S&P Constrained by Short-term Sideways Pattern

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 Tuesday September 11, 2018.

We’ve noted in the previous Market Outlook that: “our near-term woke on price structure and momentum suggested that the S&P is setting up for a short-term technical bounce.”  As anticipated, the S&P rose slightly on Monday, snapping a four-day losing streak, led by utilities and industrials.  For the day, the bench mark gauge gained 0.2 percent to 2,877.13.  The tech-heavy Nasdaq climbed 0.3 percent to close at 7,924.16.  The Dow Jones Industrial Average slipped 0.23 percent to close at 25,857.07.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose to its highest level since August 17, fell nearly 5 percent to close at 14.16


One of the more noteworthy developments in Monday session has been the move in semiconductors.  The group rebounded nicely, cutting losses from last week led by a 9.2 percent gain in Advanced Micro Devices and a 3.5 percent jump in Broadcom.  The VanEck Vectors Semiconductor ETF (SMH) rose 0.97 percent to 106.86, up nearly 10 percent YTD while the S&P gained nearly 8 percent over the same period.  Now the question is whether the rally has more legs?  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 (weekly)

Our “U.S. Market Trading Map” painted SMH bars in green (buy) – see area ‘A’ in the chart.  The first dominant feature on the chart is the rising trend line starting in mid-2015.  The second dominant feature of the chart is the early 2018 massive triangle trading pattern, which represents the digestion period.  Last week’s selloff tested and held support at the 20-week moving average, a key technical level.  Over the next few days, traders should monitor trading behavior as the 2018 falling trend line is tested as resistance.  A sustain breakout above that level on a weekly basis signify that the triangle pattern has resolved itself into a new upswing with upside target near 134, based on the 127.25 Fibonacci extension. Resistance stands in the way of continue rally is at the 2018 high, just above 114.

SMH has a strong band of support between 106 and 104.  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 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”]

As expected, the S&P rebounded off support at the lower boundary of the pink band, a key technical level.  That level roughly corresponds with the late August breakout.  Momentum has been strengthened but does not appear strong enough to generate a wide spread breakout.  The big picture remains the same. There is a consolidation within the 2883 and 2870 trading range, which represents digestion period in the after math of the August massive rally.  Money Flow measure flashed a bearish signal as it crossed below the zero line last week, indicating a negative net demand for stocks.  This is a bearish development, suggesting that the index might have to move to a much lower level to attract new buyers.

For now, 2870 is the line in the sand.  A close below that level will trigger a new sell signal with downside target near 2830-2800, based on the trend channel moving average and 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 2830, 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, trading behavior in the S&P remains constrained by a short-term sideways pattern and shown little evidence of a sustainable change in trend.  2870 is the line in the sand.  A failure to hold above that level would trigger a new sell signal and an unwelcome pickup in downside volatility.


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.