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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday October 6, 2017.

Stocks added on to recent winning streak, closed at record highs Thursday.  The Dow Jones industrial average rose 0.50 percent to 22,775.39.  The S&P gained 0.6 percent to 2,552.07.  The Nasdaq composite advanced 0.8 percent to 6,585.36.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 4.57% to close at 9.19.


One of the more noteworthy developments in recent days has been the move in micro-cap stocks.  The group is catching up to its larger peers with a healthy start in the first week of the last quarter of the year. The iShares Micro-Cap ETF (IWC) has risen more than 2 percent MTD, outperformed the S&P, which is up 1.30 percent.  Now the question is whether the rally has more legs?  Below is an update look at a trade in IWC.

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 – iShares Micro-Cap ETF (daily)

Our “U.S. Market Trading Map” painted IWC bars in bright green (strong buy).  The first dominant feature on the chart is the rising trend starting early 2016.  The second dominant feature of the chart is the sideways consolidation between 83 and 88 since early 2017, which represented an orderly high-level consolidation period.  The August’s massive rally pushed the ETF above the summer highs, signify a bullish breakout and resumption of the 2016 upswing.  Money Flow measure trended higher from above the zero line, indicating a positive net demand.  This is a bullish development, supporting further upside follow-through and a test of the more important resistance in the 98-99 zone, based on the 127.2% Fibonacci extension.

SDY has support near 92.  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 shifted to bullish (strong buy).  Last changed October 5, 2017 from neutral (with bearish bias y) – see area ‘A’ in the chart.

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

S&P is heading toward the upper boundary of the red band after the late September rally pushed the index above the pink band.  Technical speaking, the fact that the S&P close to upper boundary of the red band is always a hesitation.  As mentioned, a trade above the lower boundary of the red band indicates an extreme overbought conditions, a situation often precursor to pullback consolidation. Additionally, trading sentiment, contrary indicator, has been quite bullish, suggesting a pullback the way.

Money Flow measure held near multi-month high, indicating a positive net demand for stocks.  This is a bullish development, suggesting that pullback should be short lived.

Short-term trading range: 2540 to 2570.  S&P has support near 2540.  A close below that level signals a short-term correction with downside target near 2500.  The upper boundary of the red band, currently at 2570, 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 market is pretty close to an inflection point, with the S&P is less than 1 percent from the upper boundary of the red band.  Some aggressive traders might use that level like a magnet to sell against.  We would reduce exposure once the S&P clears 2540 because it would affirm the short-term overbought sell signal that is in place per the daily momentum.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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