S&P in Early Stage of Short-term Oversold Bounce

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday June 29, 2018.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks selloff in early Thursday session that saw the S&P traded as low as 2,691.99 before buyers stepped in and pushed prices higher. For the day, the bench mark gauge added 0.62 percent to close at 2,716.31.  The Dow Jones Industrial Average rose 0.41 percent to finish at 24,216.05. The Nasdaq composite finished up 0.79 percent at 7,503.68.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 5.92 percent to close at 16.85.


Transport stocks fell on Thursday, as supply concerns due to U.S. sanctions that could cause a large drop in crude exports from Iran helped fuel a rise in oil prices.  The United States this week demanded all countries halt imports of Iranian oil from November, a hardline position the Trump administration hopes will cut off funding to Tehran.  U.S. West Texas Intermediate (WTI) crude futures settled at $73.45 a barrel, up 0.95 percent. It reached $74.03 earlier in the session, highest since Nov. 26, 2014.   The selloff is weighing on the iShares Transportation Average ETF (IYT), which is down 0.26 percent on Thursday.  The ETF fell 3.2 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 IYT.

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 Transportation Average ETF (weekly)

Our “U.S. Market Trading Map” painted IYT bars in red (sell) – see area ‘A’ in the chart. Alter a strong run of outperformance since early 2016, IYT peaked in early 2018 and rolled over.  There is a distinct possibility that a bearish flag formation is currently setting up in the weekly chart of IYT, which represents the digestion period in the aftermath of the late January 2018 massive selloff.  This week’s massive selloff pushed the ETF down to support at the 1-year moving average, around 184.  That level is significant in charting terms.  It offered support since IYT breakout in 2016.  A close below that level suggests that the 4-month bearish flag had resolved itself into a new downswing with initial downside target near 171, or the 38.2% Fibonacci retracement of the 2016-2018 major upswing.

Resistance is strong near 195.  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”].

S&P moved up to test resistance at the trend channel moving average after falling below that level on Wednesday.  Momentum indicator shifted higher from near oversold zone, suggesting further short-term gains likely.  Nevertheless, the lagging Money Flow measure suggested the rally is merely a counter-trend move and the index might have to move to a much lower level to attract new buyers.  If the market is going to find a bottom in the near term, we want to see the S&P climbs above the trend channel moving average, currently at 2716.  2700 is the line in the sand.  A close below that level has measured move to 2670.

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, our near-term work on price structure and momentum suggested that the S&P is in an early stage of a short-term oversold bounce.  The index could signal an extended downward trajectory, depending on how they close over the next few days.  If the market is going to find a bottom in the near term, we want to see the S&P climbs above the trend channel moving average.  The last time the index broke below that level, it remained there for about couple of weeks.  If the S&P closes below 2700, it’ll go dramatically lower, and we’re looking at 2670-2600.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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