S&P Broke Key Support but Follow-through is Key

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

We’ve noted in the previous Market Outlook that: “the big picture remains the same. There is a consolidation near the trend channel moving average, which represents digestion period.  S&P’s 2948 is the line in the sand.  A failure to hold above that level would trigger a new sell signal and an unwelcome pickup in downside volatility.”  As anticipated, S&P gave back most of prior session gains and some more as disappointing manufacturing data stoked worries over the U.S. economy.  For the day, the bench mark gauge slid 1.23 percent to 2.940.25. The Nasdaq Composite fell 1.13 percent to 7,908.68.  The Dow Jones Industrial Average 1.27 percent to 26,573.04.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged more than 13 percent to 18.45.

The market took a precipitous fall soon after the report was released at 10:00 a.m. ET, then embarked on a steady retreat throughout the rest of the day. All 11 S&P sectors finished lower, with the cyclical industrials, materials, energy, and financials sectors, all down more than 2 percent, bearing the brunt of the damage.  As such, Industrial Select Sector SPDR ETF (XLI) tumbled 2.40 percent for the day, but is up nearly 18 percent year-to-date, slightly outperformed the S&P.  Now the question is whether the 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 trending lower after the late August rally ran into resistance near the closely watch 79-80 zone, or the prior highs set in late 2018 and earlier this year.  This week’s massive selloff confirmed the late September bearish signal and increased the probability for a test of the lower boundary of the short-term trading range that has been in place since early summer, near 72.  That level is significant in charting terms.  A close below it will bring the 4-year moving average, currently at 67.91, into view.

XLI has resistance near 80.  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 September 20, 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”]

Key technical development in Tuesday session was a close below the trend channel moving average, the level that offered support since the S&P climbed above it in early September.  Momentum indicator shifted lower from near oversold zone, indicating an internal weakness.  Money Flow measure is flashing a weak bearish signal as it’s on a verge of turning negative following recent selloff.  These elements will continue negatively affect trading sentiment in the coming days. Right now follow-through is the key.  We’d turn particular bearish if S&P closes twice below the trend channel moving average, currently at 2947.

Short-term trading range: 2925 to 2968.  S&P has support near 2925.  A close below that level has measured move to 2835.  The index has resistance near 2947.  A close above that level has measured move to 2968.

Long-term trading range: 2820 to 3100.  S&P has support near 2920.  A close below that level has measured move to 2820.  The index has resistance near 3011.  A close above that level has measured move to 3100.

In summary, S&P broke key supports Tuesday, signify resumption of the short-term downward trend that has been in place since mid-September.  While the near-term technical backdrops favors further short-term weakness, it will be important to monitor the retreat and rebound behaviors to determine whether breakouts are decisive.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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