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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday November 1, 2017.

Stocks closed slightly higher Tuesday, the final trading day of the month that saw the major indices posted another solid monthly gain.  The Dow Jones industrial average, the S&P and the Nasdaq composite rose 4.3, 2.2 and 3.6 percent, respectively, in October.  Meanwhile, the CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, up 7 percent in October to close at 10.18.

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One of the more noteworthy developments in recent days has been the move in financial services stocks.  The iShares U.S. Financial Services ETF (IYG) underperformed the broader market, fell 0.14 percent on Tuesday to close at 123.59.  The ETF however, has handily outperformed the S&P in 2017, up more than 16 percent.  The S&P is up more than 15 percent in YTD.  Now the question is whether recent pullback is a pause that refreshes or it’s a beginning of something worse? Below is an update look at a trade in IYG.

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 U.S. Financial Services ETF (daily)

Our “U.S. Market Trading Map” painted IYG bar in red (sell).  After a strong run of outperformance, IYG peaked last week at 124.77 and trended steadily lower as it worked off overbought conditions. Tuesday’s downside follow-through confirmed Monday’s bearish reversal signal and setting the stage for a test of support near 122.30, based on the 20-day moving average.  That level is significant in charting terms.  It offered support and acted as launching pad for the mid-October rally.  A failure to hold above 122.30 indicates more supply is coming into the market and as a result, the ETF has to move to a much lower level to attract new buyers.  With that said, a close below 122.30 has measured move to 118-112.

IYG has resistance near 125.  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 neutral (with bearish bias).  Last changed October 31, 2017 from bearish – see area ‘A’ in the chart.

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

Following the impressive “V” shape rally to new high last week, the S&P has been coiled into a tight trading range as it worked off overbought conditions. More often than not, coil or triangle formation tends to resolve in the direction of the existing trend, which is up in this case.  The most immediate resistance is near 2583.  A close above that level will trigger acceleration toward 2600.  Support is at the 2560 area.  If we lose this support, then the door is opened for a full retest of the trend channel moving average.

Short-term trading range: 2560 to 2600.  S&P has support near 2560.  A close below that level has measured move to the trend channel moving average, just above 2500.  The lower boundary of the red band, near 2600, represents key resistance.  Technically speaking, a trade above that level is unsustainable.  Traders should put it on the trading radar.

Long-term trading range: 2500 to 2600.  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, there is a distinct possibility that a small triangle pattern is currently setting up in the daily chart of the S&P. This pattern typically favors a trend continuation.  We should know for sure over the next couple of days as to whether this technical setup will be confirmed and triggered or not.

 

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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