Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday October 30, 2018.
We’ve noted in the previous Market Outlook that: “while last week’s massive selloff looked and felt like a short-term capitulation, near-term technical backdrops and monetary conditions has been deteriorating suggesting that rallies are counter trend and will be sold. Overall, expecting further whipsaws and intimidating times ahead.” As anticipated, stocks traded sharply higher in early Monday session that saw the S&P gained more than 1 percent before sellers stepped in and pushed prices lower. For the day, the bench mark gauge fell 0.7 percent to close at 2,641.25. The Dow fell 0.99 percent to 24,442.92. The Nasdaq Composite fell 1.6 percent to 7,050.29. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 2.2 percent to 24.70.
The heavily-weighted financials was a notable standout in Monday, rose 0.9 percent. The group, however, traded as high as 2.6% before trimming gains. . After surging 20 percent in 2017, the Financial Select Sector SPDR ETF (XLF) tumbled more than 8 percent YTD, underperformed the S&P by a wide margin. 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 XLF.
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 – Financial Select Sector SPDR ETF (weekly)
Our “U.S. Market Trading Map” painted XLF bars in red (sell) – see area ‘A’ in the chart. The first dominant feature on the chart is the rising trend line starting in early 2016. The second dominant feature of the chart is the downtrend since early 2018, which represented the digestion period. The late September selloff pushed the ETF down to the 38.2% Fibonacci retracement, a key technical level. This week’s rebound indicated that the support would hold, at least for the time being. Nevertheless, a close above the 2-yearm moving average is required to neglect the short-term downward trend pressure. A close above 26.50 on a weekly basis has measured move to around 28.
XLF has support near 24.80. 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. Last changed October 23, 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”]
Once again, broke below the bottom of its short-term trading range after the early rally attempt ran out of steam near the important sentiment 2700 mark. While it’s uncommon for the S&P to break below this technical level, such a move lower is often followed by a quick snap back. In fact, current technical setup is similar to the early 2016 in which the S&P broke through the bottom of its short-term trading range on a daily basis, only to bounce back up. Nevertheless, Money Flow measure is much weaker now. The indicator is at the lowest level since 2012. This is a negative development, suggesting that rallies are counter trend and should be sold.
Longer term, the uptrend that began in 2016 is technically broken. Technical backdrops and monetary conditions has been deteriorating. A close above 2767 is required before there is any real prospect of a change in the short-term downward trend pressure.
Short-term trading range: 2580 to 2735. S&P has key support near 2600. A close below that level has measured move to 2580. The index has resistance near 2700. A close above that level has measured move to 2735.
Long-term trading range: 2300 to 2822. S&P has support near 2624. A close below that level has measured move to 2300. The index has resistance near 2738. A close above that level has measured move to 2822.
In summary, Monday’s late day rally together with the fact that market is extremely oversold following recent selloff warns of potential trend shifts. Nevertheless, overall technical backdrops and monetary conditions has been deteriorating so we’d consider taking down exposure into oversold rebound, which we think could take S&P closer to 2750 before the big reversal kicks in.
Thanks and happy trading.
(By：Michelle Mai for Capital Essence)
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