S&P Breakouts Might Not Sustain

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.


Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday June 5, 2018.

We’ve noted in the previous Market Outlook that: “the big picture remains the same.  The S&P is trapped within a 50 points tight trading range, which represented the digestion period in the aftermath of the early May massive rally.  Near-term technical backdrop had been strengthened but does not appear strong enough to generate a widespread breakouts.”  As anticipated, stocks closed higher Monday but off intraday high with the S&P up 0.5 percent to 2,746.87.  The Dow Jones industrial average added 0.72 percent to 24,813.69.  The Nasdaq composite rose 0.7 percent to 7,606.46.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 5.35 percent to close at 12.74.


One of the noteworthy developments in recent days has been the move in retail stocks.  The group attracted strong buying support Monday that saw Walmart and Target rose 2.9 percent and 4.9 percent, respectively.  The SPDR S&P Retail ETF (XRT) jumped 2.2 percent, its biggest one-day gain since April 4, bringing its YTD gains up to 5.5 percent, outperformed the S&P by a wide margin.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XRT.

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 – SPDR S&P Retail ETF (weekly)

Our “U.S. Market Trading Map” painted XRT bars in green (buy) – see area ‘A’ in the chart. XRT has been on a tear in recent weeks after the February correction found support near the 4-year moving average.  The April rally pushed the ETF above the 20-week moving average, clearing an important hurdle.  Over the next few weeks, traders should monitor the rally and retreat behavior as the early 2018 highs is tested as resistance.  A close above 49 on a weekly basis signify a bullish reversal and upside breakout that has measured move to around 51.25, or the 2015 highs.

XRT has support near 45.50.  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 bullish.  Last changed June 1, 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 moved up to test resistance at the upper boundary of the multi-week narrow trading range, or flat flag, after recent pullback found support near 2700, or the lower boundary.  Momentum indicator shifted higher but it’s much closer to overbought than oversold zone.  Money Flow measure trend higher after briefly fell below the zero line last week.  Nevertheless, the indicator has been diverged from prices over the past weeks.  It’s printed a lower highs as prices ascended above the May peak, indicating less and less money are chasing this rally.  These elements will put a cap on the upside.

Right now the most important to watch is the rally and retreat behavior as the 2752 is tested as resistance. A failure to climb above key resistance suggested that most of the potential buyers at this level had already placed their bets.  The next batch of buyers typically sits at a much lower level.  Meanwhile, a sustain advance above 2752 signify that the May flat flag had resolved itself into a new upswing that projects to 2800 but has overshoot target near 2900.

Short-term trading range: 2700 to 2752.  S&P has support near 2700.  A close below that level has measured move to 2674, based on the trend channel moving average.  The index has resistance near 2752.  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, the fact that Money Flow measure held below the May peak as S&P moved up to test key price level does not favor a sustain break to the upside.  The index could signal an upward trajectory, depending on how it closes over the next few days.  Key resistance is around 2752.  If it closes twice above that level, the next leg is likely higher, and we’re looking at 2800.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

© All rights reserved and actively enforced.
Note: This is a free edition of The Market Outlook, a daily CEM News subscriber newsletter. To get this column before market opens together with hundreds of technical trading ideas (including stocks and ETFs) every month, please click here.
Subscribe to CEM News to receive more in-depth research from Capital Essence.