S&P Will Have Downward Bias

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday September 18, 2018.

We’ve noted in the previous Market Outlook that:” the fact that the S&P is short-term overbought as it tests key sentiment level suggested that upside gains could be limited.  As for strategy, we’d look to trim positions into short-term overbought strength.”  As anticipated, S&P closed lower on Monday, down 0.6 percent to 2,888.80, after Donald Trump said an announcement on U.S.-China trade after market close. The Dow Jones Industrial Average fell 0.35 percent to 26,062.12.  Nasdaq Composite dropped 1.4 percent to close at 7,895.79.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market fell more than 2 percent to close at 12.07.


Chipmakers contributed to the drop in the major indexes Monday.  The group was under selling pressure as fears they may get hit with tariffs.  After surging more than 36 percent in 2017, the VanEck Vectors Semiconductor ETF (SMH) fell 1.35 percent Monday to 105.24, bringing its YTD gains down to just over 7 percent while the S&P gained 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 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 red (sell) – see area ‘A’ in the chart.  The first dominant feature on the chart is the rising trend line starting in late 2015.  The second dominant feature of the chart is the triangle pattern since early 2018.   Over the past few weeks, the ETF has been trending lower in a short-term corrective mode after the late August rally ran out of steam near the 2018 falling trend line.  Over the next few weeks, traders should monitor trading behaviors at the blue line, near 104.  That level has been tested several times over the past months.  A close below it on a weekly basis could trigger a new down leg with downside target around 92, based on the 2-year moving average.

SMH has resistance near 110.  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 17, 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”]

Once again, S&P fell below the important sentiment 2900 mark after last week’s oversold bounce ran into resistance just below the all-time high set in late August.  Momentum indicator shifted lower from overbought zone, suggesting further short-term weakness likely.  The lower boundary of the pink band, around 2885, represents key support.  It was tested several times over the past months.  This history indicated an important role in terms of support.  A close below that level signify a bearish reversal and a test of the trend channel moving average, around 2846, should be expected.

Short-term trading range: 2846 to 2922.  S&P has support near 2885.  A close below that level will trigger a short-term sell signal with downside target near 2846, based on the trend channel moving average.  The index has resistance between 2900-2922, or the lower boundary of the red band.

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, market internals deteriorated as S&P’s testing key technical level.  S&P will have a downward bias this week, pressured by short-term negative momentum but we expect support at the trend channel moving average to remain largely intact.



Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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