Market preview and trading plan – week of Sept. 12, 2016

Weekly outlook — S&P 500 CASH INDEX

The S&P 500 cash index ($SPX) closed at 2127.81 last Friday, down 51.17 points for a 2.3% net weekly loss.

Last week: the volatility came back. After the Labor Day holiday the two major indexes (DOW and SP500) started lagging behind bullish moves in the Russell 2000 and NASDAQ. On Thursday and Friday, mixed FedSpeak messages added more uncertainty to the market. And we had the rollover in futures contract (from Sept to Dec) period. Heavy selling occurred Friday.

This week: the high volatility will remain this week. A continuation low move should still be expected. Any bounce is likely to be brief.

Technical analysis

a) Long- and intermediate-term

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SPX, Sept. 9, 2016. Weekly chart.

Before Friday’s price breakdown the market was already showing large cap stocks – the Dow and the S&P500 – lagging behind bullishness from small caps and technology stocks (RUT and the NASDAQ comp). The SP500 index and Dow started to show low momentum strength.

We are entering the worst part of the year for equities, fighting a long-term overbought condition. Last week’s trading plan reminded readers that “ the overbought condition shouldn’t be ignored.”

Now we are moving into the worst months of the year for equities (Sept and Oct), and market sentiment could turn bearish from one period into other, as fast as turning the pages of the calendar.”

Friday’s sell-off proves the point. It shouldn’t have surprised our traders.

Take a close look at the SP500 index weekly chart. The price closed right above its 20-week moving average line (2125.15), but didn’t break the intermediate-term first support line yet.

That means Friday’s selling didn’t do any damage to the intermediate-term and long term uptrend. But the breakdown of the August monthly range may lead the index to continue moving lower until it completes a short-term correction.

There is an inverted H&S pattern on the weekly chart. There are two kinds of measurements we can use to calculate the next move:

  • One is based on yearly range breakout level as a measurement. This breakout level range will be from 2119.81-2103.11. If based on this zone, there is a great chance for index to have a pullback testing move, and then 2103.11-2100 zone should hold index up.
  • The second is based on actual price movement. Index never broke through the neckline of the inverted H&S pattern. Instead it is going to form multiple shoulders. The current pullback could be stopped at 2103.11 level or lower to 2055.12 area, if the 2135-37.50 zone holds the index down in the short-term.

b) Short-term

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SPX, Sept. 9, 2016. Daily chart.

SP500 index broke the 2147.58 support level and confirmed the short-term top had been posted. Now 2147.58-50 will be the key zone to watch ahead of the major short-term resistance 2163-2173.

We may see some price bounce in the early days, but as long as the index stays under 2145-50 it shouldn’t change the short-term downside direction.

But 2113-2103 – the previous breakout zone– will try to stall the decline or slow down the selling. A break below 2098.50 level could trigger panic selling; in that case an extended move to near the 200-day moving average line (2055-45 zone) is possible.

Daily outlook – S&P 500 MINI FUTURES (ES)

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ESU6, Sept. 9, 2016. Daily chart.

ES gapped down at the open in reaction to news of North Korea testing nuclear weapons. In addition a mix of conflicting raise-no-raise FedSpeak confused the market and brought uncertainty about the Fed’s next move back into play. The ES sold off and lost 61.50 points from its prior day’s closing, a 2.8% loss.

ES may have overreacted. Nevertheless the break below last month’s low confirms that a short-term top has been posted. At least for this week, ES needs to find a foothold first before it can rally back.

The range breakdown point is at 2141.50. ES could go up to test the 2145.50-41.50 area, but as long as the price does not move past that area the downside target will be around 2091.50-87.50, the maximum measurement from the range breakdown move.

The current ES price is inside the testing zone (2134-2103.75) of last year’s range breakout. If the 2103.75 level holds up the market is likely to move back up near 2134-35.50 or higher up to 2145.50-41.50 to test last Friday’s daily range breakdown level.

Support and resistance

Major support levels: 2103.50-01.75, 2091.50-87.50, 2078.50-75.50, 2065-62
Major resistance levels: 2134-35.50, 2156-57, 2163.50-61.50, 2175.50-78.50

Outlook

Short-term —- Neutral
Medium term —–Bullish
Long term —- Bullish