Market Internal Deteriorated As S&P Tested Key Level

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.


Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday September 4, 2019.

We’ve noted in the previous Market Outlook that: “while the near-term technical outlook remains bullish, given the looming resistance near S&P’s 2945, there is no big commitment to accumulate stocks aggressively at this point.  What this means is that as the S&P inches into the area of key overhead resistance, aggressive sellers will most likely dips in their toes to see how the market reacts.  So, we’d be cautious against taking large position at this stage.”  As anticipated, stocks fell on Tuesday, the first trading day of a historically tough month, as the market digested several global events. Additional tariffs imposed by the U.S. and China on each other went into effect on Sunday protests escalated in Hong Kong, and UK Prime Minister Boris Johnson threatened to call a snap election if rebel lawmakers vote to block a no-deal Brexit.

For the day, the S&P lost 0.7 percent to 2,906.27.  The Dow Jones Industrial Average fell 1.1 percent to t 26,118.02.  The Nasdaq Composite pulled back 1.1 percent to 7,874.16.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose more than 3 percent to 19.66.

The U.S. imposed 15 percent tariffs on a variety of Chinese goods on Sunday, while China imposed new charges on U.S. products from Sept. 1. It marked the latest escalation in their long-running trade war.  Retail stocks fell broadly, led by declines in Signet Jewelers and Guess. Signet dropped 9.5 percent while Guess lost 8.1 percent.  As such, the SPDR S&P Retail ETF (XRT) fell 1.5 percent on the day and is down more than 4 percent year-to-date, underperformed the S&P.  Now the question is whether recent 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 sideways using the 38 zone as support.  This level is significant in charting terms.  It was tested several times over the past years.  A failure to hold above 38 suggests 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 35, or the 38.2% Fibonacci retracement of the 2008 major upswing.

XRT has resistance near 41.  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 28, 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”]

As expected, S&P retreated after last week’s rally ran out of steam near the trend channel moving average.  Tuesday’s early selloff pushed the index down to support at the upper boundary of the green band.  That level was significant when the index climbed above it last week.  Market internal deteriorated but downside momentum does not appear strong enough to generate widespread breakdowns.  Right now the most important thing to look is trading behaviors as the upper boundary of the green band is tested as support.  A failure to hold above that level signify a bearish trend shift and a much deeper pullback should be expected.

Short-term trading range: 2895 to 2944.  S&P has support near 2895.  A close below that level has measured move to 2820-2800.  The index has resistance near 2914.  A close above that level has measured move to 2944.

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, market internal deteriorates as S&P moved down to test key level.  The index could signal a downward trajectory, depending on how it closes over the next few days.  Key support is defined by the upper boundary of the green band, around 2900.  If it closes below that level, the next leg is likely lower, and we’re looking at 2800.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

© All rights reserved and actively enforced.
Note: This is a free edition of The Market Outlook, a daily CEM News subscriber newsletter. To get this column before market opens together with hundreds of technical trading ideas (including stocks and ETFs) every month, please click here.
Subscribe to CEM News to receive more in-depth research from Capital Essence.