S&P Shifted to Low Level Consolidation Phase

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday August 1, 2018.

Stocks closed higher Tuesday after a report said the U.S. and China are seeking talks to defuse an escalating trade conflict between the two countries.  For the day, the Dow Jones Industrial Average rose 0.43 percent to close at 25,415.19. The S&P gained 0.5 percent to 2,816.29. The Nasdaq Composite advanced 0.6 percent to 7,671.79.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 10 percent to close at 12.83.


One of the noteworthy developments in recent days has been the move in Chinese tech stocks. The group slid to its lowest in more than a year following report that Donald Trump is willing to up the ante in the trade war with Beijing and could slap tariffs on every Chinese good imported to the U.S.  The Invesco China Technology ETF (CQQQ) fell 1.20 percent Tuesday to 53.70, down more than 11 percent YTD.  Now the question is whether recent selloff is a pause that refreshes or it’s a beginning of a new downswing?  Below is an update look at a trade in CQQQ.

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 China Technology ETF (weekly)

Our “U.S. Market Trading Map” painted CQQQ bars in red (sell) – see area ‘A’ in the chart.  After a strong run of outperformance since late 2015, CQQQ peaked in late 2017 and rolled over.  Over the past few weeks, CQQQ has been trending higher in a short-term corrective mode as it worked off oversold conditions.  The rally tested and failed at the 23.6% Fibonacci retracement.  This week’s downside follow-through confirmed last week’s bearish reversal signal.  Tuesday’s massive selloff pushed the ETF below the late June low, signify a bearish breakdown with downside target near 51, based on the 4-year moving average.

CQQQ has resistance near 57.  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 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”]

S&P bounced off support at the lower boundary of the pink band.  In fact, current trading pattern is very similar to the early June 2018.  After reached the most overbought level since late January, S&P retreated as traders justify the underlying valuations.  As you can see in the above chart, the index formed a significant short-term high near the lower boundary of the red band and traded lower throughout the following weeks.  With that said, if history is any guidance then traders should expect at least a test of support at the trend channel moving average, currently at 2765.

Short-term trading range: 2790 to 2825.  S&P has support near 2790.  A failure to hold above that level has measured move to around 2765, based on the trend channel moving average.  The index has resistance near 2825.  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, recent trading actions represented an orderly low-level consolidation period in the aftermath of last week’s massive reversal.  We’d turn particular bearish if the S&P closes twice below 2790.  With that said, if that support gives way, the next leg is likely lower, and we’re looking at 2765.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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