S&P Broke Short-term Upward Trend

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 August 14, 2018.

We’ve noted in the previous Market Outlook that: “S&P’s quick run is showing some signs of exhaustion. Market internals deteriorated as the index struggled to get pass the January highs.”  As anticipated, stocks sold off Monday as a financial crisis in Turkey dampened traders sentiment.  For the day, the S&P declined 0.4 percent to 2,821.93.  The Dow Jones Industrial Average fell 0.50 percent to close at 25,187.70.  The Nasdaq Composite fell 0.25 percent to 7,819.71.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged more than 12 percent to 14.78.


Emerging-market assets were under severe pressure on Monday as Turkey’s currency crisis continued to stoke fears of spillover effects.  Turkey’s lira was trading at fresh all-time low against the U.S. dollar, after shedding some 14% of its value at the end of last week.  After a strong run of outperformance in 2017 that saw the iShares MSCI Emerging Markets ETF (EEM) soared more than 34 percent, the ETF fell 1.64 percent to 42.48 Monday, down nearly 10 percent YTD.  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 EEM.

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 – iShares MSCI Emerging Markets ETF (daily)

Our “U.S. Market Trading Map” painted EEM 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 2016.  The second dominant feature of the chart is the downward trend since early 2018.  The late June oversold relief rally ran into resistance near the 20-week moving average. This week’s downside follow-through confirmed last week’s bearish breakdown, suggesting that the 2-month bearish flag pattern had resolved itself into a new downswing.  EEM has minor support near 42.  A close below that level has measured move to just below 40, based on the 4-year moving average.

EEM has resistance near 45.  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 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”]

Key technical development in Monday session was a close below the lower boundary of the pink band.  That level was significant when the index climbed above it in early July.  This is a negative development, signify a bearish reversal.  Money Flow measure is on a verge of turning negative, suggesting that the bears are more aggressive as prices off than the bulls were as prices ascended. In fact, the indicator had been diverged from price action over the past months.  The S&P took out the July high while the indicator set a lower low. This negative divergence had increased the probability that an important near-term high has been established and the index could be in an early stage of a new downswing that should, at least, test the trend channel moving average, currently at 2786.  A consecutive close below 2826 will confirm this.

Short-term trading range: 2786 to 2869.  S&P has support near 2800.  A close below that level has measured move to 2786, based on the trend channel moving average.  The index has resistance near 2826, or the lower boundary of the pink band.  A close above that level will trigger acceleration toward the lower boundary of the red band, near 2869.

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 broke key support Monday, signify a bearish trend reversal with downside target near 2786.  Nevertheless, it will be important to monitor the retreat and rebound behaviors over the next few days to determine whether breakouts are decisive.

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.