S&P’s Held Support but Upside Gains to be Limited

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday May 31, 2018.

Stocks rebounded Wednesday as Italian credit fears eased.  For the day, the Dow Jones industrial average rose 1.26 percent to close at 24,667.78. The S&P added 1.27 percent to finish at 2,724.01.  The Nasdaq composite rose 0.89 percent to close at 7,462.45.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 12.22 percent to close at 14.94.

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After a strong run of outperformance from January 2016 lows to late January 2018 that saw the iShares MSCI Emerging Markets ETF (EEM) nearly doubling, the ETF has been under tremendous selling pressure in recent days, fell 2.6 percent MTD and down 3 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 EEM.

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 EEM bars in red (sell) – see area ‘A’ in the chart.  Over the past few weeks, EEM has been basing sideways using the 50-week moving average as support.  That level roughly corresponds with the 23.6% Fibonacci retracement.  It offered strong support since the ETF broke out in mid-2016.  Last week’s massive selloff pushed EEM below the 50-week moving average, signify a bearish breakout.  This week’s downside follow-through confirmed the bearish signal and opened up for a test of the 38.2% Fibonacci retracement, just below 43.  A close below that level has measured move to 40, based on the 50% Fibonacci retracement and the 4-year moving average.

EEM has resistance near 46.30.  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 shifted to neutral.  Last changed May 30, 2018 from bearish (see area ‘A’ in the chart).

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

S&P tested and bounced off support at the trend channel moving average.  That level roughly corresponds with the 2018 falling trend line.  Wednesday’s rally pushed the index back into the mid-May narrow trading range.  The big picture remains the same. There is a consolidation within the 2700-2750 trading range, which represents digestion period in the after math of the early May massive rally.  Money Flow measure has been deteriorated following recent selloff but still above the zero line, indicating a positive net demand for stocks.  2750 is the line in the sand.  A sustain breakout above that level will bring the March highs, near 2800, into view.

Short-term trading range: 2700 to 2750.  S&P has support near 2700.  A close below that level has measured move to 2672, based on the trend channel moving average.  The index has resistance near 2750.  A close above that level will bring the March highs, near 2800, into view.

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 tested and held support at the trend channel moving average but lagging Money Flow measure suggested that upside gains could be limited.  Recent trading actions leaving the S&P in what looks to us like a back-and-forth consolidation of the early May massive rally. Wednesday’s rebound pushed the index back into the multi-week narrow trading range. At some point the market will eventually breakout from the tight trading range.  That, if and when it happens, should be a fierce move.  And this is something traders need to look out for.

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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