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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday June 1, 2018.

Stocks fell on Thursday after President Donald Trump slapped tariffs on the European Union, Mexico and Canada, sparking trade war fears.  For the day, Dow Jones industrial average dropped 1.02 percent to close at 24,415.84. The S&P declined 0.7 percent to 2,705.27. The Nasdaq composite gave up 0.3 percent to 7,442.12.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 3.28 percent to close at 15.43.

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Consumer staples stocks got hit hard Thursday as the sector is considered most sensitive to higher costs that likely would ensue from Trump’s tariffs on steel and aluminum imports from EU, Canada and Mexico.  The Consumer Staples Select Sector SPDR ETF (XLP) fell 1.6 percent to 49.66, down more than 12 percent YTD.  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.  Over the past few weeks, XLP has been basing sideways using the 23.6% Fibonacci retracement of the 2009 to 2018 major upswing as support.  There is a distinct possibility that a bearish flag formation is currently setting up in the weekly chart of XLP, which represents the digestion period in the aftermath of the early February 2018 massive selloff.  A sustain break below 48.70 will push the ETF out of recent trading range and trigger a new sell signal that has measured move to 44, based on the 38.2% % Fibonacci retracement.

XLP has resistance near 51.  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 bearish.  Last changed May 31, 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”].

S&P continues basing sideways near the lower boundary of the pink band.  That level acted as launching pad throughout 2017. It was significant when the S&P fell below it in early February.  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 flashed a bearish signal as it crossed below the zero line on Thursday, indicating a negative net demand for stocks.  This is a bearish development, suggesting that the index might have to move to a much lower level to attract new buyers.  S&P’s 2700 is the line in the sand.  A close below that level will bring the trend channel moving average, currently at 2672, 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, market is in holding pattern as traders are watching to see whether or not the S&P can hold above 2700.  Money Flow measure and momentum had been deteriorated, suggesting that the support might not hold for long.  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.

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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