Real Danger in Current Market

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday March 11, 2019.

We’ve noted in the previous Market Outlook that: “S&P broke key support Thursday, 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.”  As anticipated, stock sold off sharply early Friday that saw the S&P lost nearly 1 percent as disappointing growth in U.S. jobs contributed to global growth concerns and profit-taking interest. However, renewed buying interest in the afternoon helped the benchmark index trim its loss to 0.2 percent to close at 2,743.07.  The Dow Jones Industrial Average pulled back 0.1 percent to close at 25,450.24. The Nasdaq Composite slid 0.2 percent to close at 7,408.14.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 3 percent to 16.05.

Weak trade data out of China, where February exports declined 20.7% year-over-year, far below analyst expectations and wiping out a surprise jump in January fueled concerns about the global economy slow down.  As such, the Industrial Select Sector SPDR ETF (XLI) fell 0.20 percent on the day but is up more than 15 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 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 green (buy) – 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 late 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 October breakdown point.  Last week’s massive selloff is a clear indication of supply overwhelming demand.  Over the next few weeks, the most important thing to watch is the retreat and rebound behavior as the 73-72 zone is tested as support.  A close below that level has measured move to around 70. Short-term traders could use that level as the logical level to measure risk against.

XLI has a strong band of resistance between 77 and 81.  A close above 81 has measured move to around 90, based on the 127.2% Fibonacci extension.

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”]

S&P moved down to test support at the early February bullish breakaway gap after falling below the lower boundary of the pink band on Thursday.  The late day rally attempt suggested that the support would hold, at least for the time being.  Short-term momentum has weakened but does not appear strong enough to generate major breakdowns. 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.  For the near term, the market has carved out key short-term resistance and support levels for traders to monitor.  If S&P breaks and holds above 2750, then a retest of 2817, or the October-March highs, would be easier to be achieved.

Support is at the early February bullish breakaway gap, around 2720.  A close below that level would bring the trend channel moving average, currently at 2673, into view.

Short-term trading range: 2673 to 2817.  S&P has support near 2720.  A close below that level has measured move to 2673.  The index has resistance near 2750.  A close above that level has measured move to 2782-2817.

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, market internals had been weakened as S&P moved down to test support at the early February bullish breakaway gap.  The longer the index stays near that level, the more vulnerable it is to lower prices.  This is the real danger in the current market.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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