S&P’s 2800 Might Not Hold for Long

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday May 29, 2019.

We’ve noted in the previous Market Outlook that: “S&P’s oversold rally is showing signs of buyer’s fatigue, noting a struggle for the index to get past Thursday’s bearish breakaway gap.  There is a good chance S&P will see some near-term weakness.”  As anticipated, S&P closed lower Tuesday, fell 0.8 percent to 2,802.39, as investors continued to show little enthusiasm for risk assets.  The Dow Jones Industrial Average dropped 0.9 percent to 25,347.77. The Nasdaq Composite fell 0.4 percent to end the day at 7,607.35.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 6 percent to close at 15.85.

Industrial sector led the market lower as investors remained concerned about a protracted trade war with China. Donald Trump said on Monday the U.S. was “not ready” to make a deal with China, before adding he expected one in the future. Trump also said tariffs on Chinese imports could go up “substantially”.  As such, the Industrial Select Sector SPDR ETF (XLI) fell 0.92 percent on the day but is up 13.5 percent YTD, outperformed the S&P.  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 red (sell) – see area ‘A’ in the chart. Over the past few weeks, XLI has been basing sideways using the 2-year moving average, a key technical level based on moving averages, as support after the late 2018 rally ran out of steam near the 2018 falling trend line.  This week’s selloff pushed the ETF below the 2-year moving average, signify a bearish breakout.  Right now follow-through is the key.  A close below the late March low of 72.79 on a weekly basis will confirm the bearish signal and a retest of the more important support near the 68-64 zone, or the 38.2% Fibonacci retracement and the 4-year moving average, should be expected.

XLI has resistance near 75.  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 22, 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”]

Once again, S&P moved down to test support at the important sentiment 2800 zone after the early rally attempt ran out of steam near last week’s bearish breakaway gap.  As mentioned, short-term indicators are oversold but problematic.  The index had several opportunities for breaking out over the past few days, and its failure to stage a meaningful rally is a bearish development.  Tuesday’s late day selloff is a clear indication of buyer’s fatigue, suggesting that the S&P might have to move to a much lower level to attract new buyers.  Perhaps the negative Money Flow measure is the best illustration of the bears’ case.

For now, 2800 is the line in the sand.  A close below that level will trigger another selloff with initial downside target near 2790-2776.

Short-term trading range: 2800 to 2873.  S&P has support near 2800.  A close below that level has measured move to 2776.  The index has resistance near 2844.  A close above that level has measured move to 2873.

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, Tuesday’s late day selloff pushed S&P down to key support zone at the important sentiment 2800 mark.  Money Flow measure is not favorable over the near to intermediate term, suggesting the support might not hold for long.  A failure to bounce off key support means that long-term buying pressure has finally been exhausted. The stronger the support level, the more powerful the selloff.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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