Momentums Deteriorated as S&P Struggled to Get Pass January Highs

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday August 13, 2018.

We’ve noted in the previous Market Outlook that: “our work on price pattern and momentum suggested that S&P could be in an early stage of a distribution phase.”  As anticipated, stocks sold off Friday as geopolitical concerns pushed the Turkish lira to a record low against the dollar and rattled investors.  For the day, the S&P fell 0.7 percent to close at 2,833.28.  The Dow Jones Industrial Average fell 0.77 percent to 25,313.14.  The Nasdaq Composite slipped 0.7 percent to 7,839.11.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged more than 16 percent to 13.16.


One of the noteworthy developments in recent days has been the move in semiconductors.  The group has been under selling pressure in recent days after Morgan Stanley downgrades the semiconductor industry from in line to cautious, citing rising chip inventory levels.  The VanEck Vectors Semiconductor ETF (SMH) fell 2.35 percent Friday, bringing its YTD gains down to 8 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 SMH.

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 – VanEck Vectors Semiconductor ETF (daily)

Our “U.S. Market Trading Map” painted SMH bars in red (sell) – see area ‘A’ in the chart. Over the past few weeks, SMH has been trending higher in a short-term corrective mode after the late June selloff found support near the 1-year moving average. There is a distinct possibility that a bear flag formation is currently setting up in the weekly chart of SMH.  Over the next few days, traders should monitor trading behavior near 102.  A close below that level suggests that the multi-week bearish flag formation had resolved itself into a new downswing with a downside target around 90.

SMH has resistance near 110.  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 August 10, 2018 from bullish (see area ‘A’ in the chart).

[Note: for more details analysis, please take a look at our “US Market ETF Trading Map”]

S&P retreated after the late July rally ran out of steam near the lower boundary of the red band, just below all time-high set in late January.  Momentum indicator shifted lower from overbought zone, suggesting further short-term weakness likely.  Adding to concerns in the negative divergence on Money Flow measure, which peaked in late July and formed a lower high as prices broke out earlier last week.  Technically speaking, this trading pattern exhibits characteristics of a distribution phase, the period in which smart money sell (distribute) their positions.  Over the next few days, traders should monitor the retreat and rebound behaviors as the lower boundary of the pink band is tested as support.  A failure to hold above that level signify a bearish breakdown and a much deeper pullback should be expected.

Short-term trading range: 2800 to 2868.  S&P has minor near 2825.  A close below that level has measured move to 2784, based on the trend channel moving average.  The index has resistance near 2868, or the lower boundary of the red band.  A close above that level will trigger acceleration toward the range top, near 2900.

Long-term trading range: 2690 to 2880.  S&P has long-term support near 2690.  A close below that level will trigger a major sell signal with a downside target near 2580.  The index has resistance near 2880.

In summary, S&P’s quick run is showing some signs of exhaustion. Market internals deteriorated as the index struggled to get pass the January highs.  The index could signal a downward trajectory, depending on how it closes over the next few days.  Initial support is defined by the lower boundary of the pink band, around 2825.  If it closes below that level, the next leg is likely lower, and we’re looking at 2790-2800.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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