S&P Remains Constrained by Short-term Sideways Trend

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday July 3, 2018.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks fell sharply earlier in early Monday session that saw the S&P traded as low as 2,698, down nearly 1 percent, as Wall Street grew even more worried about the spat between the U.S. and its key trade partners.  The market however, managed to overcome the early weakness and closed higher.  For the day, the S&P edged up by 0.31 percent to 2,726.71.  The Dow Jones Industrial Average rose 0.15 percent to close at 24,307.18 and the Nasdaq composite outperformed, advancing 0.76 percent to finish at 7,567.69.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 3.05 percent to close at 15.60.


Chinese stocks fell sharply in recent days as traders grew even more worried about the spat between the U.S. and China.  A looming July 6 deadline is set to see the U.S. impose a 25 percent tariff on $34 billion worth of Chinese goods from more than 800 product categories. China has also announced that it will retaliate with duties on the same value of U.S. products.  The iShares China Large-Cap ETF (FXI) fell 2 percent Monday, down 8.8 percent YTD.  Now the question is whether recent selloff is a beginning of an end or there’re more pains ahead?  Below is an update look at a trade in FXI.

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 China Large-Cap ETF (weekly)

Our “U.S. Market Trading Map” painted FXI bars in red (sell) – see area ‘A’ in the chart.  After a strong run of outperformance since early 2016, FXI peaked in late January 2018 and rolled over.  The late June massive selloff took out the one-year moving average, indicating the 4-month flat flag had resolved itself into a new downswing.  This week selloff pushed FXI down to the 50% Fibonacci retracement of the 2016-2018 upswing.  That level is significant in charting terms.  It roughly corresponds with the 4-year moving average.  If Chinese market is going to find a bottom in the near term, we want to see FXI stabilizes near 40.50.  A close below that level has measured move to 38, based on the 61.8% Fibonacci retracement.

FXI has resistance near 44.  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 shifted to neutral.  Last changed July 2, 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”]

The S&P continues basing sideway near the trend channel moving average.  Momentum indicator trended higher from near oversold zone, allowing additional upside probing. Nevertheless, Money Flow measure whipsaws near the zero line, indicating a lack of commitments. It is no surprised that the bulls are having a difficult time pushing prices above the late June high, near 2750. For now, 2700 is the line in the sand.  A close below that level will trigger another selloff with initial downside target near 2650.

Short-term trading range: 2700 to 2750.  S&P has support near 2718.  Below it, a more significant support lies at 2700.  This creates a strong band of support between 2718 and 2700.  A close below 2700 on a weekly basis has measured move to 2650.  The index has resistance near 2750.  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, trading behavior in the S&P remains constrained by a short-term sideways pattern and shown little evidence of a sustainable change in trend.  2700 is the line in the sand.  A failure to hold above that level would trigger a new sell signal and an unwelcome pickup in downside volatility.


Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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