S&P Vulnerable to Further Downside Retracement

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday October 8, 2018.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks fell sharply Friday after the release of employment data pushed interest rates higher.  The S&P traded as low as 2869 before buyers stepped in and prices off the intraday low.  For the day, the bench mark gauge fell 0.6 percent to close at 2,885.57.  The Dow Jones Industrial Average dropped 0.68 percent to 26,447.05.  The Nasdaq Composite pulled back 1.2 percent to 7,788.45.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped more than 4 percent to close at 14.82.


The rise in yields pushed emerging markets lower.   The iShares MSCI Emerging Markets ETF (EEM) went from hot to not.  After surging more than 34 percent in 2017, EEM tumbled more than 13 percent YTD while the S&P rose about 8 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 EEM.

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 – iShares MSCI Emerging Markets ETF (weekly)

Our “U.S. Market Trading Map” painted EEM 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.  Over the past couple of weeks, EEM has been trending higher in a short-term corrective as it worked off oversold conditions.  The September rally ran into resistance at the 20-week moving average, a key technical level.  Last week’s massive selloff pushed the ETF below the September low, signify resumption of the 2018 downswing.  Over the next few weeks, traders should monitor trading behavior as the 4-year moving average, just below 40, is tested as support.  A close below that level has measured move around 37, based on the 61.8% Fibonacci retracement.

EEM has resistance near 43.70.  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 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”]

S&P moved down to test support at the trend channel moving average after falling below the lower boundary of the pink band on Thursday.  That level was tested several times over the past months.  Some aggressive traders might use this level like a magnet to buy.

Market internal has been weakened.  Money Flow measure flashed a bearish signal as it trended lower from below the zero line, indicating the bears are more aggressive as prices off than the bulls were as prices ascended.  Right now the trend channel moving average, currently at 2877, is the line in the sand.  We’d turn particular bearish if the S&P closes twice below that level.

Short-term trading range: 2820 to 3000.  S&P has support near 2877.  A close below that level will trigger a medium-term sell signal with downside target near 2820.  The index has resistance near 2900.  A close above that level will turn the short-term trend up and trigger acceleration toward 3000.

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, 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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