S&P at Risk of Major Correction

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday June 22, 2018.

We’ve noted in the previous Market Outlook that: “the ability of the S&P to hold up above 2750 is impressive.  Nevertheless, we would not rule out a brief dip below this level as momentum remains weak and oversold conditions appear likely to expand before a tradable low is established.”  As anticipated, fell on Thursday as fears of an impending trade war between the U.S. and China dragged the market lower.  The S&P declined 0.6 percent to 2,749.76.  The Dow Jones industrial average dropped 0.80 percent to 24,461.70.  The Nasdaq composite pulled back 0.9 percent to 7,712.95.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, soared 14.46 percent to close at 14.64.


One of the noteworthy developments in recent days has been the move in Emerging Markets.  Hurt by the double whammy of a hawkish Fed and trade war fears between the United States and China, emerging market went into a tailspin lately.  The iShares MSCI Emerging Markets ETF (EEM) fell 1.4 percent Thursday, bringing its YTD lost up 7.8 percent, underperformed 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 BJK.

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 – iShares MSCI Emerging Markets ETF (weekly)

Our “U.S. Market Trading Map” painted EEM bars in red (sell) – see area ‘A’ in the chart. After a strong run of outperformance since early 2016, EEM peaked in early 2018 and trended lower.  The early June selloff pushed EEM below the 4-year moving average, the level that offered strong support since the ETF reached an interim low in early 2016.  This week’s downside follow-through confirmed last week’s bearish break.  Right now, the most important thing to watch is trading behavior as the 38.2% Fibonacci retracement, just below 43, is tested as support.  A close below that level on a weekly basis has measured move to 40-37, based on the 50% and 61.8% Fibonacci retracements.

EEM has resistance near 46.  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 20, 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”]

Key technical development in Thursday session was a close below the lower boundary of the pink band – the level that offered support since the index broke out in early June.  This is a negative development, signify a bearish reversal.  Momentum indicator trended lower from near overbought zone, another sign that upward pressure has been abated.  While seemingly vulnerable to further short-term weakness, support is strong near the low 2700s zone so it should not be surprising to see the index regroup and rebound from that level.

Short-term trading range: 2700 to 2755.  S&P has support near the low 2700s.  A close below that level has measured move to around 2630, based the February-April rising trend line.  The index has resistance near 2755.  A close above that level will invalidate Thursday’s bearish signal.

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, with the S&P breaking the support level of 2750, the breach targets a likely test of the 2713-2700 zone.  If the index fails to attract new buyers then the next stop will be 2630 with the possibility of a major correction to 2500 by late summer.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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