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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday October 4, 2017.

Stocks added on to recent winning streak that sent the major indices to record highs.  The Dow Jones industrial average rose 0.37 percent to 22,641.67.  The S&P finished 0.2 percent higher at 2,534.58.  The Nasdaq composite advanced 0.2 percent to close at 6,531.71.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 0.63% to close at 9.51.


Automakers released their U.S. sales for the month of September on Tuesday. The numbers mostly showed solid year-over-year gains, thanks in part to hurricane-related vehicle replacement.  Industrial shares added to records as strong car sales boosted risk appetite.  The Industrial Select Sector SPDR ETF (XLI) rose 0.43 percent to 71.80.  The ETF has risen over 15 percent YTD while the S&P added just over 13 percent.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLI.

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 – Industrial Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLI bars in bright green (strong buy).  XLI has been on a tear in recent days after the July correction found support at the 2017 rising trend line.  This week’s upside follow-through confirmed the mid-September breakout.  Money Flow measure held mostly above the zero line since the ETF reached an interim low in early 2016, indicating there was little selling pressure.  This is a positive development, supporting further upside follow-through and a test of the more important resistance in the 75-76 zone, based on the 127.2% Fibonacci extension.

XLI has support near 70.  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 continues drifting higher, using the lower boundary of the red band as support.  As mentioned, a trade above the lower boundary of the red band, or extreme overbought zone, suggesting the market is a bit ahead of itself.  Nevertheless, Money Flow measure is flashing a strong bull signal as it hoovers near multi-moth high. This certainly would argue that the path with least resistance remains higher hence, any pullback should be aggressively bought.

Short-term trading range: 2528 to 2555.  S&P has support near 2528.  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 2555, 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 daily chart of the S&P looks overstretched on the upside following recent rally.    This might negatively affect trading sentiment tomorrow but we’d view resulting weakness as an opportunity to add upside exposure.  With that said, pullback should be aggressively bought.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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