Market Vulnerable to Further Downside Retracement

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 Friday September 7, 2018.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, mostly fell on Thursday as growing concerns over global trade triggered a fresh round of profit taking.  For the day, the S&P declined 0.4 percent to close at 2,878.05.  The tech-heavy Nasdaq dropped 0.9 percent to 7,922.73.  The Dow Jones Industrial Average eked out a slight gain, rose 0.08 percent to 25,995.87.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose to its highest level since August 17, jumped more than 5 percent to close at 14.65.

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Energy is one of the worst laggards on Thursday as losses in WTI crude oil futures pressure the group. October Crude Oil futures fell 1.37 percent to 67.81/barrel after U.S. data showed gasoline inventories rose unexpectedly last week, overshadowing a bullish drawdown in crude.  The Energy Select Sector SPDR ETF (XLE) fell 1.85 percent to 72.81, bringing its YTD gains down to just 0.8 percent 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 XLE.

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 – Energy Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLE bars in red (sell) – see area ‘A’ in the chart.  There is a distinct possibility that a massive triangle pattern is currently setting up in the daily chart of XLE.  Over the past few weeks, XLE has been trending lower after the late April rally found resistance just above 78.  That level was tested several times over the past years.  This week selloff pushed the ETF down to the mid-August low, near 71.70.  Close below this level on a weekly basis will bring the 2016 rising trend line, near 70, into view.  This level is significant in charting terms. A failure to hold above it, indicates that the massive 2016-2018 triangle pattern has resolved itself into a new downswing and a retest of the 2016 low, near 50, should be expected.

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

Market internal has been weakened.  Money Flow measure flashed a bearish signal as it’s crossed below the zero line for the first time since June.  The indicator printed a lower high as prices broke out to new highs in late August, 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 near the trend channel moving average, currently at 2823, 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 2823, 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, 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.

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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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.
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S&P in Narrow Trading Range

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 July 5, 2018.

We’ve noted in the previous Market Outlook that: “trading behavior in the S&P remains constrained by a short-term sideways pattern and shown little evidence of a sustainable change in trend.”  As anticipated, stocks traded higher in early Tuesday session before sellers stepped in and pushed prices lower.  For the day, the S&P fell 0.5 percent to 2,713.22.  The Dow Jones Industrial Average declined 0.54 percent  to close at 24,174.82. The Nasdaq composite pulled back 0.9 percent to 7,502.67.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 3.46 percent to close at 16.14.

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Energy stocks caught a bid Tuesday after West Texas Intermediate oil futures broke above $75 per barrel for the first time since November 2014. The Energy Select Sector SPDR Fund (XLE) rose 0.4 [percent to 75.12, up 4 percent YTD.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLE.

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 – Energy Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLE bars in green (buy) – see area ‘A’ in the chart.  After a strong run of outperformance since early April, XLE peaked in late May and trended lower.  In fact, trading actions over the past few weeks represented orderly high-level consolidation period.  Right now the most important thing to watch is trading actions near 77.  A sustain breakout above that level indicates that the 2-month bullish flag pattern has resolved itself into a new upswing with initial upside target near 82, based on the 61.8% Fibonacci retracement of the 2014-2016 downswing.

XLE has support near 72.  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 neutral.  Last changed July 2, 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 big picture remains the same.  There is a consolidation near the trend channel moving average.  That level was significant when the S&P climbed above it in early May.  Momentum is flashing a weak bearish signal as it shifted lower from near oversold zone.  Money Flow measure whipsaws near the zero line, indicating a lack of commitments.  These elements suggested that the index might have to move to a much lower level to attract new buyers as soon as it works off oversold conditions. For now, 2700 is the line in the sand.  A close below that level will trigger another selloff with initial downside target near 2650. The upper limit of the one week sideways trading range, near 2750, represents key price level.  A close above that level could trigger acceleration toward 2800.

Short-term trading range: 2700 to 2750.  S&P has support near 2700.  A close below 2700 has measured move to 2650.  The index has resistance near 2750.  A close above that level would trigger acceleration toward the 2800 zone.

Long-term trading range: 2640 to 2840.  S&P has support near 2640.  A close below that level will trigger a major sell signal with an initial downside target near 2500.  The index has resistance just above 2700.  A sustain advance above that level could trigger acceleration toward the early 2018 highs but for now it looks firm.

In summary, S&P is trapped within narrow trading range as traders await the Trump’s administration activates tariffs on Chinese goods worth around $34 billion on Friday, which is widely expected to trigger a tit-for-tat response from Beijing. Technical pressures are building up as the market dances its way into an increasingly tight trading range. S&P’s 2700 marks the inflection point.  A failure to hold above key level indicates a change in sentiment and a much deeper pullback should be expected.

 

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.