Narrow Trading Range In Store

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Good Morning. This is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday March 10, 2010.

Yesterday we said that: “the market is now turned indecisive just below key resistance at the 1150 level on the S&P 500 index following last week’s massive advance. While the near-term technical outlook is currently tilted toward the bearish case, a single trading session doesn’t form a trend so this is not a call for a major top, rather it’s a warning signal, a sign in which the market is telling us that it’s ready for a pause.” As anticipated, stocks started Tuesday trading session on a negative note amid growing concerns about the European debt crisis. The market however, managed to overcome the early weakness and closed slightly higher.

For the day, the Dow Jones industrial average added 12 points or 0.1 %, to finish at 10564. The S&P 500 index gained less than 2 points to settle at 1140. The NASDAQ composite added 8 points, or 0.4%, to close at 2340.

It’s worth noticing that large-cap tech stocks continued outperform the broader market for a third day in a row. The PowerShares QQQ (QQQQ) – an ETF that tracks the performance of the NASDAQ-100 index – added 0.6% to close at 46.79 – a new 18-month high. In fact, as the chart below indicated, QQQQ may climb toward the 2008 high, about 50, if prices sustain above the January high of 46.64. Just so that you know, initially added to our February 5 “U.S. Market ETF Trading Map” Model Portfolio, QQQQ has gained about 9% and remained well position.

The graphics below are from our “U.S. Market ETF Trading Map”, which shows the Money Flow measure and trading ranges for QQQQ and the S&P 500 index. As shown, 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).

Chart 1.1 – PowerShares QQQ (daily).

Looking at the one-year daily chart of QQQQ, we can see that Tuesday bullish breakout had helped clear resistance at the January high and setting the stage for a test of the strong band of resistance between the 48.20 to 50.18 areas, or the June-August 2008 highs. Money Flow measure has also trending higher from above the zero line. This is another near-term plus for the bulls.

Buyers however, should be aware that QQQQ is now extremely overbought following recent advance, so we should expect some short-term setbacks prior to the new up-leg. Right now what the bulls really want to see is a mild consolidation that respects support at the January high, about 46.60. What this means is that while the near-term technical indicators suggested that QQQQ will continue to advance, the risk/reward ratio is currently tilted toward the risk side. So we’d look to increase upside exposure on market dips rather than chasing breakout.

Chart 1.2 – S&P 500 index (daily).

As shown, current trading pattern is pretty similar to that of early January, in which the S&P 500 index bouncing up and down within the 1130-1150 trading range for nearly 2 weeks before the bears stepped in and took the market lower. Money Flow measure however, remains strong so we do not envision any significant declines in near future. What this means is that it’s possible that the market is now entering a short-term range bounce trading pattern. So, until proven otherwise, buy at the bottom of the range and sell near the top of the range could be the most profitable strategy. Key resistance is at 1150. A sustain breakout above that level will trigger a major buy signal with target of 1200. Immediate support is at 1130. A close below that level signals short-term correction with target of 1112, or the bottom of the February rising channel.

In summary, it is possible that the S&P 500 index is now entering the January’s narrow trading range, which was set between the 1130 and 1150 levels, as the market digests the short-term overbought condition. And once this condition dissipates, there is a greater than average odds that the index will take another run at the important sentiment 1200 level.

(本文作者：Michelle Mai)
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注﹕Michelle Mai為Capital Essence(錢途集團)撰寫技術分析﹐並為包括市場趨勢在內的數份金融市場投資通訊的首席市場策略師。如欲每日盤前收到更多最新分析, 敬請訂閱。

Tags: dow jones industrial average, European debt crisis, NASDAQ Composite, PowerShares QQQ, QQQQ, s&p 500 index, spx