Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday August 21, 2019.
Stocks closed lower Tuesday amid some profit taking efforts. The Dow Jones Industrial Average gave up 0.7 percent to close at 25,962.44. The S&P pulled back 0.8 percent to end the day at 2,900.51. The Nasdaq Composite slid 0.7 percent to 7,948.56. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose more than 3 percent to 17.50.
The major indexes fell to their session lows in the final minutes of the trading session as Treasury yields declined as well. The 2-year yield declined two basis points to 1.51%, and the 10-year yield declined four basis points to 1.56%. Bank shares such as Citigroup, Bank of America and J.P. Morgan Chase all traded lower as Treasury yields pulled back. As such, the SPDR S&P Bank ETF (KBE) fell 1.38 percent on the day, bringing its year-to-date gains down to about 9 percent, underperformed the S&P. 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 KBE.
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 Bank ETF (weekly)
Our “U.S. Market Trading Map” painted KBE bars in red (sell) – see area ‘A’ in the chart. The first dominant feature on the chart is the falling trend starting in September 2018. The second dominant feature of the chart is the sideways trading range between the 2-year and 4-year moving averages since early 2019, which represents the digestion period. The early August selloff pushed the ETF below the 4-year moving average, a key technical level, signify a bearish breakout and downside reversal. Right now, follow-through is the key. Over the next few days, traders should monitor trading behavior as the 39.60 zone. A close below that level will confirm the bearish signal and a retest of the late 2018 low, just below 35, should be expected.
KBE has resistance near 41.50. 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 bullish (buy). Last changed August 19, 2019 from bearish (sell) – (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 retreated after last week’s rally attempt ran out of steam just below the trend channel moving average. Tuesday’s selloff is testing support at the important sentiment 2900 mark. That level roughly corresponds with the upper boundary of the green band. Momentum indicator shifted lower from near oversold zone, indicating an internal weakness. Money Flow measure hovers near the zero line, indicating a lack of commitment. These elements will negatively affect trading sentiment in the coming days.
The trend channel moving average, currently at 2946, is the line in the sand. As mentioned, a close above that level will complete the bullish W-shape bottom and trigger acceleration toward the prior high set in late July. With that said, the bulls must hurdle and sustain above that level to maintain upside momentum. As for support, the important sentiment 2800 mark 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 2750.
Short-term trading range: 2880 to 2946. S&P has support near 2900-2890. A close below that level has measured move to 2800. The index has resistance near 2946. A close above that level has measured move to 3028.
Long-term trading range: 2450 to 3200. S&P has support near 2800. A close below that level has measured move to 2450. The index has resistance near 3080. A close above that level has measured move to 3200.
In summary, recent trading actions leaving the S&P in what looks to us like an orderly high level consolidation of last week’s massive rally. The overall technical backdrop remains positive, suggesting that selloff will likely be shallow and quick because sideline money will try to fight its way back into the market. As for strategy, traders should consider buying into market dips.
Thanks and happy trading.
(By：Michelle Mai for Capital Essence)
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