 percent, slightly underperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLF.

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 – Financial Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLF 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 2018.  The late March selloff tested and found support near the 4-year moving average.  The early May rally pushed the ETF up against the 20-week moving average.  Last week’s selloff suggested that the resistance would hold.  Over the next few weeks, traders should monitor trading behavior as the 4-year moving average, near 26.80, is retested.  A close below that level indicates that the 2-month bearish flag pattern has resolved itself into a new downswing with initial target just below 25, based on the 38.2% Fibonacci retracement of the 2016 to 2018 upswing.

XLF has resistance near 28.40.  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 bearish.  Last changed May 18, 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”]

Looking at the nine-month daily chart of the S&P, we can see that there is currently a consolidation near the lower boundary of the pink band. That level was tested several times over the past months.  Momentum indicator shifted lower from near overbought zone, indicating an internal weakness.  Nevertheless, Money Flow measure is above the zero line, indicating a positive net demand for stocks.  This could put a short-term floor under the market.  Right now the most important thing to watch is trading behavior near 2750.  A close above that level on a weekly basis would trigger acceleration toward the March highs, near 2800.  The important sentiment 2700 mark represents key support.  We’d turn particular bearish if the index closes twice below that level.

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 2677, into view.  The index has resistance near 2750.  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, trading actions over the past few days represented an orderly high-level consolidation period in the aftermath of the early May massive rally.  The S&P is trapped within the 2700 to 2750 narrow range.  While several short-term indicators are pointing toward a fading trend, positive trading sentiment could help minimize downside risk.  S&P’s 2700 marks the inflection point.  We’d turn particular bearish if the index closes twice below that level.  A failure to hold above that level indicates a change in sentiment and a much deeper pullback should be expected.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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