S&P Broke Key Support but Oversold Conditions Could Help Minimize Downside Follow-through

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday October 11, 2018.

We’ve noted in the previous Market Outlook that: “market is in holding pattern as traders are watching to see whether or not the S&P can hold above 2880.  Money Flow measure and momentum had been deteriorated, suggesting that the support might not hold for long.  A failure to hold above key price level means that long-term buying pressure has finally been exhausted.  On balance, we remain near term neutral/negative for S&P as we believe market vulnerable to some downside retracement over the short-to-intermediate term.”  As anticipated, the S&P tumbled out of gate Wednesday as a steep decline in tech shares and worries of rapidly rising rates sent the bench mark gauge on pace for its worst day in eight months, dropped 3.3 percent to 2,785.68.  The Dow Jones Industrial Average tumbled 3.15 percent to close at 25,598.74.  Nasdaq Composite plummeted 4 percent to 7,422.05.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, spiked more than 36 percent to 21.73, its highest level since late March.


Semiconductor extends October woes, among worst-performing sectors Wednesday.  After surging more than 38 percent in 2017, the iShares PHLX Semiconductor ETF (SOXX) was down 4.41percent on the day and is off about 1% YTD, underperformed the S&P by a wide margin.  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 SOXX.

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 PHLX Semiconductor ETF (weekly)

Our “U.S. Market Trading Map” painted SOXX 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 massive triangle formation since early 2018.  The early October selloff pushed SOXX below the 2018 rising trend line, suggesting that the 6-month triangle pattern has resolved itself into a new downswing.  This week’s downside follow-through confirmed the bearish signal.  Initial downside target is around 160.  A close below that level has measured move to around 127, based on the 4-year moving average.

SOXX has resistance near 181.  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 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”]

Key technical development in Wednesday session was a clear break below the trend channel moving average, the level that offered support since the S&P broke above it in early May.  Wednesday’s massive selloff pushed the index down to the bottom of its short-term trading range.  Money Flow measure trended lower from below the zero line.  The indicator is at the lowest level since summer 2017, indicating a negative net demand for stocks.  Market is oversold following Wednesday’s massive selloff but we may need to see evidence of exhaustive selling to suggest that near-term risks are ebbing.

Over the next few days, traders should monitor the retreat and rebound behaviors as the 2785 is tested as support.  That level roughly corresponds with the bottom of its short-term trading range and the 38.2% Fibonacci retracement of the 2018 upswing.  It S&P closes below that level, it’s bearish.  Technically speaking, when key support breaks, it usually begets more selling.  The next downside level to watch is 2740, or the 50% Fibonacci retracement.

Short-term trading range: 2740 to 2830.  S&P has support near 2785.  A close below that level has measured move to 2740.  The index has resistance near 2830.  A close above that level has measured move to 2880.

Long-term trading range: 2750 to 2935.  S&P has support near 2750.  A close below that level will trigger a major sell signal with a downside target near 2560.  The index has resistance near 2935.

In summary, the long awaited downside correction unfolded Wednesday, leading to a test of support at S&P’s 2785, or the bottom of its short-term trading range.  Market internals deteriorated but oversold conditions could help minimize downside follow-through and widespread breakdowns.  Nevertheless, we may need to see evidence of exhaustive selling to suggest that near-term risks are ebbing.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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