S&P Broke Key Support but Downside Risk Could be Limited

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday August 2, 2019.

We’ve noted in the previous Market Outlook that: “S&P broke key support Wednesday, signify a bearish breakout with downside target near 2924.  While seemingly vulnerable to further short-term weakness, it will be important to monitor the retreat and rebound behaviors over the next few days to determine whether breakouts are decisive.  We’d turn particular bearish if S&P closes twice below 3000.”  As anticipated, stocks traded higher in early Thursday session, a day after the Federal Reserve delivered the first interest-rate cut in a decade in part to combat the spat’s effects on global growth.  A robust rebound rally however, abruptly fell apart after President Donald Trump threatened to impose a 10% tariff on $300 billion worth of Chinese goods by September.  The S&P ended the session down 0.9 percent at 2,953.56 after rallying more than 1 percent.  The Dow Jones Industrial Average also down 0.9 percent to close at 26,583.42.  The Nasdaq Composite closed down 0.8 percent at 8,111.12.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped more than 9 percent to close at 17.63.

Thursday’s declines spread across sectors as slumping global industrial company Caterpillar Inc., consumer brand Nike Inc. and tech giant Apple Inc. slammed the market. A draft list of $300 billion worth of targets published by the Trump administration in May included a raft of consumer and technology goods, including most of Apple’s major products such the IPhone, along with toys, footwear and clothing.  Retail stocks like Nike dropped 3.4 percent. Yeti Holdings dropped 7 percent while PVH slid 6.9 percent.   As such, the SPDR S&P Retail ETF (XRT) plummeted by 3.2 percent on the day, bringing its year-to-date gain down to less than 1 percent, underperformed the S&P.  Now the question is whether Thursday’s selloff is a beginning of an end or there’re more pains ahead?  Below is an update look at a trade in XRT.

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 – SPDR S&P Retail ETF (weekly)

Our “U.S. Market Trading Map” painted XRT bars in red (sell) – see area ‘A’ in the chart. Over the past few weeks, XRT has been basing sideway after the early June recovery rally ran into resistance near the 20-week moving average, a key technical level based on moving averages.  This week’s massive selloff pushed the ETF below the June rising trend line support, signify a bearish breakout.  Over the next few days, it’d be important to monitor trading behavior as the late 2018 rising trend line, near 40.60, is tested as support. A close below that level will bring the 2018 low, just above 38, into view.

XRT has resistance near 43.30.  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 July 30, 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”]

As expected, the S&P sold off after the early rally attempt ran into resistance near the lower boundary of the pink band.  The late day selloff pushed the index down to the 2950 zone.  This level was significant when the S&P climbed above it in early July.  Market internal deteriorated as selling pressure accelerated but the momentum indicator is much closer to oversold than overbought zone.  This could help putting a short-term floor under the market.  With this in mind, we’d look to reduce exposure into intraday bounces.

For now, the trend channel moving average, currently at 2926, is the line in the sand. A failure to hold above key support suggested that most of the potential buyers at this level had already placed their bets.  The next batch of buyers typically sits at a much lower level and we’re looking at 2800.

Short-term trading range: 2926 to 2992.  S&P has support near 2950.  A close below that level has measured move to 2926-2900.  The index has resistance near 2992.  A close above that level has measured move to 3025.

Long-term trading range: 2800 to 3200.  S&P has support near 2900.  A close below that level has measured move to 2800.  The index has resistance near 3080.  A close above that level has measured move to 3200.

In summary, S&P broke several supports Thursday.  Market internal has weakened but the 2900 zone is too big and too important to fall quickly.  This could help minimize downside follow-through and widespread breakdowns.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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