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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday September 5, 2018.

We’ve noted in the previous Market Outlook that: “recent trading actions leaving the S&P in what looks to us like an orderly high level consolidation of the August massive rally.”  As anticipated, stocks closed slightly lower Tuesday amid growing concerns over trade tensions between the U.S. and key partners.  The U.S. administration was on standby to inflict additional levies on $200 billion worth of Chinese goods as soon as this week.  For the day, the S&P pulled back 0.2 percent to close at 2,896.72.  The Dow Jones Industrial Average slipped 0.05 percent to close at 25,952.48.  The Nasdaq Composite dipped 0.2 percent to 8,091.25.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose to its highest level since August 17, rose more than 2 percent to close at 13.16.

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One of the more noteworthy developments in recent days has been the move in emerging markets, which has been under pressured by rising trade fears and a strong dollar. In Turkish Lira has lost at least 40 percent of its value in 2018 over concerns surrounding President Erdogan’s policies and the economy. Meanwhile, the Peso tumbled following report that President Mauricio Macri asked the International Monetary Fund for an early release of funds from the nation’s $50 billion standby financing deal last week. The iShares MSCI Emerging Markets ETF (EEM) dropped 1.9 percent to 42.33, down more than 10 percent YTD while the S&P gained over 8 percent over the same period.  Now the question is whether recent selloff is a beginning of a bottoming process or there’re more pains ahead?  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 (weekly)

Our “U.S. Market Trading Map” painted EEM bars in red (sell) – see area ‘A’ in the chart. Over the past few weeks. EEM has been trending higher in a short-term corrective mode as it worked off oversold conditions.  The mid-August rally ran out of steam just below the 20-week moving average.  This week’s selloff pushed the ETF below the mid-August rising trend line, suggesting that the bearish flag pattern had resolved itself into a new downswing with initial downside target near 40, based on the 50% Fibonacci retracement.  A close below that level has measured move to 37, based on the 61.8% Fibonacci retracement.

EEM has resistance near 44.  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 slightly bearish.  Last changed September 4, 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 moved down to test support at the early 2018 high after recent rally ran out of steam near the lower boundary of the red band, a key technical level.  That level was significant when the S&P climbed above it in late August. 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, 2870 is the line in the sand.  A close below that level will trigger a new sell signal with downside target near 2800.  It’s roughly corresponds with the trend channel moving average.  That level was tested several times over the past months.  Some aggressive traders might use this level like a magnet to buy.

Short-term trading range: 2870 to 2926.  S&P has support near 2870.  A close below that level has measured move to 2800, based on the trend channel moving average.  The index has resistance near 2900.  Above it a more significant resistance lies at the lower boundary of the red band, around 2926.

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, our near-term work on price pattern and momentum suggested strongly that the S&P is in a midst short-term pullback correction phase that could last about 5 to 10 trading sessions.  While the near-term technical bias is skewed toward further weakness, the bulls should not get into any serious trouble as long as the market holds above 2870. As for strategy, pullback will present a buying opportunity, while selling into strength may not be the best strategy in a market considered likely to bounce back.

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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