Return of Oversold Conditions Will Put Short-term Floor Under Market

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday December 20, 2018.

Stocks closed lower Wednesday after the Fed Chair Powell, didn’t deliver on the market’s wishes.  For the day, the S&P dropped 1.5 percent, the Dow Jones Industrial Average lost 1.5 percent and the tech-heavy Nasdaq Composite lost 2.2 percent.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed flat at 25.58.

Financial sector outperformed in the early Wednesday but rolled over with the rest of the market following the Fed’s interest-rate decision and Fed Chair Powell’s press conference.  The SPDR S&P Regional Banking ETF (KRE) tumbled 2.97 percent on the day and is down nearly 22 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 KRE.

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 Regional Banking ETF (weekly)

Our “U.S. Market Trading Map” painted KRE bars in red (sell) – see area ‘A’ in the chart.  KRE sold off sharply over the past few weeks after breaking out from the October bearish flag. This week’s massive selloff pushed the ETF down toward the 61.8% Fibonacci retracement of the 2016-2018 upswing, just above 45.  This level is significant in charting terms.  A close below that level suggested that the entire trend will eventually be retraced.  With that said, a close below 45 on a weekly basis has measured move to 33, or the 2016 low.

KRE has resistance near 50.  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”]

The key event here is a test of key support at the 2500 zone, or the early 2018 low and the 38.2% Fibonacci retracement of the 2016-2018 upswing. Not only that it is a tough level to overcome, momentum indicator is at the lowest level since October, suggesting a short-term counter trend bounce could be in the wings.  Additionally, Money Flow measure also holds above the November lows, indicating less supply is coming into the market.  So, it should not be surprising to see the S&P regroups and rebounds from near 2500.

On the upside, 2600 is the line in the sand.  There is a no reason to turn particularly bullish until this area is eclipsed.

Short-term trading range: 2500 to 2600.  S&P has support near 2500.  A second close below that level has measured move to 2380.  The index has resistance near 2600.  A close above that level could trigger acceleration toward the 2700 zone.

Long-term trading range: 2350 to 2930.  S&P has support near 2530.  A close below that level on a monthly basis has measured move to 2350.  The index has resistance near 2740.  A close above that level has measured move to 2950.

In summary, Wednesday’s trading action was extremely strong in most respects. Though return of oversold conditions on an intraday basis will put a short-term floor under the market.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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