S&P Bullish Doji Candlestick Pattern Signify Impending Trend Reversal

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday October 9, 2018.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks fell sharply in early Monday session that saw the S&P traded as low as 2862 before buyers stepped in and prices off the intraday low.  For the day, the bench mark gauge fell 0.04 percent to close at 2,884.43. The Dow Jones Industrial Average climbed 0.15 percent to 26,486.78. The Nasdaq Composite also pulled back 0.7 percent to 7,735.95.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped nearly 6 percent to close at 15.69.


Chinese stocks sold off sharply, the Shanghai Composite fell 3.7 percent overnight, after the People’s Bank of China slashed its reserve requirement ratio (RRR) by 100 basis points, effective from next week.  After surging nearly 72 percent in 2017, the Invesco China Technology ETF (CQQQ) fell more than 28 percent YTD while the S&P rose about 8 percent.  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 CQQQ.

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 – Invesco China Technology ETF (weekly)

Our “U.S. Market Trading Map” painted CQQQ 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 downward trend since late 2017.  Over the past couple of weeks, CQQQ has been trending lower after the September relief rally ran out of steam near the late August breakout point.  This week’s selloff pushed the ETF below the September-October lows, signify resumption of the 2017 downswing.  Over the next few weeks, traders should monitor trading behavior as the 61.8% Fibonacci retracement, near 41.30, is tested as support.  A close below that level has measured move around 25, or the 2015 low.

CQQQ has resistance near 49.  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 bearish.  Last changed October 8, 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”]

Monday’s downside follow-through confirmed last week’s bearish reversal signal.  S&P briefly fell below the trend channel moving average in early Monday session after climbed above that level in July.  Money Flow measure trended lower from below the zero line.  The indicator is at the lowest level since late March, indicating a negative net demand for stocks.  Momentum has been weakened but it is much closer to oversold than overbought zone.  In accordance to the Japanese candlestick pattern recognition, Monday’s bullish long tail is a clear indication of demand overwhelming supply.  This could help putting a short-term floor under the market. Right now the trend channel moving average, currently at 2878, 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 2878.  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, the bullish reversal doji candlestick pattern in the S&P together with the short-term oversold condition suggested strongly that the market is at or very close to a significant near-term low.  So it wouldn’t surprise us to see at least an attempt to rally over in the coming days.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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