S&P Broke Key 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 Tuesday May 14, 2019.

We’ve noted in the previous Market Outlook that: “so far last week’s oversold rally has proved nothing as far as its staying power or as a possible trend reversal.”  As anticipated, stocks sold off on Monday, as trade tensions escalated after China retaliated with a tariff rate hike on U.S. imports.  . The S&P tumbled 2.4 percent to 2,811.87.  The Dow Jones Industrial Average dropped 2.4percent to 25,324.99.  The Nasdaq Composite dropped 3.4 percent to 7,647.02.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged more than 28 percent to close at 20.54.

Growth concerns were manifested in the underperformance of the tech sector.  As such, the iShares PHLX Semiconductor ETF (SOXX) tumbled 4.68 percent Monday but is up more than 22 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 SOXX.

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 – iShares PHLX Semiconductor ETF (weekly)

Our “U.S. Market Trading Map” painted SOXX bars in red (sell) – see area ‘A’ in the chart.  Over the past few weeks, SOXX has been trending lower in a short-term corrective mode after the late 2018 rally ran out of steam near 218.  This week’s selloff pushed the ETF below the 197 zone.  That level is significant in charting terms.  It was the prior high set in 2018 and roughly corresponds with the 2019 rising trend line.  This is a negative development, signify a bearish breakout and downside reversal.  Over the next few weeks, traders should monitor trading behavior as the 180 zone is tested as support. A close below that level will bring the 2018 low, around 144 into view.

SOXX has resistance near 197.  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”]

S&P moved down to test support at the important sentiment 2800 mark after falling below the trend channel moving average in early Monday trading session.  That level was tested several times over the past week.  Momentum has been deteriorated following recent selloff.  Nonetheless, intraday oversold conditions returned with Monday’s selloff, supporting a short-term rebound.

For now, 2800 is the line in the sand.  A close below that level would see a massive pickup in volatility.

Short-term trading range: 2775 to 2900.  S&P has support near 2800.  A close below that level has measured move to 2775.  The index has resistance near 2862.  A close above that level has measured move to 2909.

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, S&P broke several key supports Monday, signify a bearish breakout.  However, intraday oversold conditions returned with Monday’s selloff, supporting a short-term rebound.  Over the next few days, it will be important to monitor the retreat and rebound behaviors to determine whether breakouts are decisive.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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