Market Internals Weakened as S&P Tests Key Support

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.


Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday July 31, 2018.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks sold off sharply in earl y Monday session that saw the S&P briefly broke below the important sentiment 2800 mark before buyers stepped in and pushed prices off the intraday low.  For the day, the bench mark gauge declined 0.6 percent to 2,802.60.  The Dow Jones Industrial Average fell 0.57 percent to close at 25,306.83.  The tech-heavy Nasdaq Composite dropped 1.4 percent to 7,630.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped 9.44 percent to close at 14.26.


One of the noteworthy developments in recent days has been the move in large-cap tech stocks.  Shares of Facebook and Netflix fell 2.2 percent and 5.7 percent, respectively. Amazon declined 2.1 percent while Google-parent Alphabet fell 1.8 percent. The Invesco QQQ Trust Series I (QQQ) notched a three-day drop of 4.2 percent, the biggest lost since late April, 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 QQQ.

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 – Invesco QQQ Trust Series I (weekly)

Our “U.S. Market Trading Map” painted QQQ bars in red (sell) – see area ‘A’ in the chart.  After a strong run of outperformance since late June, QQQ peaked last week at 182.93 and rolled over.  This week’s downside follow-through confirmed last week’s bearish reversal signal.  This is a negative development, suggesting that the ETF might have to test support at the 20-week moving average, just below 170.  That level is significant in charting terms.  A close below it on a weekly basis will bring the 1-year moving average, just below 162, into view.

QQQ has resistance near 180.  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 slightly bearish.  Last changed July 30, 2018 from 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 moved down to test support at the lower boundary of the pink band after recent rally stalled near 2850, the late January massive breakdown gap and the lower boundary of the red band.  Momentum indicator trended lower from overbought zone, suggesting further short-term weakness likely.  Money Flow measure has been deteriorated and is on a verge of breaking below 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 and a test of the more important support near 2763, based on the trend channel moving average should be expected.

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, market internals had been weakened as S&P moved down to test support at the important sentiment 2800 mark.  The longer the index stays near 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)

© All rights reserved and actively enforced.
Note: This is a free edition of The Market Outlook, a daily CEM News subscriber newsletter. To get this column before market opens together with hundreds of technical trading ideas (including stocks and ETFs) every month, please click here.
Subscribe to CEM News to receive more in-depth research from Capital Essence.