S&P in Range-bound Trading Environment

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday August 17, 2018.

Stocks closed higher on Thursday on renewed hope that a resolution to a trade dispute with China could be on the horizon.  For the day, the Dow Jones Industrial Average rose 1.58 percent to 25,558.73.  The S&P gained 0.8 percent to 2,840.69. The Nasdaq Composite advanced 0.4 percent to 7,806.52.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 8 percent to 13.45.

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One of the noteworthy developments in recent days has been the move in semiconductors. After a strong run of outperformance that saw the VanEck Vectors Semiconductor ETF (SMH) soared more than 36 percent in 2017, the ETF gave back most of the early 2018 gains in recent day, up 5.9 percent YTD while the S&P rose 6.2 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. The first dominant feature on the chart is the rising trend line starting in 2015.  The second dominant feature of the chart is the sideways trend since early 2018.  This week’s massive selloff pushed the ETF down to the 1-year moving average, a key support level.  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, based on the 2-year moving average and the 38.2% Fibonacci retracement.

SMH has resistance near 107.  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 neutral.  Last changed August 16, 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 rebounded nicely after recent pullback found support near the important sentiment 2800 mark, just above the trend channel moving average.  Thursday’s rally pushed the index above the lower boundary of the pink band.  That level was significant when the index fell below it on Wednesday.  It’s now acting as key support.  Momentum indicator has been strengthening but upside momentum does not appeared strong enough to generate a widespread breakout. There is a high probability that market is in for a ‘range-bound’ trading environment.  Resistance is strong near 2850-2860.  This could put a cap on the upside.  On the downside, support is strong between 2800 and 2790.

Short-term trading range: 2830 to 2860.  S&P has a strong band of support between 2800 and 2791, based on the trend channel moving average.  A close below that level has measured move to around 2740.  The index has resistance near 2850-2860.  A close above that level will trigger acceleration toward the early 2018 high.

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, there is a high probability that S&P is in for a ‘range-bound’ trading environment.  This is a rally and retreat environment. It is not a trending environment. Short-term traders can anticipate continued volatility with rapid up and down moves in the markets.

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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