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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday October 2, 2017.

We’ve noted in the previous Market Outlook that: “after several failure attempts to push prices lower last week, the bears throw in the towel on Wednesday’s GOP’s tax-cut plan.  S&P will have an upward bias toward the end of the week.”  As anticipated, the S&P closed at a record Friday, up 0.4 percent to 2,519.35. The Dow Jones industrial average closed up 0.11 percent to 22,405.09.  The Nasdaq Composite rose 0.66 percent to close at 6,495.96.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 0.42% to close at 9.51.

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Home prices continue to rise faster the average household incomes. The Case-Shiller index showed a 5.8% YoY rise in prices.  Nonetheless, homebuilders have reported strong results.  The Spdr S&P Homebuilders ETF (XHB) broke out to new high last week, up 3.51 percent despite disappointing new home sales and housing starts. The ETF has risen over 17 percent YTD while the S&P is up more than 12 percent.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XHB.

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 – Spdr S&P Homebuilders ETF (daily)

Our “U.S. Market Trading Map” painted XHB bars in bright green (strong buy).  XHB has been on a tear in recent days after the early September pullback found support near the late August’s breakout point.  Friday’s upside follow-through confirmed Thursday’s bullish breakout above the early September’s high, signify resumption of the 2016-2017 upswing. Money Flow measure surged to multi-month high, indicating a positive net demand. This is a bullish development, supporting further upside follow-through and a test of the more important resistance at the 127.2% Fibonacci extension, near the 41.50 zone.

XHB has support near 39.  Short-term traders could use that level as the logical level to measure risk against.

Chart 1.2   – S&P 500 index (daily)

Short-term technical outlook remains bullish (strong buy).  Last changed September 27, 2017 from slightly bearish (weak sell) – 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 up to test resistance at the lower boundary of the red band after breaking out from the one-week falling trend line.  Money Flow measure surged to the highest level since July, indicating an increase in buying pressure.  This is a positive development but let’s notice that last week’s rally had pushed the index up against the lower boundary of the red band – the level that had been successful in repelling price action over the past months.  So it should not be surprising to see some short-term conditions in the coming days.

Short-term trading range: 2496 to 2520.  S&P has support near 2496.  A close below that level signals a short-term correction with downside target near 2473, based on the trend channel moving average.  The lower boundary of the red band, currently at 2520, represents key price level.  Technically speaking, a trade above that level is unsustainable.  Traders should put it on the trading radar.

Long-term trading range: 2470 to 2570.  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, last week’s bullish breakout above the mid-September’s falling trend line had helped putting the bulls back onto the driver side of the market. However, given the looming resistance at the 2520 level on the S&P, there is no big commitment to accumulate stocks aggressively at this point.  What this means is that as the S&P inches into the area of key overhead resistance, aggressive sellers will most likely dips in their toes to see how the market reacts.  So, it should not be surprising to see some short-term setbacks in the coming days.

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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