S&P Broke Key Support but Follow-through May Await

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.


Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday June 28, 2018.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, the S&P ended the session off down 0.9% at 2,699.63 after the bench mark gauge touched an intraday high of 2,746.09.  Wednesday intraday reversal marked its largest blown lead since February.  The Dow Jones Industrial Average fell 0.7 percent to close at 24,117.59.  The Nasdaq composite tumbled 1.5 percent to 7,445.08.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, soared 12.50 percent to close at 17.91.


One of the noteworthy developments in recent days has been the move in Chinese tech stocks.  The group has been under selling pressure as trade-related worries have created anxieties among traders.  After a strong run of outperformance that saw the Invesco China Technology ETF (CQQQ) surged nearly 72 percent in 2017, the ETF fell for three straight day, tumbled 4.5 percent Wednesday to 54.04, down nearly 11 percent YTD.  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 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. Alter a strong run of outperformance since 2015, CQQQ peaked in late 2017 and traded within the 55-67 trading range.  This week’s massive selloff pushed the ETF below the lower boundary of its 7-month sideways trading range, signify a bearish breakout.  This is a negative development and opened up for a test of the more significant support at the 38.2% Fibonacci retracement, near 51.

Resistance is strong near 59.  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”]

Key technical development in Wednesday was a close below the trend channel moving average.  That level was significant when the index climbed above it in May.  This is a negative development, signify a bearish reversal.  Money Flow measure whipsaws around the zero line as market sold off, suggesting that the bears are more aggressive as prices off than the bulls were as prices ascended. Nevertheless, the market is short-term oversold following recent selloff.  This could help putting a short-term floor under the market.  Right now follow-through is the key.  A close below 2700 tomorrow will bring the February-April rising trend line, around 2670, into view.

Short-term trading range: 2670 to 2716.  S&P has support near 2700.  Below it, a more significant support lies at 2670.  A close below 2670 on a weekly basis has measured move to 2500.  The index has resistance near 2716.  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, S&P broke key support Wednesday, signify a bearish trend reversal with downside target near 2670.  Nevertheless, it will be important to monitor the retreat and rebound behaviors over the next few days to determine whether breakouts are decisive.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

© All rights reserved and actively enforced.
Note: This is a free edition of The Market Outlook, a daily CEM News subscriber newsletter. To get this column before market opens together with hundreds of technical trading ideas (including stocks and ETFs) every month, please click here.
Subscribe to CEM News to receive more in-depth research from Capital Essence.