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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday October 3, 2017.

Stocks closed at record highs on Monday as Wall Street kicked off the fourth quarter on a high note.  For the day, the Dow Jones industrial average gained 152.51 points to close at 22,557.60.  The S&P rose 0.4 percent to 2,529.12.  The Nasdaq composite closed 0.3 percent higher at 6,516.72.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 0.63% to close at 9.45.

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One of the more noteworthy developments in recent days has been the move in energy stocks.  The sector may be bottoming as a number of bullish technical development signals potential reversal for the worst-performing S&P sector this year.  The Energy Select Sector SPDR ETF (XLE) fell more than 9 percent YTD while the S&P has risen nearly 13 percent.  Below is an update look at a trade in XLE.

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 – Energy Select Sector SPDR ETF (daily)

Our “U.S. Market Trading Map” painted XLE bars in bright green (strong buy).  Over the past few days, XLE has been basing sideways using the 38.2% Fibonacci retracement zone as support. This is a bullish development, represented an orderly high-level consolidation period in the aftermath of the late August massive rally.  Money Flow measure surged to the highest level since late 2016, indicating an increase in buying pressure.  This is a positive development, supporting further upside follow-through and a retest of the late 2016 high, just above 78.

XLE has support near 67.  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”]

S&P cleared key resistance last week, breaking above the mid-September falling trend line and never looked back.  This is a bullish development but let’s notice that the rally has created overbought conditions, suggesting the market is a bit ahead of itself.  Additionally, after Monday’s gains, the S&P is about 3 points above the lower boundary of the red band.  Technically speaking, a trade above that level often precursor to a meaningful correction.  Nonetheless, Money Flow measure is above the zero line and momentum remains supportive.  This certainly would argue that the near-term risk remains to the upside.  With this in mind we’d look to increase upside exposure into short-term market dips rather than chasing breakouts.

Short-term trading range: 2520 to 2550.  S&P has support near 2520.  A close below that level signals a short-term correction with downside target near 2500, based on the lower boundary of the pink band.  The upper boundary of the red band, currently at 2550, 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, the fact that market is overbought as S&P approached key price level that had been successful in repelling price action in the past suggested that probability of a sustain breakout without a pullback is extremely limited.

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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