Momentum Weakened as S&P Tests Key Support

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday May 9, 2019.

We’ve noted in the previous Market Outlook that: “while the US China trade concerns continue negatively affect trading sentiment, the fact that the S&P pulled back to level that had been successful in repelling price action in the past increased the probability for a short-term bounce. Nevertheless, market internal has been deteriorated following recent selloff so rally could be short-lived.”  As anticipated, the S&P was on pace to end a two-day slide, being up was much as 0.5 percent in early Wednesday session on optimism that a trade deal may still get done, but the recovery attempt faded in last 30 minutes of trading.  For the day, the bench mark gauge fell 0.16 percent to 2,879.42. The Nasdaq Composite was down 0.26 percent to 7,943.32.  The Dow Jones Industrial Average finished unchanged at 25,967.33.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, climbed less than 1 percent to close at 19.40.

A disappointing forecast from Intel late in the trading day, the chipmaker said it expects low single-digit revenue growth over the next three years, dragged down the tech sector.  As such, the Technology Select Sector SPDR ETF (XLK) fell 0.12 percent on the day but is up more than 23 percent YTD, outperformed the S&P by a wide margin.  Now the question is whether recent pullback 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 green (buy) – 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 since 2018.  The late 2018 selloff found support near the 38.2% Fibonacci retracement, a key technical level based on Fibonacci levels.  The early 2019 rally pushed the ETF above the 2018 highs, signify a bullish reversal and upside breakout.

Over the past few weeks, XLK has been trending lower in a short-term corrective mode as it works off overbought conditions.  The correction is testing support at recent breakout point, just above 76.  This level is significant in charting terms.  A close below it will jeopardize the April’s bullish signal and a test of the more important support near the 70 zone should be expected.

XLK has resistance just below 80.  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 May 6, 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”]

The big picture remains the same.  S&P is testing support at the trend channel moving average after recent rally ran out of steam near the lower boundary of the red band, a key technical level.  Market internal has been weakened but downside momentum does not appear strong enough to generate a widespread breakdown.  Money Flow measure is flashing a weak bearish signal as it’s on a verge of falling below the zero line.  The indicator printed a lower high as prices broke out to new highs in late April, indicating less money’s chasing stocks higher.  These elements will continue negatively affect trading sentiment over the coming days.

For now, 2858 is the line in the sand.  We’d turn particular bearish if the index closes twice below that level.

Short-term trading range: 2858 to 2900.  S&P has support near 2858.  A close below that level has measured move to 2775.  The index has resistance near 2900.  A close above that level has measured move to 2950-3000.

Long-term trading range: 2775 to 3000.  S&P has support near 2890.  A close below that level has measured move to 2775.  The index has resistance near 3000.  A close above that level has measured move to 3115.

In summary, momentum has weakened as S&P moved down to test support at the trend channel moving average.  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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