Momentum Not Favorable Over Near to Intermediate Term

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday August 2, 2018.

Stocks closed mix Wednesday following report that the Trump administration is looking at the possibility of slapping a 25 percent tariff on $200 billion worth of imported Chinese goods — after initially setting them at 10 percent.  For the day, the Dow Jones Industrial Average fell 0.32 percent to close at 25,333.82. The S&P closed 0.1 percent lower at 2,813.36.  The Nasdaq Composite bucked the lower trend, however, closing 0.4 percent higher at 7,707.29.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 2.49 percent to close at 13.15.


One of the noteworthy developments in recent days has been the move in consumer staples. The group attracted strong buying support in recent days as an escalation in trade tensions between the U.S. and China forced traders to defensive names.  The Consumer Staples Select Sector SPDR ETF (XLP) jumped about 9 percent since reached an interim low in early May 2018.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLP.

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 Staples Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLP bars in red (sell) – see area ‘A’ in the chart.  The first dominant feature on the chart is the rising trend line starting in early 2009.  The second dominant feature of the chart is the downtrend starting in early 2018, which represents the digestion period.  The February downswing found support near the 23.6% Fibonacci retracement of the 2009-2018 upswing.  The May recovery rally tested resistance at the 1-year moving average.  That level is significant when XLP broke below it in February.  It’s now acting as strong resistance.  This week’s bearish reversal signal suggested that the resistance would hold and a retest of the May low, just below 49, should be expected.  XLP has minor support near 51.40.

XLP has resistance near 54.  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 August 1, 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 continues drifting sideways using the lower boundary of the pink band as support.  Technically speaking, trading actions over the past few days represents an orderly low-level consolidation period in the aftermath of last week’s massive reversal.  The fact that the S&P is basing sideways as it digested excessive bearishness instead of bouncing significantly higher indicated an internal weakness.  Adding to concerns is the lagging Money Flow measure, which is representative of the buyers losing momentum.  These elements suggested that the index might have to move to a much lower level to attract new buyers as soon as market works off oversold conditions.  2800 is the line in the sand.  A close below that level has measured move to 2766, based on the trend channel moving average.

Short-term trading range: 2800 to 2845.  S&P has support near 2800.  A failure to hold above that level has measured move to around 2766, based on the trend channel moving average.  The index has resistance near 2845.  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, trading action over the past few days represented an orderly low-level consolidation period in the aftermath of last week’s downside reversal.  Momentum is not favorable over the near to intermediate term, suggesting that this is not a time to be long.  2800 is the line in the sand.  The longer the index stays near that level, the more vulnerable it is to lower prices.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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