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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday April 5, 2013.

We’ve noted in the previous Market Outlook that: “based upon recent trading actions, the long awaited correction had finally arrived. However, unless there is a close below key technical support at S&P’s 1530, Wednesday selloff is a merely a pause that refresh rather that a beginning of something worse.  As for strategy, traders should consider buying into market dips.”  As anticipated, after notched its high in early Thursday trading session, the S&P rolled over and traded in the negative territory before buyers stepped in the afternoon and pulled the index out of the red.  For the day, the S&P 500 added 6.29 points, to end at 1559.98.  The Dow Jones Industrial Average gained 55.76 points to close at 14,606.11.  The NASDAQ edged up 6.38 points to finish at 3,224.98.  The CBOE Volatility Index, the widely considered the best gauge of fear in the market, fell 2.25% to 13.89.


Weakness among major tech names like Apple (AAPL), Google (GOOG), and International Business Machines (IBM) weighed on the sector.  In response, the Technology Select Sector SPDR (XLK) ended near the flat line, up just 0.3% to 29.96.  Below is an updated look at a trade in XLK.  The ETF was underperformed the market in recent days and is at an interesting spot.

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

As indicated in the above chart, our “U.S. Market ETF Trading Map” rates XK as a Hold.  XLK moved down to test support at the trend channel moving average (as represents by the white line in the chart) after the late March rally encountered a new wave of selling interest near the range top resistance.  After printed a multi-month high in early March, Money Flow measure trended steadily lower, indicating a waning buying pressure.  This is a short-term negative but Thursday bullish doji candlestick suggested that the ETF had found some short-term support.  The oversold condition is another near-term plus for the bulls.  Over the next few days, traders should expect at least an attempt to rally.

Resistance is at the range top, near 30.39.  A sustain advance above that level could trigger acceleration toward the September 2012 high of 31.70.  As for support, the bears will encounter two strong supporting levels.  The first one is at the trend channel moving average, currently at 29.74.  Below it, a more significant support lies at the bottom of its short-term trading range near 29.

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.  Once again, the index rebounded nicely off support at the lower edge of the pink band, currently at 1556.  This is a short-term positive but the fact that Money Flow measure still holds near 3-week low, indicated a lack of commitment among the bulls.  This could put a cap on the rally.

Over the next few days, traders should look for trading actions near the weekly pivot high of 1574.  That level roughly corresponds with the lower edge of the red band and the last bull market high set in 2007. That level represents a major price resistance.  A sustain advance above it could trigger a massive short-covering rally that target the range top resistance near 1600.  But for now, it looks firm.

Support is at the lower edge of the pink band, currently at 1556.  Should that support gives way, a test of the trend channel moving average, currently at 1531.

In summary, the S&P tested and respected support at the lower edge of the pink band.  Our near-term work on price structure and momentum suggested that the index is in a reflexive oversold bounce but upside is likely to be limited.  The lower edge of the red band marks the inflection point.  A sustain break above that level is required before there is any real prospect of a change in a short-term sideways trading pattern.

(By:Michelle Mai for Capital Essence)
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