Market Internal Deteriorated as S&P Tested Key Support

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday June 20, 2018.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, the S&P tumbled out of gate, traded as low as 2,743.19 as Donald Trump’s latest threat to China triggered a global stocks selloff.  The bench mark gauge however, managed to overcome the early weakness and closed off the intraday low.  For the day, the S&P dropped 0.4 percent to 2,762.45.  The Dow Jones industrial average fell 1.15 percent  to close at 24,700.21. The Nasdaq composite closed 0.3 percent lower at 7,725.59.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped 8.45 percent to close at 13.35.


One of the noteworthy developments in recent days has been the move in Chinese equity markets.  Shanghai and Shenzhen tumbled 3.8% and 5.8% respectively after Donald Trump asked the U.S. Trade Representative to identify $200B worth of Chinese products that will be subject to additional tariffs of 10%.  As such, the Invesco China Technology ETF (CQQQ) fell 2.95 percent Tuesday, down 3 percent YTD.  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 CQQQ.

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 – Invesco China Technology ETF (weekly)

Our “U.S. Market Trading Map” painted CQQQ bars in red (sell) – see area ‘A’ in the chart. After a strong run of outperformance since early 2017, CQQQ peaked in late 2017 and printed a bearish series of lower lows and lower highs.  This week’s massive selloff pushed the ETF slightly below the 1-year moving average, the level that offered support since CQQQ broke out in early 2017.  This is a bearish development, suggesting that the ETF might have to move to a much lower level to attract new buyers.  A close below 59 on a weekly basis will confirm this and a test of the more significant support near the 50 zone should be expected.

CQQQ has resistance near 62.  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 June 19, 2018 from slightly 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 down to test support at the lower boundary of the pink band after climbed above that level in early June.  Momentum indicator trended lower from near overbought zone, suggesting further short-term weakness likely.  Money Flow measure fell below the zero line, indicating a negative net demand for stocks.  In fact, the early June high made a bearish divergence as price made a higher high and Money Flow measure a lower low.  This is a negative development, suggesting smart money is leaving the bullish band wagon.  2750 is the line in the sand.  A close below that level signify a bearish trend shift and a test of the trend channel moving average, near 2700, should be expected.

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, market internals deteriorated as S&P tests key support.  The index could signal a downward trajectory, depending on how it closes over the next few days.  Key support is defined by the lower boundary of the pink band, around 2750.  If it closes below that level, the next leg is likely lower, and we’re looking at 2700.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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