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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday October 9, 2017.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks closed lower Friday after data showed the US labor market experienced its first contraction in seven years.  For the day, the Dow Jones industrial average fell 0.01 percent to close at 22,773.67.  The S&P declined 0.1 percent to 2,549.33.  The Nasdaq composite eked out a record high, rising 0.07 percent to 6,590.18.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 5.01% to close at 9.65.


After a strong run of outperformance since early September, the iShares Europe ETF (IEV), which tracks the investment results of the S&P Europe, formed a multi-year high in early October.  Last week’s selloff indicated a bearish turnaround, according to our “U.S. Market Trading Map”. Below is an update look at a trade in the IEV.

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 Europe ETF (weekly)

Our “U.S. Market Trading Map” painted IEV bars in red (sell).  After a steep uptrend, there are some reasons for caution on the move to new highs.  The late September outside reversal bar which is often located at the end of an uptrend.  Adding to concerns is momentum, which has been deteriorated since early summer as prices moved higher.  These elements increased the probability for a pullback consolidation.  Support is around 45.50.  Expect this support to hold, at least on a first pullback.

IEV has resistance just below 48.  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 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 pulled back to test support at the lower boundary of the red band after recent rally ran out of steam near 2550.  As mentioned, the fact that the S&P closed above to lower boundary of the red band is always a hesitation.  It’s suggesting that the market is ahead of itself and the risk of a pullback consolation has risen.  Nonetheless, the overall technical backdrop remains supportive and Money Flow measure climbed to multi-year higher after last week’s bullish breakout, indicating a positive net demand for stocks.  With this in mind, we would consider reducing exposure into additional strength, which we think could take the S&P closer to 2580, based on the upper boundary of the red band, before the rally falters.

Short-term trading range: 2540 to 2580.  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 2580, 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 rally off August low of 2317 on the S&P appears too extended and that a short-term pullback consolidation is near.  However, the overall upside trajectory is still in place.  So it’s possible that the market will have one last push higher, toward the 2580 zone, before a serious correction kicks in.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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