S&P Setup for a Snapback Bounce

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday October 12, 2018.

Stocks fell sharply on Thursday in a second straight day amid ongoing fears of rapidly rising interest rates and a possible global economic slowdown.  For the day, the Dow Jones Industrial Average tumbled 2.13 percent to close at 25,052.83. The S&P dropped 2.1 percent to 2,728.37. The Nasdaq Composite pulled back 1.3 percent to 7,329.06.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged more than 8 percent to 24.98.

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Gold prices rose on Thursday as a sell-off in global stock markets prompted investors to seek safety in the yellow metal.  The SPDR Gold Shares (GLD), the world’s largest gold-backed exchange-traded fund, rose 2.57 percent to 115.78 on the day and is off more than 6% YTD, underperformed the S&P by a wide margin.  Now the question is whether the rally has more legs?  Below is an update look at a trade in GLD.

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 Gold Shares (weekly)

Our “U.S. Market Trading Map” painted GLD bars in green (buy) – see area ‘A’ in the chart. The first dominant feature on the chart is the falling trend line starting in 2011.  The second dominant feature of the chart is the sideways trading pattern since late 2015.  Over the past few weeks, GLD has been basing sideways near 112 after the April selloff found support just above the late 2016 lows.    This week’s rally pushed the ETF up against the 20-week moving average, a key technical level, just above 116.  A close above that level will turn the short-term trend up and trigger acceleration toward the 2016-2017 highs, near 130. That level roughly corresponds with the 38.2% Fibonacci retracement of the 2011 downswing.

GLD has support near 112.  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”]

Thursday’s massive selloff pushed the S&P below the bottom of its short-term trading range.  While it’s uncommon the S&P to break below the technical level, such a move lower is often followed by a quick snap back.  The index broke through the bottom of its short-term trading range on a daily basis in August 2015 and November 2016, only to bounce back up.  So it shouldn’t be surprised to see at least an attempt to rally over the next few days.

Longer term, the uptrend that began in 2016 is still intact, but we’re testing that now.  2700 is the line in the sand.  A close below that level on a weekly basis will break the long-term uptrend and a retest of the early 2018 lows should be expected.

Short-term trading range: 2630 to 2820.  S&P has support near 2700.  A close below that level has measured move to 2630.  The index has resistance near 2765.  A close above that level has measured move to 2820.

Long-term trading range: 2560 to 2930.  S&P has support near 2650.  A close below that level has measured move to 2560.  The index has resistance near 2750.  A close above that level on a monthly basis has measured move to 2930.

In summary, market is extremely oversold following recent decline.  Like a rubber band, stocks tend to snap back to the mean if they have dropped too far from the “fair” value. With that said, if lower stock prices create some values for investors, then, given everything being equal, the market should be able to find some buyers.  However, give the significant damage that had been done over the past few days, we may need to see evidence of exhaustive selling to suggest that near-term risks are ebbing.  S&P’s 2700 is the line in the sand.  A close below that level could trigger a torrent of selling, which would eventually push the S&P down to the early 2018 lows.

 

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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