S&P’s Upside to be limited by Overbought Condition

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 Friday August 3, 2018.

Stocks closed mix Thursday as strength in Apple helped offset trade worries.  For the day, the Dow Jones Industrial Average fell 0.03 percent to close at 25,326.16. The S&P advanced 0.5 percent to 2,827.22.  The Nasdaq Composite jumped 1.2 percent to 7,802.69.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 7 percent to close at 12.19.

CEMNews_trial

One of the noteworthy developments in recent days has been the move in social media stocks. The group was under tremendous selling pressure following Facebook (FB) and Twitter (TWTR) disappointing quarterly results.  The Global X Social Media ETF (SOCL) fell 3.7 percent so far this week, bringing its YTD gains down to just 0.2 percent.  Now the question is whether the recent selloff is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in SOCL.

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 – Global X Social Media ETF (weekly)

Our “U.S. Market Trading Map” painted SOCL bars in red (sell) – see area ‘A’ in the chart.  The first dominant feature on the chart is the rising trend line starting in late 2015.  The second dominant feature of the chart is the downtrend starting in early 2018, which represents the digestion period.  The late July selloff pushed the ETF below the 1-year moving average.  That level is significant in charting terms.  It provided support since SOCL broke out in early 2016.  Right now follow-through is the key. A close below 32.50 on a weekly basis has measured move to 30, based on the 38.2% Fibonacci retracement.

SOCL has resistance near 34.40.  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 bullish.  Last changed August 2, 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”]

Once again, the S&P rebound nicely after the early selloff attempt found support near the important sentiment 2800 mark, slightly below the lower boundary of the pink band.  With Thursday’s gains, the index is up against the upper limit of the sideways trading range that has been dominant the market since early this week.  Market is short-term overbought and 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.  A close below that level has measured move to 2769, 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 2769, 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, the fact that the S&P is short-term overbought as it moved up to test formidable resistance suggested that upside gains could be limited.  As for strategy, we’d look to trim positions into short-term overbought strength.

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.