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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday July 13, 2012.

As it was the case of late, stocks traded lower for most of Thursday trading session before buyers stepped in and took the major indices off their intraday lows in the final half-hour.  For the day, the Dow Jones Industrial Average fell 31.26 points, or 0.25 percent, to close at 12,573.27.  The S&P 500 index slump 6.69 points, or 0.50 percent, to end at 1,334.76.  The NASDAQ dropped 21.79 points, or 0.75 percent, to finish at 2,866.19.  The CBOE Volatility Index, the widely considered the best gauge of fear in the market, closed up 2.12 percent to 18.33.


Defensive names outperformed in Thursday trading with health care, consumer staples and utilities leading the rise while financials and technology lagged.  Below is an updated look at a trade in the Utilities Select Sector SPDR (XLU).

The graphics below are from our “U.S. Market ETF Trading Map”, which show the near-term technical bias and trading ranges for XLU and the S&P 500 index.  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 – Utilities Select Sector SPDR (daily)

As indicated in the above chart, our “U.S. Market ETF Trading Map” rates XLU as a Buy.  XLU had been trending higher over the past few days after the July correction found support near the 50% Fibonacci retracement of the mid-June to early July upswing.  Money Flow measure strengthened the bulls’ case as it trended higher from above the zero line.  Momentum indicator also points higher, allowing further upside probing.  Over the next few days, traders should look for the rally and retreat trading behaviors as the 37.30 level is tested as resistance.  the bullish perspective is that a sustain advance above that level indicates that the one-month bullish pennant pattern had resolved itself into a new upswing that has the potential propel prices into the important sentiment 40 mark.

As for support, last week’s pivot low of 36.56 represents a major price support.  Only a close below that level can wreck the near-term bullish outlook.

Chart 1.2 – S&P 500 index (daily).

As indicated in the above chart, our “U.S. Market ETF Trading Map” rates the S&P as a Hold.  The index continues basing sideways near support at 1334 after Thursday rally attempt was met with a new wave of selling interest.  This is a short-term negative but let’s notice that despite recent weakness, the index remains confined to an upward sloping channel.

The most important feature on the S&P chart is the upward sloping trend channel starting from the June low at 1266.  The sharp rebound in early June and again in late June provided the two anchor points to confirm the position of this uptrend channel.  Technically speaking, it had two important effects.  First, it helps to establish the trend and provides the limits for potential pullback in the future.  Second, a violation of this trend line will tell traders when the uptrend has ended and a new downtrend commenced.

The general direction is up so the next we need to determine to potential upside targets. These targets, or upside limits, are provided by the upped edge of the trend channel, currently at 1410.  That level roughly corresponds with the upper edge of the red band.  Normally, a move above that level often marks short-term peak.  Therefore, it should not be surprising to see the index correcting lower from that level.

Resistance stands in the way of continue rally is at 1364-1375, or the lower edge of the pink band and the July high.

Major support is at 1334.  A close below it will break the bullish higher high and higher low patterns going back to early June and a test of 1308, or the upper edge of the green band, should follow shortly.

In summary, although Thursday weak close is very disappointed, the bulls still have the benefit of the doubts as long as the S&P holds above the lower edge of the June rising trend channel.  As for strategy, pullback will present a buying opportunity, while selling into strength may not be the best strategy in a market considered likely to bounce back.

(By:Michelle Mai for Capital Essence)
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