S&P in Orderly High Level Consolidation Mode

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday September 4, 2018.

We’ve noted in the previous Market Outlook that: “S&P will have a downward bias heading into the end of the month, pressured by short-term negative momentum but we expect support at the important sentiment 2900 mark to remain largely intact.  There is a high probability that market 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.”  As anticipated, stocks traded sharply lower in early Friday session following report that published off-record comments made by Trump concerning any future pact with Canada: “it’s going to be so insulting they’re not going to be able to make a deal.”  The S&P traded as low as 2,891.73 before buyers stepped in and pushed prices off the intraday low.  For the day, the bench mark gauge closed little change at 2,901.52.  The Dow Jones Industrial average gave up 0.09 percent to close at 25,964.82 while the tech-heavy Nasdaq Composite added 0.26 percent to 8,109.54.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose to its highest level since August 17, surged more than 10 percent to close at 13.53.


One of the more noteworthy developments in recent days has been the move in biotech stocks.  The group attracted strong buying support in recent day that saw the iShares Nasdaq Biotechnology ETF (IBB) surged more than 4 percent last week, bringing its YTD gains up to 14.4 percent while the S&P gained 8.5 percent over the same period.  Now the question is whether the rally has more legs?  Below is an update look at a trade in IBB.

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 – the iShares Nasdaq Biotechnology ETF (weekly)

Our “U.S. Market Trading Map” painted IBB bars in green (buy) – see area ‘A’ in the chart. Over the past few weeks. IBB has been trending lower in a short-term corrective mode after the early May rally ran out of steam near the early 2018 highs. The late July correction found support at the 10-week moving average, a key technical level.  Last week’s upside breakout signify a bullish reversal and resumption of the multi-year upswing that has been in place since early 2016.  This is a positive development, opened up for a retest of the 2015 high, just above 133.

IBB has support just above 166.  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 bullish.  Last changed August 21, 2018 from neutral (see area ‘A’ in the chart).

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

The big picture remains the same.  There is a consolidation near the important sentiment 2900 mark.  That level was significant when the S&P climbed above it last week. Market internal has been weakened but downside momentum does not appear strong enough to generate a widespread breakdown.

Money Flow measure flashes a weak bull signal as it trended lower from above the zero.  The indicator printed a lower high as prices broke out to new highs this week, indicating less money’s chasing stocks higher.  These elements will continue negatively affect trading sentiment over the coming days.

For now, 2900 is the line in the sand.  A close below that level will trigger another selloff with initial downside target near 2870, or the early 2018 high.  This creates a strong band of support between 2870 and 2900. Some aggressive traders might use this level like a magnet to buy.

Short-term trading range: 2870 to 2925.  S&P has support near 2900.  A close below that level has measured move to 2870, based on the lower boundary of the pink band.  The index has resistance near 2925, based on lower boundary of the red band.  Above it a more significant resistance lies at the upper boundary of the red band, around 2980.

Long-term trading range: 2800 to 3000.  S&P has support near 2800.  A close below that level will trigger a major sell signal with a downside target near 2700.  The index has resistance near 3000.

In summary, recent trading actions leaving the S&P in what looks to us like an orderly high level consolidation of the August massive rally.  The index is holding firmly above 2900, a level it has not breached since market broke out last week.  In fact, trading actions over the past few days represents an orderly high level back-and-forth consolidation of the August’s massive rally.  This is a positive development, increased the probability that the S&P will break out to new highs as soon as the market shakes off excessive bullishness.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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