S&P in Short-term Corrective Mode

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday June 19, 2018.

We’ve noted in the previous Market Outlook that: “there is currently a test of support at the lower boundary of the pink band.  Momentum and Money Flow measure are not favorable over the near to intermediate term, suggesting that this is not a time to be long.”  As anticipated, the S&P closed lower but off intraday low as a potential trade war between the U.S. and China escalated.  For the day, the bench mark gauge fell 0.2 percent to 2,773.63.  The Dow Jones industrial average dropped 0.41 percent to close at 24,987.47.  The Nasdaq composite meanwhile, pared losses to close flat at 7,747.03.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 2.75 percent to close at 12.31.


One of the noteworthy developments in recent days has been the move in semiconductors.  Northland Capital Markets lowers its rating to underperform from market perform for Intel shares.  The firm predicts Intel’s sales growth in its data center segment will drop to 20 percent in its third quarter and fall to 11 percent in its fourth quarter.  The VanEck Vectors Semiconductor ETF (SMH) fell 1.21 percent to 108.97, bringing its YTD gains down to 11.40 percent, outperformed the S&P by a wide margin.  Now the question is whether recent pullback is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in SMH.

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 – VanEck Vectors Semiconductor ETF (weekly)

Our “U.S. Market Trading Map” painted SMH bars in red (sell) – see area ‘A’ in the chart. After a strong run of outperformance in early May, SMH peaked in early June and coiled into a tight trading range as it worked off overbought conditions.  Monday’s massive selloff pushed the ETF below the 20-day moving average, suggesting that the one week triangle pattern had resolved itself into a new downswing with initial downside target near 104.

SMH has resistance near 109.50.  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 slightly bearish.  Last changed June 15, 2018 from bullish (see area ‘A’ in the chart).

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

The big picture remains the same. There is currently a test of support at the lower boundary of the pink band.  That level was significant when the index climbed above it in early June.  Momentum trended lower from near overbought zone, suggesting further short-term weakness likely. Adding to concerns is the lagging Money Flow measure.  The indicator printed a series of lower highs as prices ascending, indicating an internal weakness.  These elements suggesting that the support might not hold for long and the S&P might have to move to a much lower level to attract new buyers.  While more backing and filling would not be a surprise, a close below 2750 would see a massive pickup in volatility.

Short-term trading range: 2750 to 2800.  S&P has minor support near 2750.  A close below that level has measured move to around 2700, based the trend channel moving average.  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, after the late May massive rally, stocks digested their gains in a consolidation phase that is giving way to a pullback in the S&P.  Support is strong in the 2750 area.  While more backing and filling would not be a surprise, a close below that level would see a massive pickup in volatility.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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