S&P Vulnerable to Downside Retracement as Bulls are Losing Control of the Market

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday July 2, 2018.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks traded higher in early Friday session that saw the S&P traded as high as 2,743 but a late-session sell-off in bank shares knocked the bench mark gauge from its high.  For the day, the S&P gained 0.1 percent to close at 2,718.37.  The Dow Jones Industrial Average rose 0.23 percent to 24,271.41.  The Nasdaq composite also advanced 0.1 percent to 7,510.30.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 4.51 percent to close at 16.09.


Oil prices rose on Friday as U.S. sanctions against Iran threatened to remove a substantial volume of crude from world markets at a time of rising global demand.  During the final week of the second quarter of 2018 NYMEX crude oil rallied and moved to the highest price since November 2014.  U.S. West Texas Intermediate (WTI) crude ended Friday’s session up 70 cents, or 1 percent, at $74.15.  As such, the Invesco DB Commodity Index Tracking Fund (DBC) rose 1.14 percent to 17.68, up 6.4 percent YTD.  Now the question is whether the rally has more legs?  Below is an update look at a trade in DBC.

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 DB Commodity Index Tracking Fund (weekly)

Our “U.S. Market Trading Map” painted DBC bars in green (buy) – see area ‘A’ in the chart.  Over the past few weeks, DBC has been trending lower in a short-term corrective mode as the 2017 recovery rally ran out of steam near the 2015 highs.  The late May selloff tested and respected support at the 2017 rising trend line.  That level roughly corresponds with the 23.6% Fibonacci retracement of the 2016-2018 upswing.  Last week’s massive bullish engulfing bar is a clear indication of demand overwhelming supply.  This is a short-term positive development, opened up for a retest of the early 2018 high, around 18.40.  That level is significant in charting terms. A sustain advance above that level would trigger acceleration toward the next level of resistance, near 20.40.

Support is strong near 17.  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”]

The big picture remains the same.  There is currently a test of support at the trend channel moving average after the May rally ran out of steam near the February-March highs.  Momentum indicator trended higher from near oversold zone, suggesting further short-term gains likely.  Nevertheless, the lagging Money Flow measure suggested that the bears are more aggressive as prices dropped than the bulls were as prices ascended.  These elements suggested that the S&P might have to move to a much lower level to attract near buyers as soon as the market worked off short-term oversold conditions.

Short-term trading range: 2700 to 2753.  S&P has support near 2717.  Below it, a more significant support lies at 2700.  This creates a strong band of support between 2717 and 2700.  A close below 2700 on a weekly basis has measured move to 2640.  The index has resistance near 2753.  A close above that level would trigger acceleration toward the 2800 zone.

Long-term trading range: 2640 to 2840.  S&P has support near 2640.  A close below that level will trigger a major sell signal with an initial downside target near 2500.  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, there is currently a test of support at the trend channel moving average after the May rally ran out of steam near the important sentiment 2800 mark.  Nevertheless, the fact that the S&P is basing sideways as market worked off short-term oversold conditions, suggested that the bulls are losing control and that market is vulnerable to further downside retracement.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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