Category Archives: Market Outlook

Risk Far Outweighs Reward beyond S&P’s 2950

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday October 3, 2018.

Stocks closed mix Tuesday as optimism around global trade offset weakness in the large-cap tech stocks.  For the day, the Dow Jones Industrial Average rose 0.5 percent to 26,773.94.  The S&P closed flat at 2,923.43 and the Nasdaq Composite fell 0.47 percent to 7,999.55.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, added 0.4 percent to close at 12.05

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One of the noteworthy developments in recent days has been the move in retailers.  The group was under selling pressure after Donald Trump imposed tariff of 10% on half of Chinese goods coming into America, which might rises to 25% at year end.  The SPDR S&P Retail ETF (XRT) fell 3.27 percent to 49.06, bringing its YTD gains down to 8.6 percent.  The S&P rose over 9 percent over the same period.  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 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 XLY bars in red (sell) – see area ‘A’ in the chart.  Over the past few weeks, XRT has been trending lower in a short-term corrective mode after the July rally ran out of steam just above the prior high set in 2015.  This week massive selloff pushed the ETF below the 23.6% Fibonacci retracement, a key technical level, signify a bearish trend reversal.  A close below 50 on a weekly basis will confirm the signal and a test of the more important support near the 47 zone, based on the 38.2% Fibonacci retracement and the 1-year moving average, should be expected.

XRT has resistance near 52.  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.  Last changed October 1, 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”]

S&P bounced back and forth within confines of the rising pink band since reaching an interim low in late June.  The upswing was very rapid with some short-term consolidation near each of the significant support or resistance levels. These support and resistance levels also define the limits and barriers to any future rally and uptrend development. Until proven otherwise, we expect the index to range bound within the pink band, between 2900 and 2950.  A trade above 2950, or the lower boundary of the red band, often marks significant short-term market top so traders should put it on the trading radar.

Momentum has been trending lower over the past weeks but the indicator is much closer to overbought than oversold zone.  Money Flow measure flashed a bearish signal as fell below the zero line, indicating a negative net demand for stocks.  These elements will continue negatively affect trading sentiment in the coming days.

Short-term trading range: 2872 to 3000.  S&P has support near 2900.  A close below that level will trigger a short-term sell signal with downside target near 2872, based on the trend channel moving average.  The index has resistance near 2950, or the lower boundary of the red band.  A close above that level could trigger acceleration toward the upper boundary of the red band, near 3000.  A close above that level often marked short-term market top so traders should put it on the trading radar.

Long-term trading range: 2730 to 3050.  S&P has support near 2840.  A close below that level will trigger a major sell signal with a downside target near 2730.  The index has resistance near 3050.

In summary, despite recent weakness, S&P is still in a nice uptrend and as long as this rising trend remains intact, the path with least resistant is higher.  However, the fact that Money Flow measure fell below the zero line as the index tests the upper limit of its short-term trading range, does not favor a sustain break to the upside. And we’d, therefore, cautious against taking large position and also believe that risk far outweighs the reward beyond that point.

 

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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