S&P Setup for Short-term Technical Bounce

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday September 10, 2018.

We’ve noted in the previous Market Outlook that: “volatility has been increased as S&P tested key support level.  While there is a low probability of a full blow correction we remain near-term negative for S&P as we believe market vulnerable to some downside retracement over the short-to-intermediate term.”  As anticipated, a big sell-off in tech and worries over potentially tighter monetary policy sent stocks lower Friday that saw the S&P fell 0.2 percent to close at 2,871.68.  The Nasdaq Composite gave up 0.3 percent to 7,902.54. The Dow Jones Industrial Average declined 0.31 percent to 25,916.54.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 1.57 percent to close at 14.88.


Donald Trump, speaking from Air Force One, said Friday the U.S. is ready to slap tariffs on an additional $267 billion worth in Chinese goods.  After surging 33 percent in 2017, the iShares China Large-Cap ETF (FXI), which tracks certain Chinese stocks, fell 1.1 percent to 40.91, down more than 11 percent YTD while the S&P gained more than 7 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 FXI.

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 China Large-Cap ETF (weekly)

Our “U.S. Market Trading Map” painted FXI bars in red (sell) – see area ‘A’ in the chart.  Over the past few weeks, FXI has been basing sideways using the 50% Fibonacci retracement of the 2016 to 2018 upswing as support.  Last week’s selloff pushed the ETF below support, signify resumption of the 2018 downswing.  Nevertheless, it’ll be important to monitor the retreat and rebound behaviors as the 4-year moving average is tested.  That level is significant in charting terms.  A close below 40 on a weekly basis will confirm last week’s bearish signal and a test of the 61.8% Fibonacci retracement, near 38, should be expected.

FIX has resistance near 44.50.  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 7, 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”]

The near-term picture remains the same. There is currently a test of support at the late August breakout after the mid-August rally ran out of steam near the lower boundary of the red band, a key technical level.

Money Flow measure flashed a bearish signal as it’s trended lower from below the zero line, indicating a negative net demand for stocks.  Momentum has been weakened but the indicator is approaching the level that has been successful in repelling price action over the past months, suggesting the stage is setting up for a short-term oversold bounce.

For now, 2870 is the line in the sand.  A close below that level will trigger a new sell signal with downside target near the trend channel moving average, currently at 2827, just above the important sentiment 2800 mark.  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: 2800 to 2926.  S&P has support near 2870.  A close below that level has measured move to 2827, based on the trend channel moving average.  Below it, a more significant support lies at 2800.  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: 2700 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, while market could continue to drift lower as concerns over global trade keeps buyers at bay, the fact that the S&P is short-term oversold as it approached key price level that had been successful in repelling price action in the past suggested that downside risk could be limited. Our near-term woke on price structure and momentum suggested that the S&P is setting up for a short-term technical bounce.


Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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