S&P Could Retest the May Lows

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday May 21, 2019.

We’ve noted in the previous Market Outlook that: “daily chart of the S&P has shown signs that upside momentum is waning as the index tested key price level… there is a high probability that the late-week selloff will momentum.”  As anticipated, the S&P declined 0.7 percent on Monday as lingering concerns about Chinese retaliation against U.S. tech companies following U.S. scrutiny of Huawei Technologies dampened general buying interest.  The Dow Jones Industrial Average lost 0.3 percent to 25,679.90.  The Nasdaq Composite dropped 1.46 percent to 7,702.38.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose more than 2 percent to close at 16.31.

Chinese tech stocks sold off sharply following reports that Alphabet and many of the semiconductor companies reportedly began suspending business activity with Huawei to comply with new regulation that requires U.S. government approval to work with the Chinese firm.  As such, the Invesco China Technology ETF (CQQQ) tumbled more than 4 percent on the day but is up more than 10 percent YTD, slightly underperformed the S&P.  Now the question is whether recent selloff is a pause that refreshes or it’s a beginning of something new?  Below is an update look at a trade in CQQQ.

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 – Invesco China Technology ETF (weekly)

Our “U.S. Market Trading Map” painted CQQQ bars in red (sell) – see area ‘A’ in the chart.  Over the past few weeks, CQQQ has been trending lower after the early 2019 rally ran out of steam near the 2-year moving average, a key technical level based on moving averages. This week’s selloff pushed the ETF below the 4-year moving average, signify a bearish breakout and downside reversal.  Right now, follow-through is the key.  A close below 45 on a weekly basis will confirm the bearish signal and a retest of the 2018 lows, around 38, should be expected.

CQQQ has resistance near 45.  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 May 20, 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 fell below the trend channel moving average after climbed above that level last Thursday.  Monday’s downside follow-through confirmed last Friday’s bearish reversal signal.  This is a negative development, increased the probability for a retest of the early May low, near 2800.  We’d turned particular bearish if the index closes twice below that level.  With that said, a break below 2800 will bring the lower boundary of the green band, currently at 2778, into view.  While seemingly vulnerable to further short-term weakness, support is strong near the dark-green zone and Money Flow measure is still above the zero line.  These elements could help minimize downside follow-through and widespread breakdowns.

Short-term trading range: 2800 to 2870.  S&P has minor support near 2800.  A close below that level has measured move to 2778.  The index has resistance near 2870.  A close above that level has measured move to 2900-2950.

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 as the early May oversold relief bound ran out of steam near the lower boundary of the pink band.  Expect increase in near-term volatility as the lows of May is retested.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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