S&P Cleared Key Resistance but Upside to be Limited

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday July 16, 2018.

Stocks closed higher Friday as traders digested the latest batch of mix earning reports.  For the day, the S&P climbed 0.1 percent to 2,801.31.  The Dow Jones Industrial Average rose 0.38 percent to 25,019.41. The Nasdaq Composite added just 0.03 percent to close at 7,825.98.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 3 percent to 12.18.


One of the noteworthy developments in recent days has been the move in emerging markets, which were under tremendous selling pressure as investors worry that a tit-for-tat global trade spat between the U.S. and trading partners in China, Europe, Canada and Mexico could morph into a full-blow trade war, with the potential to dent global economic growth.  After surging more than 34 percent in 2017, the iShares MSCI Emerging Markets ETF (EEM) tumbled nearly 7 percent YTD.  Now the question is whether recent selloff is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in EEM.

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 MSCI Emerging Markets ETF (weekly)

Our “U.S. Market Trading Map” painted EEM bars in red (sell) – see area ‘A’ in the chart.  After a strong run of outperformance since early 2016, EEM peaked in early 2018 and rolled over.  The early June massive selloff pushed the ETF below the 1-year moving average and down to the 38.2% Fibonacci retracement of the 2016-2018 upswing.  Last week’s upside follow-through confirmed the early July bullish reversal bar.  Nevertheless, trading actions over the past weeks merely represented an orderly low-level consolidation period in the aftermath prior to a new downswing.

EEM has support near 42.50.  A close below that level has measured move to just below 40, based on the 50% Fibonacci retracement and the 4-year moving average.  Resistance is just above 46.  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 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”]

Key technical development in Friday session was a close above the important sentiment 2800 mark.  That level was significant when the S&P tested and failed in February, March and June.  The bullish breakout would be confirmed on another close above 2800 this week, which would support upside follow-through and a test of more important resistance in the 2870 area in the coming weeks.  Nevertheless, S&P is short-term overbought follow recent advance so it should not be surprising to see backing and filling prior to the new upswing.

Short-term trading range: 2740 to 2810.  S&P has minor support near 2790.  A failure to hold above that level has measured move to 2750.  The index has resistance near 2811, based on the lower boundary of the red band.  A close above that level would trigger acceleration toward the early 2018 high.

Long-term trading range: 2660 to 2860.  S&P has support near 2760.  A close below that level will trigger a major sell signal with an initial downside target near 2660.  The index has resistance near 2860.

In summary, S&P cleared key resistance, breaking out from a 6-month sideways trading range.  Consecutive close above 2800 this week would signify a breakout and bullish reversal, supporting upside follow-through in the weeks ahead.  However, market is short-term overbought following recent advance. There could be a sell-off in the offing but it would be shallow if so.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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