Not Time to Be Long

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday June 27, 2018.

We’ve noted in the previous Market Outlook that: “Money Flow measure and momentum had been deteriorated as S&P moved down to test support at the 2700 zone.  Nevertheless, this area is too big and too important to fall quickly so it should not be surprising to see some backings and fillings in the coming days.”  As anticipated, stocks closed slightly higher Tuesday, regained some of Monday’s massive lost.  For the day, the Dow Jones Industrial Average rose 0.12 percent to close at 24,283.11. The S&P gained 0.2 percent and ended at 2,723.06. The Nasdaq composite advanced 0.4 percent to 7,561.63.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 8.14 percent to close at 15.92.


One of the noteworthy developments in recent days has been the move in financials.  The Financial Select Sector SPDR Fund (XLF) fell for a 12th straight session on Tuesday, extending what had already been its longest such streak on record, down 0.3 percent to close at 26.69, its lowest close since November 2017.  Now the question is whether the recent selloff is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in XLF.

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 – Financial Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLF bars in red (sell) – see area ‘A’ in the chart. Alter a strong run of outperformance since early 2016, XLF peaked in late January 2018 and rolled over.  Over the past few weeks, XLF had been basing sideways using the 1-year moving average as support.  This week’s massive selloff pushed the ETF below the moving, signify a bearish breakout.  This is a bearish development, increased the probability for a test of the more significant support at the 38.2% Fibonacci retracement, just below 25.

Resistance is strong near 27.20.  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 bearish.  Last changed June 25, 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”]

Over the past few days, S&P had been trending lower in a short-term corrective mode after the May recovery rally ran out of steam near the February-March highs.  The correction is testing support at the trend channel moving average.  This level was tested several over the past months.  Technically speaking, the more often support is tested the weaker it becomes.  Adding to concerns is the lagging Money Flow measure.  The indicator whipsaw near zero line as market sold off, suggesting that the bears are more aggressive as prices off than the bulls were as prices ascended.  These elements suggested that the support might not hold for long and the index will have to move to a much lower level to attract new buyers.  A close below 2700 on a weekly basis will confirm this.

Short-term trading range: 2700 to 2760.  S&P has minor support near 2716.  Below it, a more significant support lies at 2700.  This creates a strong band of support between 2716 and 2700.  A close below 2700 has measured move to 2665.  The index has resistance near 2760.  If the market is going to find a bottom in the near term, we want to see the S&P climbs above that level. The longer the index stays below that level, the more vulnerable it is to lower prices.

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, this week’s selloff pushed the S&P down to formidable support zone.  Momentum and Money Flow measure are not favorable over the near to intermediate term, suggesting the support might not hold for long.  With that said, this is not a time to be long. If the market is going to find a bottom in the near term, we want to see the S&P stabilizes and climbs above 2760.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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