S&P Broke Important Support but Follow-through is the Key

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday March 8, 2019.

Stocks closed lower on Thursday as a negative economic outlook from the European Central Bank (ECB) helped fuel growth concerns and profit-taking interest.  For the day, the Dow Jones Industrial Average lost 0.8 percent to 25,473.23.  The S&P fell 0.8 percent to 2,748.93. The Nasdaq Composite dropped 1.1 percent to 7,421.46.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose more than 5 percent to 16.59.

Ten of the 11 S&P 500 sectors finished lower with consumer discretionary and financials leading the retreat.  Bank of America, Goldman Sachs, Morgan Stanley and Citigroup all fell around 1 percent. The SPDR S&P Bank ETF (KBE) dropped 1.6 percent on the day but is up more than 16 percent YTD, outperformed the S&P by a wide margin.  Now the question is whether recent selloff is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in KBE.

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 Bank ETF (weekly)

Our “U.S. Market Trading Map” painted KBE bars in red (sell) – see area ‘A’ in the chart. The first dominant feature on the chart is the rising line starting in early 2016. The second dominant feature of the chart is the downward trend in 2018, which represented the digestion period.  The December selloff found support near the 61.8% Fibonacci retracement.  The January oversold rally pushed the ETF up against the 1-year moving average, a key technical level based on moving averages.  This week’s massive bearish engulfing bar indicated that the resistance would hold.  Over the next few days, the most important thing to watch is the retreat and rebound behavior as the 42 zone is tested as support.  A close below that level has measured move to around 40.

KBE has resistance just below 46.  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 March 5, 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”]

Key technical development in Thursday session was a close below 2750, or December breakdown point.  That level was significant when the S&P climbed above it in early February.   This is a negative development, signify a bearish reversal.  Money Flow measure has been falling sharply over the past few days, suggesting that the bears are more aggressive as prices dropped than the bulls were as prices ascended.  Right now follow-through is the key.  A close below 2750 tomorrow will bring the trend channel moving average, currently at 2666, into view.

Short-term trading range: 2666 to 2870.  S&P has support near 2735.  A close below that level has measured move to 2666.  The index has resistance near 2750.  A close above that level has measured move to 2767-2785.

Long-term trading range: 2640 to 2960.  S&P has support near 2750.  A close below that level has measured move to 2640.  The index has resistance near 2850.  A close above that level has measured move to 2960.

In summary, S&P broke key support Wednesday, signify a bearish trend reversal.  Nevertheless, it will be important to monitor the retreat and rebound behaviors to determine whether breakouts are decisive.  Right now follow-through is the key.  A close below 2750 this week would see a pickup in near-term volatility and bring the trend channel moving average, currently at 2666, into view.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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