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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday October 5, 2018.

We’ve noted in the previous Market Outlook that: “S&P’s rally is showing signs of buyer’s fatigue, noting a struggle for the index to get past 2940.  A failure to move above key resistance means 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.  This is the danger in the current market.”  As anticipated, stocks fell sharply on Thursday as the benchmark 10-year Treasury note yield reached its highest level since 2011, breaking above 3.2 percent.  For the day, the S&P declined 0.8 percent to 2,901.61, its worst day since June 25.  The Dow Jones Industrial Average dropped 0.75 percent to 26,627.48.  The NASDAQ Composite dropped 1.8 percent to 7,879.51.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged more than 22 percent to close at 14.22.

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One of the more noteworthy developments in recent days has been the move in biotech.  The group went from hot to not.  After surging more than 43 percent in 2017, the SPDR S&P Biotech ETF (XBI) tumbled 3.22 percent Thursday to 91.84, bringing its YTD gains down to 8.1 percent while the S&P rose 8.5 percent over the same period.  Now the question is whether recent pullback is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in XBI.

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 – SPDR S&P Biotech ETF (weekly)

Our “U.S. Market Trading Map” painted XBI 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 August 2018.  Over the past couple of weeks, XBI was basing sideways near the 20-week moving average as it worked off oversold conditions. Last week’s selloff pushed the ETF below the 20-week moving average and down to the 1-year moving average, a key technical level.  This level was tested several times over the past year.  A close below 91 on a weekly basis signify a major trend shift and a test of the more important support near the 82 zone, based on the 2-year moving average, should be expected.

XBI has resistance 96.50.  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 October 4, 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”]

Key technical development in Thursday session was a close below the lower boundary of the pink band, the level that offered support since the index reached an interim low in June.  This is a negative development.  Nevertheless, current trading pattern is similar to the mid-August in which the S&P fell briefly below the pink band, tested the trend channel moving average and climbed to new highs a couple weeks later.  The only different is that Money Flow measure is much weaker now.   The indicator whipsaws around the zero line as market sold off, suggesting that the bears are more aggressive as prices off than the bulls were as prices ascended.  Right now 2900 is the line in the sand.  A failure to hold above it means that near-term buying pressure has finally been exhausted and the index has to move to a much lower level to attract new buyers.

Short-term trading range: 2876 to 3000.  S&P has support near 2900.  A close below that level will trigger a short-term sell signal with downside target near 2876, based on the trend channel moving average.  The index has minor resistance near 2918, or the lower boundary of the pink band.  A close above that level will invalidate Thursday’s bearish signal and trigger acceleration toward the upper boundary of the red band, near 3000.  A close above that level often marked short-term market top so traders should put it on the trading radar.

Long-term trading range: 2730 to 3050.  S&P has support near 2840.  A close below that level will trigger a major sell signal with a downside target near 2730.  The index has resistance near 3050.

In summary, S&P broke key support Thursday, signify a potential trend reversal.  Nevertheless, it will be important to monitor the retreat and rebound behaviors over the next few days to determine whether breakouts are decisive. 2900 is the line in the sand.  If the S&P closes below that level, it’ll go dramatically lower, and we’re looking at 2870-2830.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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