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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday August 10, 2017.

We’ve noted in the previous Market Outlook that: “Tuesday’s bearish topping tail candlestick together with the lagging Money Flow measure suggested that an important near-term high has been established and the S&P is entering a much needed pause.  This increases the probability that the late day sell-off will momentum but a much deeper slide is needed to erase the short-term upward trajectory.”  As anticipated, stocks sold off in early Wednesday session that saw the S&P traded as low as 2,462.08 before buyers stepped in and pushed prices off the intraday low.  For the day, the bench mark gauge closed just below the flatline at 2,474.02.  The Dow Jones industrial average fell 36.64 points to close at 22,048.70.  The Nasdaq composite lagged, falling 0.28 percent to 6,352.33.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 1.37% to close at 11.11.

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Defense stocks spiked Wednesday as U.S. and North Korean relations heated up, with Lockheed Martin (LMT), Raytheon and Northrop Grumman all hitting record highs.  This is bullish from a technical perspective.  In fact, a closer look at the weekly chart of LMT suggests that the stock has embarked on a rally that should test 320 at minimum but has overshoot target near 400.  Just so that you know, initially profiled in our June 2, 2016 “Swing Trader BulletinLMT had gained about 29% and remained well position.  Below is an update look at a trade in LMT.

The graphics below are from our “U.S. Market Trading Map”, show the near-term technical bias and trading ranges.  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 – Lockheed Martin. (weekly)

Our “U.S. Market Trading Map” rates LMT as a Buy. The overall technical outlook remains Bullish.  Last changed May 2017 from neutral. LMT has been on a tear in recent days following the early July breakout above the May sideways trading range.  Money Flow measure surged to the highest level since last summer, indicating an increase in buying pressure.  This is a positive development, supporting further upside follow-through and a test of the 127.2% Fibonacci extension, around 320.  A sustain advance above that level has measured move to 400, based on the 161.8% Fibonacci extension.

LMT has support near 286.  Short-term traders could use that level as the logical level to measure risk against.

Oil prices edged higher on Wednesday, up 39 cents to $49.56, after a report showed inventories fell by 6.5 million barrels last week, government data showed, steeper than the expected decrease of 2.7 million barrels.  The drop in inventories raised hopes that OPEC-led output cuts were helping wipe out a three-year global supply glut.  Despite the overall optimism, the VanEck Vectors Oil Services ETF (OIH) fell to the lowest level since late February 2016, down 0.68% to 23.30.  And according to our “U.S. Market Trading Map”, there could be more pains ahead for the ETF.  Below is an update look at a trade in OIH.

Chart 1.2 – VanEck Vectors Oil Services ETF (weekly)

Our “U.S. Market Trading Map” painted OIH bars in red (strong sell).  OIH has been trending steadily lower after the early 2016 recovery rally ran out of steam near the 38.2% Fibonacci retreatment of the 2014 down-leg.  This week bearish break broke support at the early July low.  Money Flow measure held firmly below the zero line since early 2017, indicating there was little buying interest. This is a bullish development, increased the odds for a retest of the 2016 low, just above 20.

OIH has resistance near 25. Short-term traders could use that level as the logical level to measure risk against.

Chart 1.3   – S&P 500 index (daily)

Short-term technical outlook shifted to neutral.  Last changed August 9, 2017 from bullish (see area ‘A’ in the chart).

[Note: for more details analysis, please take a look at our “US Market ETF Trading Map”]

As expected, S&P moved down to test support at the lower boundary of the pink band after recent test of resistance at the lower boundary of the red band was met with an aggressive wave of selling interest.  The late day rebound is pretty impressive.  However, Money Flow measure is not favorable over the near to intermediate term.  After peaking in mid-July, the indicator has been trending lower as prices ascending higher.  This bearish development suggested that the support might not hold for long and the S&P has to move to a much lower level to attract new buyers.

Short-term trading range: 2460 to 2490.  S&P has minor support near 2468.  Below it, a more significant support lies at 2460.  This creates a strong band of support between 2468 and 2460. A close below 2460 will break the consolidator pattern and has measured move to 2440-2400.  The lower boundary of the red band, around 2490, represents key price level.  A close above that level often marked short-term market tops.  Traders should put it on the trading radar.

Long-term trading range: 2400 to 2500.  Unless there is a headline that everyone recognizes as extremely positive or negative, expect S&P to swing within this 100 points range.

In summary, after the July massive rally, stocks digested their gains in a consolidation phase that is giving way to a pullback in the S&P.  Support is strong in the 2460 area and downside momentum does not appear strong enough to generate a decisive breakdown.  As for strategy, traders should consider buying into market dips.

 

(By:Michelle Mai for Capital Essence)

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