S&P in Narrow Trading Range

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday July 5, 2018.

We’ve noted in the previous Market Outlook that: “trading behavior in the S&P remains constrained by a short-term sideways pattern and shown little evidence of a sustainable change in trend.”  As anticipated, stocks traded higher in early Tuesday session before sellers stepped in and pushed prices lower.  For the day, the S&P fell 0.5 percent to 2,713.22.  The Dow Jones Industrial Average declined 0.54 percent  to close at 24,174.82. The Nasdaq composite pulled back 0.9 percent to 7,502.67.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 3.46 percent to close at 16.14.


Energy stocks caught a bid Tuesday after West Texas Intermediate oil futures broke above $75 per barrel for the first time since November 2014. The Energy Select Sector SPDR Fund (XLE) rose 0.4 [percent to 75.12, up 4 percent YTD.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLE.

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 – Energy Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLE bars in green (buy) – see area ‘A’ in the chart.  After a strong run of outperformance since early April, XLE peaked in late May and trended lower.  In fact, trading actions over the past few weeks represented orderly high-level consolidation period.  Right now the most important thing to watch is trading actions near 77.  A sustain breakout above that level indicates that the 2-month bullish flag pattern has resolved itself into a new upswing with initial upside target near 82, based on the 61.8% Fibonacci retracement of the 2014-2016 downswing.

XLE has support near 72.  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 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 big picture remains the same.  There is a consolidation near the trend channel moving average.  That level was significant when the S&P climbed above it in early May.  Momentum is flashing a weak bearish signal as it shifted lower from near oversold zone.  Money Flow measure whipsaws near the zero line, indicating a lack of commitments.  These elements suggested that the index might have to move to a much lower level to attract new buyers as soon as it works off oversold conditions. For now, 2700 is the line in the sand.  A close below that level will trigger another selloff with initial downside target near 2650. The upper limit of the one week sideways trading range, near 2750, represents key price level.  A close above that level could trigger acceleration toward 2800.

Short-term trading range: 2700 to 2750.  S&P has support near 2700.  A close below 2700 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, S&P is trapped within narrow trading range as traders await the Trump’s administration activates tariffs on Chinese goods worth around $34 billion on Friday, which is widely expected to trigger a tit-for-tat response from Beijing. Technical pressures are building up as the market dances its way into an increasingly tight trading range. S&P’s 2700 marks the inflection point.  A failure to hold above key level indicates a change in sentiment and a much deeper pullback should be expected.


Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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