Not a Time to be Long

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday August 26, 2019.

The stock market sold off on Friday after Donald Trump ordered companies to find an alternative to China in response to Beijing announcing retaliatory tariffs against the U.S. The S&P slid 2.6 percent to close at 2,847.11. The Dow Jones Industrial Average fell 2.4percent to close at 25,628.90.  The Nasdaq Composite dropped 3 percent to end the day at 7,751.77.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged more than 19 percent to 19.87.

The critical spread between the 10-year Treasury yield and the 2-year yield inverted multiple times throughout Friday’s trading session after Donald Trump ordered American companies to steer clear of trade with Beijing.  An inversion of the 2-10 yields, which viewed by fixed income traders as a recession prognosticator, put a damper bank lending profits. As such, the SPDR S&P Bank ETF (KBE) tumbled more than 3 percent on the day, bringing its year-to-date gains down to just over 6 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. Last week’s downside follow-through confirmed the prior week’s bearish breakout below the 4-year moving average, a key technical level based on moving averages.  This is a negative development, increased the probability for a retst of the late 2018 low just below 35.  A consecutive close below 39.60 will confirm this.

KBE has resistance just above 41.40.  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 August 23, 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, the S&P retreated after recent rally attempt failed at the trend channel moving average.  Friday’s massive selloff pushed the index down to support at the lower boundary of the green band.  This level was tested several times over the past months.  Technically speaking, the more often support is tested the weaker it becomes.  Adding to concerns is the lagging Money Flow measure.  The indicator whipsaw near zero line as the S&P struggled to get past formidable resistance, suggesting that the bears are more aggressive as prices off than the bulls were as prices ascended.  These elements suggested that the support might not hold for long and the index will have to move to a much lower level to attract new buyers.

The trend channel moving average, currently at 2946, is the line in the sand.  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 2500.

Short-term trading range: 2800 to 2946.  S&P has support near 2825.  A close below that level has measured move to 2800.  The index has resistance near 2900.  A close above that level has measured move to 2946.

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, last week’s selloff pushed the S&P down to formidable support zone.  Momentum and Money Flow measure are not favorable over the near to intermediate term, suggesting this is not a time to be long.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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