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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday July 12, 2018.

We’ve noted in the previous Market Outlook that: “S&P is at key technical juncture.  Current rally is testing formidable resistance at the important sentiment 2800 zone.  The longer the index stay below that level, the more vulnerable it is to lower prices.”  As anticipated, stocks closed lower Wednesday after the Trump administration published a list of 10 percent duties on $200 billion worth of Chinese goods.  For the day, the S&P dropped 0.7 percent to 2,774.02.  The Dow Jones Industrial Average fell 0.88 percent to 24,700.45.  The Nasdaq Composite declined 0.6 percent to close at 7,716.61.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped nearly 8 percent to 13.63.

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While escalation in trade tensions between the U.S. and China weighed on risk assets, areas of the market considered safer traded up on the day.  The Utilities Select Sector SPDR ETF (XLU), the so-called defensive sector, bucking the sharply negative tone of the overall market, up 0.90 percent to 52.49.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLU.

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 – Utilities Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLU bars in green (buy) – see area ‘A’ in the chart.  After plunging more than 20 percent from multi-year high in late 2017, XLU found support at the 4-year moving average.  The ETF had been range trade in between the 2-year and 4-year moving averages since early 2018.  The late June rally pushed the ETF above the 2-year moving average, signify a bullish breakout and upside reversal.  This is a positive development, opened up for a test of the late 2017 high, just above 57.

XLU has support near 51.  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 11, 2018 from bullish (see area ‘A’ in the chart).

[Note: for more details analysis, please take a look at our “US Market ETF Trading Map”]

S&P sold off after the late June oversold rally attempt ran out of steam near 2800, a key technical level. That level was tested several times over the past months.  Momentum indicator shifted lower from below overbought zone, suggesting further short-term weakness likely.  S&P has support near 2770-2750.  A failure to hold above that level will bring the 2750-2730 zone back into view.

Short-term trading range: 2730 to 2800.  S&P has minor support near 2770.  A close below that level has measured move to 2750-2730.  The index has resistance near 2800.  A close above that level would trigger acceleration toward the early 2018 high but it’s not expected this week.

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, our near-term work on price structure and momentum suggested strongly that the late June oversold relief rally has come to an end.  S&P’s 2750 is the line in the sand.  If the index fails to hold above it this week, then the next stop will be 2700 with the possibility of a brief breakdown below that level.

 

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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