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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday October 11, 2017.

We’ve noted in the previous Market Outlook that: “the fact that the S&P managed to hold on to the September’s massive gains in the face overbought conditions suggested that the bulls are holding an edge for a short-term corrective mode, which is taking place within a context of a medium-term uptrend.”  As anticipated, stocks rose to record highs on Tuesday after Wal-Mart announced a large buyback and Honeywell said it was splitting into two. Pfizer also contemplated a spin-off.  For the day, the Dow Jones industrial average rose 0.31 percent to end at 22,830.68.  The S&P added 0.2 percent to finish at 2,550.64.  The Nasdaq composite up 0.1 percent to close at 6,587.25.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 2.42% to close at 10.08.

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Retail giant Wal-Mart announced a $20 billion buyback before the bell and reiterated its earnings outlook for the current fiscal year. The news sent the Consumer Staples Select Sector SPDR ETF (XLP) higher nearly 1 percent.  In fact, according to our “U.S. Market Trading Map”, Tuesday’s rally indicated an impending bullish turnaround. Below is an update look at a trade in the XLP.

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 – Consumer Staples Select Sector SPDR ETF (daily)

Our “U.S. Market Trading Map” painted XLP bar in green (buy).  After a strong run of outperformance since early 2017, XLP peaked in early June at 57.36. The ETF rolled over and never looked back.  The September’s massive selloff pushed XLP below the 200-day moving average – a key technical level.  Tuesday’s rally signified a bullish breakout and upside reversal.  Right now follow-through is the key.  An upside follow-through tomorrow will confirm the bullish signal and a test of the 200-day MA, currently at 54.66, should be expected.  Given the technical damage done over the past months, there is no reason to turn bullish until this zone is eclipsed.  A sustain advance above that level has measured move to around 56, based on the July-September highs.

XLP has support just below 53.50.  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 continues basing sideways, using the lower boundary of the red band as support. In fact, trading actions over the past few days represented an orderly high-level consolidation period in the aftermath of the late September massive rally.  This is a bullish development, suggested that the path with least resistance is still significantly higher here.  Perhaps, the positive Money Flow measure is the best illustration of the bulls’ case.

Short-term trading range: 2550 to 2580.  S&P has support near 2550.  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, several key technical indicators suggest that S&P is in a midst of a short-term consolidation phase.   The fact that the index managed to hold on to most of recent gain in the face of such extreme overbought condition, indicating an internal strength.  This increases the probability that the S&P will break out from current trading range as soon as the market shakes off the excessive bullishness.

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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