Momentum Weakened as S&P Tested Key Support

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 Thursday September 6, 2018.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks tumbled in early Wednesday session that saw the S&P traded as low as 2,876.92 before buyers stepped in and pushed prices off the intraday low.  For the day, the bench mark gauge declined 0.3 percent to 2,888.60.  The tech-heavy Nasdaq Composite dropped 1.2 percent to 7,995.17.  Meanwhile the Dow Jones Industrial Average closed 0.09 percent higher at 25,974.99.  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.


Tech shares fell Wednesday as Twitter CEO Jack Dorsey and Facebook COO Sheryl Sandberg testified in front of Congress.  Adding to concerns was report that Attorney General Jeff Sessions will meet with state attorneys general later in September to discuss worries surrounding tech companies that may be hurting competition and intentionally stifling the free exchange of ideas on their platforms.  The Technology Select Sector SPDR ETF (XLK) fell 1.25 percent to 74.37, bringing its YTD gains down to 16.3 percent. The S&P gained about 8 percent over the same period.  Now the question is whether recent selloff is a pause that refreshes or it’s a beginning of a deep correction?  Below is an update look at a trade in XLK.

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 – Technology Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLK bars in red (sell) – see area ‘A’ in the chart. Over the past few weeks, XLK has been trending higher after the late July selloff found support near the 20-week moving average, a key technical level.  This week’s selloff is testing support at last week’s breakout point.  Our near-term work on price structure and momentum suggested that the support might not hold and XLK might have to retest the 20-week moving average, just below 72.  A close below 74 on a weekly basis will confirm this.  Although not expected at this moment, a failure to hold above the 20-week moving average will bring the 1-year moving average, just below 68, into view.

XLK has resistance just above 76.  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 September 5, 2018 from slightly bearish (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.  S&P moved down to test support at the late August breakout point after recent rally ran out of steam near the lower boundary of the red band, a key technical level.  That level roughly corresponds with the lower boundary of the pink band.

Market internal has been weakened but downside momentum does not appear strong enough to generate a widespread breakdown.  Money Flow measure flashes a weak bearish signal as it’s on a verge of falling below the zero line.  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 around 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, momentum has weakened as S&P moved down to test support at the lower boundary of the pink band.  The longer the index stays near that level, the more vulnerable it is to lower prices.  This is the real danger in the current market.

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.