Expect Increase in Near-term Volatility as Markets Establishing Tradable Low

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday December 26, 2018.

Follow-through selling and unsettling developments in Washington triggered another massive selling selloff Monday that saw the major indices tumbled more than 2 percent.  The S&P fell 2.7 percent.  The Dow Jones Industrial Average lost 2.9 percent and the Nasdaq Composite lost 2.2 percent.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged nearly 20 percent to 36.07.

The heightened sense of uncertainty in the market fueled another clear-cut effort to reduce equity exposure.  The Industrial Select Sector SPDR ETF (XLI) tumbled more than 3 percent on the day and is down more than 20 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 XLI.

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 – Industrial Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLI 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.  XLI sold off sharply over the past couple weeks after the November rally attempt ran out of steam near the 2-year moving average. This week’s downside follow-through confirmed last week’s bearish break below 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.

XLI has resistance near 63.75.  A close above that level will open up for a test of the 71-72 zone.

XLI has support near 59.  Short-term traders could use that level as the logical level to measure risk against.  A close below that level has measured move to 55, or 38.2% Fibonacci retracement of the 2009 major upswing.

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”]

Monday’s massive selloff pushed the S&P below support at the 50% Fibonacci retracement of the 2016-2018 upswing.  The index has closed below the bottom of its short-term trading range for a second day.  The inability of the major indices to launch a sustainable rebound effort from oversold conditions indicated an internal weakness.  Nevertheless, momentum indicator is now at the lowest level since October, stocks could try to bounce later in the week but given the damages done over the past weeks, we don’t expect to see any significant or sustainable rally just yet.

On the downside, support is strong near the 2340-2320 zone.  Although not expected this week, a close below 2320 on a monthly 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: 2320 to 2530.  S&P has a strong band of support near 2340-2320.  The index has resistance near 2500-2530.  A close above 2530 could trigger acceleration toward the 2600 zone.

Long-term trading range: 2320 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, Monday’s massive selloff had finally generate oversold conditions within the framework of the long-term uptrend.  While there is a higher than average odds for a short-term rebound, we expect increase in near-term volatility as markets establishing a tradable low.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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