Weekly Technical Outlook on Major Stock Indices 30 Jul to 03 Aug 2018

S&P 500 – A potential major top may have been formed

Key Levels (1 to 3 weeks)

Intermediate resistance: 2823

Pivot (key resistance): 2877/80

Supports: 2790, 2740 & 2710

Next resistance: 2940

Medium-term (1 to 3 weeks) Outlook

Last week, the SP 500 Index (proxy for the S&P 500 futures) had staged the expected residual push up to hit the lower limit of a major resistance zone at 2840 (printed a high of 2848 on 25 Jul, U.S. session). Click here for a recap on our previous weekly outlook.

Right now, the Index may have seen its major cyclical top that suggest the end of the melt-up phase in place since Feb 2016. Thereafter, a potential multi-month corrective decline shall occur in the first step (likely to be in a greater magnitude of the 11% recent sell-off that occurred in Jan/Feb 2018).

The key risk elements are as follow:

• Since its 03 Apr 2018 low of 2552, the price action of the Index has shaped out an impending bearish “Ascending Wedge” configuration (a typical bearish reversal pattern that forms at the end of a melt-up phase). Last week, the Index has pushed up and hit the upper limit of the “Ascending Wedge” at 2848 with a bearish divergence signal seen in the shorter-term 4 hour Stochastic oscillator (see 1st & 2nd charts).
• Based on the Elliot Wave/fractal analysis, the Index is likely to have completed the primary degree impulsive wave 5/ of (5) that indicates a potential end of the multi-year bullish structure in place since Feb 2016 low of 1810 with a derived Fibonacci projection cluster level at 2840 that coincides closely with last week high of 2848 (the upper limit of the “Ascending Wedge”).
• One of the outperforming benchmark indices, the Nasdaq 100 that continued to print record all-time highs since the Jan/Feb 2018 sell-off had came close to a Fibonacci projection cluster level of 7560 (printed a fresh all-time of 7511 on 25 Jul 2018) and ended the week with a bearish weekly “Shooting Star” candlestick; a negative follow - through from its prior week “Spinning Top”. These observations suggest that the market leader has started to show signs exhaustions and any further decline in the Nasdaq 100 is likely to create a negative feedback loop into broader U.S. stock market (see 3rd chart).
• Sector relative strength (RS) analysis on the S&P 500 using the sectors ETFs is now showing outperformance in the defensive sectors; Utilities (XLU) and Consumer Staples (XLP) against the S&P 500. In addition, the main outperformer; the Technology sector (XLK) that consists of the momentum driven tech stocks has started to show exhaustion sign based on its RS chart against the S&P 500 (SPY). Right now, we are seeing a rotation into the laggards (defensives; XLU & XLP)) from the sector leader, momentum driven tech stocks (XLK) which tends to indicate a potential major top in the making for the broader U.S. stock market (see 4th chart).

Therefore, we turn bearish below the key medium-term pivotal resistance of 2877/80. In the shorter-term (1 to 3 days), the Index may see a minor rebound first above the 2790 intermediate support (the former medium-term swing high areas of 27 Feb, 13 Mar, 13 Jun 2018) towards the intermediate resistance at 2823 given that the 4 hour Stochastic oscillator is coming close to an extreme oversold level of 6. Thereafter, another potential downleg is likely to materialise to target the next support at 2740 (the lower limit of the “Ascending Wedge”) in the first step.

On the other hand, a clearance above 2877/80 invalidates the bearish scenario for the continuation of the melt-up phase towards the next resistance at 2940 (the upper boundary of the primary ascending channel from Feb 2016).            

Nikkei 225 – Still stuck within the range of 23020 & 22200

Key Levels (1 to 3 weeks)

No change, maintain neutrality stance between 23020 and 22200. Only a break below 22200 reinstates the bears for a potential downleg to target the supports of 21460 follow by 21100 next (the lower boundary of the major ascending channel from Jun 2016 low.

A daily close above 23020 opens up scope for an impulsive upleg to target the next resistance at 24200 (the medium-term swing high of 23 Jan 2018, a 27-year high).

Hang Seng – At risk of shaping another downleg

Key Levels (1 to 3 weeks)

Medium-term (1 to 3 weeks) Outlook

Last week, the Hong Kong 50 Index (proxy for Hang Seng Index futures) had shaped the expected mean reversion rebound and met the lower limit of the resistance/target zone at 29100 (printed a high of 29132 on 26 Jul 2018).

However, a clearance above 29400 invalidates the bearish tone for an extension of the mean reversion rebound to test the next intermediate resistance at 30100 (the pull-back of the former 5-month range support from 10 Feb 2018).