S&P in Short-term Overbought Correction

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday July 27, 2018.

We’ve noted in the previous Market Outlook that: “the fact that market is overbought as the S&P poked its head into the level that had been successful in repelling price action in the past suggesting that a short-term correction could be in the wings.”  As anticipated, S&P fell 0.3 percent to close at 2,837.44 Thursday, led by a steep decline in Facebook shares.  The Nasdaq Composite dropped 1 percent to finish at 7,852.18 while the Dow Jones Industrial Average rose 0.44 percent to 25,527.07.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 1.22 percent to close at 12.14.


One of the noteworthy developments in recent days has been the move in consumer discretionary.  The group was under selling pressure in recent days following Netflix Inc. (NFLX) disappointing second-quarter earnings reports.  The Consumer Discretionary Select Sector SPDR ETF (XLY) fell 0.5 percent to 111.93, bringing its YTD gains down to just over 13 percent, outperformed the S&P by a wide margin.  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 XLY.

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 – Consumer Discretionary Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLY bars in red (sell) – see area ‘A’ in the chart.  After a strong run of outperformance since early April, XLY peaked in early July and rolled over.  Trading actions over the past couple of weeks represented an orderly high level consolidation.  Over the next few weeks, traders should monitor trading behavior as 107.80 is tested as support.  A close below that level will invalidate the early June bullish breakout signal and a trigger a new sell signal with downside target near 100, based on the 23.6% Fibonacci retracement of the 2016-2018 upswing and the 1-year moving average.

XLY has resistance just above 113.  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.  Last changed July 23, 2018 from slightly bearish (see area ‘A’ in the chart).

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

As expected, S&P retreated after a test of resistance at the red band was met with a new wave of selling interest.  Momentum indicator shifted lower from overbought zone, suggesting further short-term weakness likely.  Money Flow measure however, still above the zero line, indicating a positive net demand for stocks.  This could help putting a short-term floor under the market.  With this in mind, we’d look to increase upside exposure into short-term market dips.

Short-term trading range: 2780 to 2850.  S&P has support near 2820-2810.  A failure to hold above that level has measured move to around 2780.  The index has resistance near 2850, or the upper boundary of its short-term trading range.  A trade above that often precursor to a meaningful downside correction.

Long-term trading range: 2760 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, based upon recent trading action, the S&P is in a short-term overbought condition.  Although seemingly vulnerable to further short-term weakness, the overall technical backdrop remains positive so pullback should be shallowed and quick.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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