S&P Shifted to Consolidation Mode

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday July 17, 2018.

We’ve noted in the previous Market Outlook that: “market is short-term overbought following recent advance. There could be a sell-off in the offing but it would be shallow if so.”  As anticipated, stocks closed mix Monday as traders digested a fresh batch of earning reports.  For the day, the S&P slipped 0.1 percent to 2,798.43.  The Nasdaq Composite closed 0.3 percent lower at 7,805.72.  The Dow Jones Industrial Average rose 0.18 percent to 25,064.36.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped 5.43 percent to 12.83.


One of the noteworthy developments in recent days has been the move in bank stocks.  The group attracted strong buying support Monday after Bank of America (BAC) reported better-than-expected earnings and revenue.  BAC shares rose 4.31 percent.  The SPDR S&P Bank ETF (KBE) gained 1.3 percent to 47.86.  Now the question is whether the rally has more legs?  Below is an update look at a trade in KBE.

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 – SPDR S&P Bank ETF (weekly)

Our “U.S. Market Trading Map” painted KBE bars in red (sell) – see area ‘A’ in the chart.  After a strong run of outperformance since late 2016, KBE peaked in early 2018 and rolled over.  The late June downswing is testing support at the 1-year moving average.  This level as tested several times over the past months.  Technically speaking, the more often support is tested the weaker it becomes.  In fact, trading actions over the past weeks merely represented an orderly low-level consolidation period in the aftermath prior to a new downswing.  KBE has support near 47.  We’d turn particular bearish if the ETF closes twice below that level.  A close below 47 has measured move to 42, based on the 38.2% Fibonacci retracement.

Resistance is just below 49.  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”]

The S&P consolidates near the important sentiment 2800 mark after crossed above that level last week.  Momentum indicator shifted lower from near overbought zone, indicating further short-term weakness likely.  These elements suggested that the S&P might have to move to a much lower level to attract new buyers.

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 shifted to consolidation mode after the late June’s recovery rally stalled at the important sentiment 2800 mark.  Momentum is not favorable over the near to intermediate term, suggesting that this is not a time to be long. What the bulls want to see is S&P stabilizes and climbs above 2800.  The longer the index stays below that level, the more vulnerable it is to lower prices.  This is the real danger in the current market.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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