S&P Broke Several Supports but Follow-through is the Key

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 Monday December 17, 2018.

Stocks closed significantly lower Friday amid growing concerns over global economic growth.  China, the second-largest economy in the world, reported some weaker-than-expected industrial production and retail sales data.  For the day, the S&P fell 1.9 percent to 2,599.95.  The Dow Jones Industrial Average lost 2.0 percent and the Nasdaq Composite lost 2.3 percent.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped nearly 5 percent to 21.63.

Retailers got hit hard Friday after Costco (COST) reported its fiscal Q1 results, which included revenues that were slightly below consensus. Margin weakness, attributed to higher merchandising costs, also weighed on the stock.  Shares tumbled more than 8 percent.  The SPDR S&P Retail ETF (XRT) fell 1.18 percent on the day and is down 7 percent YTD, underperformed the S&P by a wide margin.  Now the question is whether recent selloff is a beginning of an end or there’re more pains ahead?  Below is an update look at a trade in XRT.

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 S&P Retail ETF (weekly)

Our “U.S. Market Trading Map” painted XRT 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 2017.  The second dominant feature of the chart is the downward trend since late August 2018.  Last week’s downside follow-through confirmed the early December’s bearish break below the 4-year moving average and the 61.8% Fibonacci retracement.  This is a negative development, suggested that the entire trend will eventually retrace.  XRT has minor support near 39.  A close below that level on a weekly basis will opened the flood gate toward the 2017 low, just below 38.

XRT has resistance near 45.  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”]

Key technical development in Friday session was a close below the important sentiment 2600 mark.  This is a bearish development because it implied more supply is coming into the market.  And S&P might have to move to a much lower level to attract new buyers as a consequence.  Momentum has weakened but oversold conditions are widespread enough to generate a meaningful rebound.  Right now follow-through is the key.  A close below 2600 on Monday will confirm the bearish break and a retest of support at the 2530-2515 zone, or the early 2018 low and the bottom of its short-term trading range.

For now, 2700 is the line in the sand.  In theory, the longer the index holds below this resistance the stronger it becomes.  A close above it is required to neglect the short-term downward trend pressure.  There is a no reason to turn particularly bullish until this area is eclipsed.

Short-term trading range: 2515 to 2736.  S&P has support near 2600.  A second close below that level has measured move to 2530-2515.  The index has resistance near 2700.  A close above that level could trigger acceleration toward the 2736-2760 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, Friday’s decline led to a serious breach of several supports.  The breakdown breakout would be confirmed on another close below 2600, which would support near-term downside follow-through and a test of more important support in the 2530-2515 zone.

 

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.