S&P Entered High Volatility Phase

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday July 30, 2018.

We’ve noted in the previous Market Outlook that: “based upon recent trading action, the S&P is in a short-term overbought correction.  Although seemingly vulnerable to further short-term weakness, the overall technical backdrop remains positive so pullback should be shallowed and quick.”  As anticipated, stocks fell on Friday as poor earnings from Intel and Twitter trumped a strong growth reading for the economy.  For the day, the S&P fell 0.7 percent to 2,818.82.  The Dow Jones Industrial Average declined 0.30 percent to close at 25,451.06.  The Nasdaq Composite dropped 1.46 percent to 7,737.42.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped 7.33 percent to close at 13.03.


One of the noteworthy developments in recent days has been the move in tech stocks.  The group posted their second straight day of steep losses. On Thursday, the sector dropped more than 1.5 percent as Facebook (FB) posted its worst day ever. Shares of Intel (INTC) and Twitter (TWTR) dragged the sector lower on Friday, falling 8.59 percent and 20.54 percent respectively after the release of their latest quarterly results.  The Technology Select Sector SPDR ETF (XLK) fell 1.7 percent Friday, bringing its YTD gains down to 12.4 percent.  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 XLK.

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 – Technology Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLK bars in red (sell) – see area ‘A’ in the chart.  After a strong run of outperformance since early 2016, XLK climbed above 74 before seller stepped in and pushed prices lower.  In accordance to the Japanese candlestick pattern recognition, last week’s massive bearish shooting star is a clear indication of supply overwhelming demand.  Right now follow-through is the key.  A close below 71.40 will confirm the bearish signal and a test of the late June low, around 69, should follow shortly.  A close below 69 has measured move to 65-58, based on the 1-year moving average and the 23.6% Fibonacci retracement of the 2016-2018 upswing.

XLK has resistance just above 74.  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 bearish.  Last changed July 27, 2018 from slightly bullish (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 sold off sharply after a test of the massive 2-conjoining resistance near 2850, or the late January massive breakdown gap and the lower boundary of the red band was met with a new wave of selling interest.  Momentum indicator trended lower from overbought zone, suggesting further short-term weakness likely.  Money Flow measure has been deteriorated but still above the zero line, indicating a weak net demand for stocks.  Right now, 2800 is the line in the sand. A close below that level would see a massive pickup in volatility.

Short-term trading range: 2760 to 2850.  S&P has support near 2800.  A failure to hold above that level has measured move to around 2760, based on the trend channel moving average.  The index has resistance near 2850.  A close above that level will trigger acceleration toward the January highs.

Long-term trading range: 2770 to 2870.  S&P has long-term support near 2770.  A close below that level will trigger a major sell signal with a downside target near 2670.  The index has resistance near 2860.

In summary, Money Flow measure and momentum had been deteriorated as S&P worked off overbought conditions.  We expect increase in near-term volatility as the index tests support at the 2800 zone. This area is too big and too important to fall quickly so it should not be surprising to see some backings and fillings in the coming days.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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