The Path With Least Resistance Remains Lower

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.

 

Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday December 13, 2018.

We’ve noted in the previous Market Outlook that: “while several indicators remain supportive of further pullback, return of oversold conditions on an intraday basis might help putting put a short-term floor under the market.  However, the bulls must hurdle and sustain above S&P’s 2700 or market will work off oversold conditions and fall under its own weight.  With that said, the longer the index stays below 2700, the more vulnerable it is to lower prices.”  As anticipated, optimism that trade relations between the U.S. and China were progressing sent stocks higher in early Wednesday that saw the S&P gained as much as 1.9 percent before sellers stepped in and pushed the market off the intraday high.  For the day, the bench mark gauge climbed 0.6 percent to close at 2,651.07.  The Dow Jones Industrial Average rose 0.6 percent to close at 24,527.27.  The Nasdaq Composite jumped 1 percent to 7,098.31.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 1.4 percent to 21.46.

Strikingly, the Dow Jones Transportation Average, which is a key driver of economic sentiment, underperformed as UPS (UPS) and FedEx (FDX) dragged on the average.  The iShares Transportation Average ETF (IYT) closed flat on the day but is down more than 7 percent YTD, underperformed the S&P by a wide margin.  Now the question is whether recent selloff is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in IYT.

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 Transportation Average ETF (weekly)

Our “U.S. Market Trading Map” painted IYT bars in red (sell) – see area ‘A’ in the chart. The first dominant feature on the chart is the rising trend line starting in 2016.  The second dominant feature of the chart is the downward trend since late September 2018.  This week’s downside follow-through confirmed last week’s bearish break below the 2-year moving average. That level that was significant when the ETF broke above it in 2016.  Right now the most important thing to watch is the retreat and rebound behavior near 173, or the 38.2% Fibonacci retracement.  A close below that level has measured to 163, or the 4-year moving average and the 50% Fibonacci retracement.

IYT has resistance near 182.  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 (sell).  Last changed December 4, 2018 from bullish (buy) (see area ‘A’ in the chart).

[Note: for more details analysis, please take a look at our “US Market ETF Trading Map”]

Once again, S&P sold off sharply after the early rally attempt ran out of steam just below the important sentiment 2700 mark.  In theory, the longer the index holds below this resistance the stronger it becomes.  Momentum has been deteriorated following recent selloff, suggesting the path with least resistance remains lower.

For now, 2600 is the line in the sand.  So unless there is a serious breach of this important support, we could be range bounce from here into the end of the year. As for resistance, if 2700 is taken out on a closing basis, then the door is opened for a retest of the October and November recovery highs, near 2815 but it’s not expected this week.

Short-term trading range: 2600 to 2766.  S&P has support near 2600.  A close below that level has measured move to 2530, or the early 2018 low.  The index has resistance near 2700.  A close above that level could trigger acceleration toward the 2740-2815 zone.

Long-term trading range: 2350 to 2930.  S&P has support near 2660.  A close below that level on a monthly basis has measured move to 2350.  The index has resistance near 2750-2800.  A close above that level has measured move to 2930.

In summary, S&P’s rally attempt failed near formidable resistance, indicating the path with least resistance remains lower.  If the index fails to climb above 2700 this week, then the next stop will be 2600 with the possibility of a brief breakdown below that level.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

© All rights reserved and actively enforced.
Note: This is a free edition of The Market Outlook, a daily CEM News subscriber newsletter. To get this column before market opens together with hundreds of technical trading ideas (including stocks and ETFs) every month, please click here.
Subscribe to CEM News to receive more in-depth research from Capital Essence.