S&P Vulnerable to Further Downside Retracement

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday January 4, 2019.

Stocks fell sharply on Thursday as a revenue warning from Apple and weak manufacturing data stoked worries about a slowdown in global economic growth.  The Dow Jones Industrial Average lost 2.8 percent to 22,686.22.  The S&P pulled back 2.47 percent to 2,447.89. The Nasdaq Composite tumbled 3 percent to 6,463.50.  CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged nearly 10 percent to 25.45.

The heavily-weighted information technology sector got hit hard Thursday as Apple dragged on the group with a steep loss of 10.0%, which sent the stock to a level not seen since mid-2017. The Technology Select Sector SPDR ETF (XLK) tumbled 5.05 percent on the day after falling more than 3 percent in 2018, slightly outperformed the S&P.  Now the question is whether the selloff is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in XLK.

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 – Technology Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLK bars in red (sell) – see area ‘A’ in the chart.  The first dominant feature on the chart is the rising trend line starting in 2015.  The second dominant feature of the chart is the downward trend starting in October 2018, which represents the digestion period.  This week’s massive selloff invalidated last week’s bullish reversal signal.  This is a negative development, opened the door for a test of the massive 2-conjoining support just below 54, or the 50% Fibonacci retracement and the 4-year moving average.  A close below 57.50 on a weekly basis will confirm this.

XLK has resistance near 63.50.  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 shifted to bearish (sell).  Last changed January 3, 2019 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”]

After rallying nearly 200 points from the December 26 low of 2346 and meeting anticipated resistance at the 38.2% Fibonacci retracement near 2510, S&P sold off in Thursday and closed just above the lower boundary of the green band.  That level has been tested several times in recent months.  A close below it would trigger a multi-week meltdown, the way we have in October and December. It’s obviously the most important level to keep on the trading radar.

As mentioned, Money Flow measure is below the zero line but has been diverged from price actions.  S&P undercut the October low while Money Flow measure printed a higher low.  This bullish divergence suggested that downside risk could be limited.

Short-term trading range: 2350 to 2570.  S&P has minor support near 2430. A close below that level will bring the December low, near 2350, back into view.  The index has a strong band of resistance near 2500-2530.  A close above 2530 could trigger acceleration toward the 2600 zone. Given the damages done over the past weeks, there is a no reason to turn particularly bullish until this zone is eclipsed.

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, S&P’s oversold rally ran out of steam near 2500.  A failure to move above key resistance means that most of the potential buyers at this level had already placed their bets. The next batch of buyers typically sits at a much lower level.  On balance, we remain near term negative for S&P as we believe market vulnerable to further downside retracement over the short-to-intermediate term.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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