S&P in Early Stage of Distribution Phase

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday June 11, 2018.

We’ve noted in the previous Market Outlook that: “the fact that S&P is short-term overbought as it tested key price level that had been successful in repelling price action in the past does not favor a sustain breakout.”  As anticipated stocks traded lower in early Friday session amid increasing tensions between the U.S. and key trade partners that saw the S&P traded as low as 2,763.59 before buyers stepped in and pushed prices higher. For the day, the bench mark gauge added 0.3 percent to 2,779.03.  The Dow Jones industrial average rose 0.30 percent to 25,316.53. The Nasdaq composite added 0.1 percent higher at 7,645.51.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 0.41 percent to close at 12.18.


Defensive stocks were under tremendous selling pressure as the yield on the benchmark 10-year Treasury note inched higher to 2.94 percent.  Higher interest rates tend to make high-dividend yielders less attractive versus the relative stability of high-quality bonds.  The Utilities Select Sector SPDR ETF (XLU) fell 3 percent for the week, bringing its YTD lost to 7.6%, underperformed the S&P by a wide margin.  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 XLU.

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 – Utilities Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLU bars in red (sell) – see area ‘A’ in the chart. XLU has been trapped within the confines of the 2-year and 4-year moving averages after the late 2017 selloff found support near 47. In fact, trading actions over the past months represents an orderly low level consolidation period.  Last week’s selloff pushed the ETF down to support at the 4-year moving average, just above 48.  That level was tested in early 2018 as support.  Momentum has been deteriorated, suggesting the support might not hold for long.  A close below 48 has measured move to around 44, based on the 38.2% Fibonacci retracement of the 2009-2017 upswing.

XLU has resistance near 51.20.  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 continues drifting near the lower boundary of the red band.  Momentum indicator trended higher but it’s much closer to overbought zone.  This might put a cap on the upside.  Adding to concerns in the negative divergence on Money Flow measure, which peaked in mid-May and formed series of lower highs as prices ascending.  Technically speaking, trading pattern over the past few weeks exhibits characteristics of a distribution phase, the period in which smart money sell (distribute) their positions.  The distribution phase is a very emotional time for the markets, as investors are gripped by periods of complete fear interspersed with hope and even greed as the market may at times appear to be taking off again.  Prices can often stay locked in a trading range that can last a few weeks or even months.  With this in mind, we’d look a trim positions into overbought strength.

Short-term trading range: 2740 to 2800.  S&P has minor support near 2740.  A close below that level has measured move to 2700.  The index has resistance near 2800-2814, based on the late February and early March highs and the upper boundary of its short-term trading range.  The market had historically developed important near-term top around that level.

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, our work on price pattern and momentum suggested that S&P could be in an early stage of a distribution phase.  On balance, we’re cautiously optimistic on stocks over the short-term and look to trim positions into overbought strength.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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