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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday May 30, 2018.

We’ve noted in the previous Market Outlook that: “S&P is trapped within narrow trading range as we’re heading into the end of the month.  Technical pressures are building up as the market dances its way into an increasingly tight trading range. S&P’s 2700 marks the inflection point.  A failure to hold above key level indicates a change in sentiment and a much deeper pullback should be expected.”  As anticipated, stocks sold off Tuesday amid political turmoil in Italy that sent the euro tumbling.  Also contributed to the overall pessimism is ongoing difficult trade talks with China.  The S&P fell below the important sentiment 2700 mark in early Tuesday session and traded as low as 2676.81 before buyers stepped in and pushed the market off the intraday low.  For the day, the bench mark gauge fell 1.16 percent to close at 2,689.86.  The Dow Jones industrial average fell 1.58 percent to finish at 24,361.45, while the Nasdaq composite fell 0.5 percent to finish at 7,396.59.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged 28.74 percent to close at 17.02.

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Concerns about a global credit blight and anemic interest rates appeared to weigh on financial stocks, sending shares of the nation’s largest banks tumbling. Goldman Sachs, J.P. Morgan, Citigroup, Morgan Stanley and Bank of America all lost more than 3 percent.  The Financial Select Sector SPDR ETF (XLF) fell 3.34 percent Tuesday, down 3.5 percent YTD.  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 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.  XLF moved down to test support at the 4-year moving average after the early May rally ran into resistance at the 20-week moving average.  Right now the most important to watch is trading behavior as the 26.90 level is retested as support.  A close below that level on a weekly basis has measured move to 24.70, based on the 38.2% Fibonacci retracement of the 2016-2018 upswing.

XLF has resistance near 28.30.  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 bearish.  Last changed May 25, 2018 from neutral (see area ‘A’ in the chart).

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

Key technical development in Tuesday session was a close below the important sentiment 2700 mark.  This is a negative development, suggesting that the 2-week flat flag, or sideways trading pattern had resolved itself into a new downswing.  Momentum indicator shifted lower from near overbought zone, suggesting further short-term weakness likely.  Money Flow measure has been trending lower over the past few days, indicating a weak net demand for stocks.  These elements suggested that the path with least resistance is to the downside.

However, let’s notice that Tuesday’s selloff pushed the S&P down to the 2-conjoining support near 2672, the trend channel moving average and the 2018 falling trend line.  That level was significant when the index climbed above it in early May.  It’s now acting as strong support. We’d turn particular bearish if the index closes twice below that level.

Short-term trading range: 2672 to 2700.  S&P has support near 2672.  A close below that level has measured move to the low 2600s.  The index has resistance near 2700.  A close above that level will invalidate Tuesday’s bearish signal.

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 broke key support Tuesday, signified the two-week flat flag had resolved itself into a new downswing.  Nevertheless, support is strong near 2672.  It will be important to monitor the retreat and rebound behaviors over the next few days to determine whether the breakdown is decisive.

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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