Signs of Capitulation

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 24, 2018.

We’ve noted in the previous Market Outlook that: “the S&P 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 weeks, upside reward could be limited.”  As anticipated, the S&P had climbed to session highs in Friday morning action, up 1.5 percent to 2504, amid some market-soothing commentary from New York Fed President John Williams.  The market however, unable to hold on to early gains and rolled over on report that Director of the White House National Trade Council Peter Navarro told Nikkei that an agreement with China in 90 days will be difficult to attain.  For the day, the S&P fell 2.1 percent.  The Dow Jones Industrial Average dropped 1.8 percent.  The Nasdaq Composite tumbled 3 percent.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged nearly 11 to 28.38.

Concerns about the strength of the global economy heading into next year sent transport stocks lower along with crude oil prices.  U.S. West Texas Intermediate crude oil ended Friday’s session down 29 cents at $45.59, the lowest closing price since January 2016.   The iShares Transportation Average ETF (IYT) fell 1.72 percent on the day and is down nearly 17 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 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 2009.  The second dominant feature of the chart is the downward trend since September 2018.  IYT sold off sharply over the past couple weeks after the November rally attempt ran out of steam near the 1-year moving average.  Last week’s massive selloff pushed the ETF below the 50% Fibonacci retracement and the 4-year moving average.  That level is significant in charting terms.  It was tested several times over the past years and offered extraordinary buying opportunities to those whose can stomach the wild rides.  IYT has resistance near 164.  A close above that level will open up for a test of the 182-190 zone.

IYT has support near 150, or the 61.8% Fibonacci retracement.  Short-term traders could use that level as the logical level to measure risk against.  A close below that level has measured move to 115, or the 2016 low.

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”]

Last week’s massive selloff pushed the S&P below its normal trading range and into extreme oversold territory.  While extreme oversold condition is normal during long-term downtrend, it suggested that downside momentum might not sustain without at least a short-term breather.  In fact, current trading pattern is very similar to the October selloffs.  As shown, after fell below the bottom of its short-term trading range on October 11 and again on October 24, the index traded lower throughout the week. The S&P formed a significant short-term low on October 29 and traded higher throughout the following weeks. With that said, if history is any guidance then traders should expect at least an attempt to rally toward immediate resistance at the 2500-2530 zone.

On the downside, support is strong near the 2380-2340 zone, of the 50% Fibonacci retracement of the 2016 upswing and the 4-year moving average.  Although not expected this week, a close below 2340 on a weekly basis will break the multi-year bull trend.

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: 2340 to 2530.  S&P has a strong band of support near 2380-2340.  The index has resistance near 2500-2530.  A close above 2530 could trigger acceleration toward the 2700 zone.

Long-term trading range: 2330 to 2730.  S&P has support near 2330.  A close below that level on a monthly basis has measured move to 1920.  The index has resistance near 2650.  A close above that level has measured move to 2730.

In summary, recent market activities are showing some signs of capitulation among traders.  It seems to us that we will likely capitulate just below S&P’s 2400 zone. Right now the strategy is to wait for a bounce trade as soon as price patterns show us that the level of maximum pain has been reached.

 

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.