S&P in Orderly Low-level Consolidation

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday September 13, 2018.

We’ve noted in the previous Market Outlook that: “S&P tested and held support at the lower boundary of the pink band.  While Tuesday’s rally had improved the posture of our short-term indicators, which supportive of further upside probing, follow-through is the key.  S&P has 2890 to trade against.”  As anticipated, report that U.S. is in the process of proposing a new round of trade talks with China in the near future sent stocks higher in early Wednesday session that saw the S&P traded as high as 2,894 before sellers stepped in and pushed the index off the intraday highs.  For the day, the bench mark gauge gained just 0.04 percent to close at 2,888.92.  The Dow Jones Industrial Average rose 0.11 percent to 25,998.92.  The Nasdaq Composite down by 0.2 percent to close at 7,954.23.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market fell less than 1 percent to close at 13.14.

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Tech stocks have been under pressure lately amid increasing regulatory pressure toward social media companies, especially Facebook and Twitter.  After surging more than 52 percent in 2017, the Global X Social Media ETF (SOCL) fell more than 5 percent YTD while the S&P gained over 8 percent over the same period.  Now the question is whether recent pullback is a pause that refreshes or it’s a beginning of a something worse?  Below is an update look at a trade in SOCL.

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 – Global X Social Media ETF (weekly)

Our “U.S. Market Trading Map” painted SOCL bars in red (sell) – see area ‘A’ in the chart.  The first dominant feature on the chart is the rising trend line starting in early 2016.  The second dominant feature of the chart is the downward trend since early 2018.   The late June massive selloff pushed the ETF below the 1-year moving average, breaking an important support, and down to key technical support at the 2-year moving average, around 30.  This level is significant in charting terms.  A failure to hold above it on a weekly basis will break the 2016 uptrend and bring the 4-year moving average, around 25, into view.

SOCL has resistance near 34.50.  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 remains bullish.  Last changed September 11, 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”]

S&P moved up to test resistance at the upper limit of the one-week narrow trading range after recent pullback found support at the lower boundary of the pink band.  Money Flow measure trended higher after briefly fell below the zero line last week.  Momentum indicator shifted higher but it’s much closer to overbought than oversold zone.  So it should not be surprise to see further consolidation as overbought conditions are absorbed.

Right now the most important to watch is the rally and retreat behavior as the 2891 is tested as resistance. A failure to climb above key resistance suggested that most of the potential buyers at this level had already placed their bets.  The next batch of buyers typically sits at a much lower level.  Meanwhile, close below 2876 signify a downside reversal and a much deeper pullback should be expected.

Short-term trading range: 2800 to 2925.  S&P has minor support near 2876.  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.  The index has resistance near 2900.  Above it a more significant resistance lies at the lower boundary of the red band, around 2925.

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 actions over the past few days represented an orderly low-level consolidation period in the aftermath of the late August selloff.  For now, 2876 is the line in the sand. We’d turn particular bearish if the index closes twice below that level.  With that said, if that support gives way, the next leg is likely lower, and we’re looking at 2800.

 

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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