Market Vulnerable to Further Downside Retracement

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday September 7, 2018.

We’ve noted in the previous Market Outlook that: “momentum has weakened as S&P moved down to test support at the lower boundary of the pink band.  The longer the index stays near that level, the more vulnerable it is to lower prices.”  As anticipated, mostly fell on Thursday as growing concerns over global trade triggered a fresh round of profit taking.  For the day, the S&P declined 0.4 percent to close at 2,878.05.  The tech-heavy Nasdaq dropped 0.9 percent to 7,922.73.  The Dow Jones Industrial Average eked out a slight gain, rose 0.08 percent to 25,995.87.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose to its highest level since August 17, jumped more than 5 percent to close at 14.65.


Energy is one of the worst laggards on Thursday as losses in WTI crude oil futures pressure the group. October Crude Oil futures fell 1.37 percent to 67.81/barrel after U.S. data showed gasoline inventories rose unexpectedly last week, overshadowing a bullish drawdown in crude.  The Energy Select Sector SPDR ETF (XLE) fell 1.85 percent to 72.81, bringing its YTD gains down to just 0.8 percent while the S&P gained more than 7 percent over the same period.  Now the question is whether recent selloff is a pause that refreshes or it’s a beginning of a deep correction?  Below is an update look at a trade in XLE.

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 – Energy Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLE bars in red (sell) – see area ‘A’ in the chart.  There is a distinct possibility that a massive triangle pattern is currently setting up in the daily chart of XLE.  Over the past few weeks, XLE has been trending lower after the late April rally found resistance just above 78.  That level was tested several times over the past years.  This week selloff pushed the ETF down to the mid-August low, near 71.70.  Close below this level on a weekly basis will bring the 2016 rising trend line, near 70, into view.  This level is significant in charting terms. A failure to hold above it, indicates that the massive 2016-2018 triangle pattern has resolved itself into a new downswing and a retest of the 2016 low, near 50, should be expected.

XLE has minor resistance near 76.  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.  Last changed September 5, 2018 from slightly bearish (see area ‘A’ in the chart).

[Note: for more details analysis, please take a look at our “US Market ETF Trading Map”]

The near-term picture remains the same. There is currently a test of support at the late August breakout point after the mid-August rally ran out of steam near the lower boundary of the red band, a key technical level.

Market internal has been weakened.  Money Flow measure flashed a bearish signal as it’s crossed below the zero line for the first time since June.  The indicator printed a lower high as prices broke out to new highs in late August, indicating less money’s chasing stocks higher.  These elements will continue negatively affect trading sentiment over the coming days.

For now, 2870 is the line in the sand.  A close below that level will trigger a new sell signal with downside target near the trend channel moving average, currently at 2823, just above the important sentiment 2800 mark.  That level was tested several times over the past months.  Some aggressive traders might use this level like a magnet to buy.

Short-term trading range: 2800 to 2926.  S&P has support near 2870.  A close below that level has measured move to 2823, based on the trend channel moving average.  Below it, a more significant support lies at 2800.  The index has resistance near 2900.  Above it a more significant resistance lies at the lower boundary of the red band, around 2926.

Long-term trading range: 2700 to 3000.  S&P has support near 2800.  A close below that level will trigger a major sell signal with a downside target near 2700.  The index has resistance near 3000.

In summary, volatility has been increased as S&P tested key support level.  While there is a low probability of a full blow correction we remain near-term negative for S&P as we believe market vulnerable to some downside retracement over the short-to-intermediate term.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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