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

Wall Street ended a busy week on a positive note as stocks climbed to new record highs on Friday.  The Dow Jones industrial average rose 0.1 percent to close at 23,539.19.  The S&P climbed 0.3 percent to 2,587.84. The Nasdaq composite rose 0.7 percent to 6,764.44, an all-time high.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 7.96% to close at 9.14.

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One of the more noteworthy developments in recent days has been the move in industrial stocks.  The Industrial Select Sector SPDR ETF (XLI) underperformed the broader market, fell 0.10 percent on Friday to close at 71.83.  The ETF also underperformed the S&P on a monthly and YTD basis.  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 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 1.2 – Industrial Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLI bars in red (sell).  After a strong run of outperformance since late August, XLI peaked in late October and rolled over.  Friday’s downside follow-thorough confirmed Thursday’s bearish reversal signal. This is a bearish development, setting the stage for a test of support at the 20-day moving average, around 69.50.  A close below that level has measured move to around 67.

XLI has resistance near 73. Short-term traders could use that level as the logical level to measure risk against.

Chart 1.3   – S&P 500 index (daily)

Short-term technical outlook remains neutral.  Last changed October 30, 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”]

S&P continues drifting higher within the confines of the pink band.  This is a bullish development but let’s notice that the late October rally has created an overbought condition. Adding to concerns is the lagging RSI. Last week’s low high, suggesting that buying enthusiasm faded as the index inches toward all-time high.  This bearish development does not favor a sustain break to the upside.  With this in mind we’d consider taking down exposure.

Short-term trading range: 2565 to 2605.  S&P has minor support near 2565.  A close below 2460 has measured move down 2522, based on the trend channel moving average.  The lower boundary of the red band, around 2605, represents key price level.  A close above that level often marked short-term market tops.  Traders should put it on the trading radar.

Long-term trading range: 2530 to 2630.  Unless there is a headline that everyone recognizes as extremely positive or negative, expect S&P to swing within this 100 points range.

Bottom line, while the market could continue to drift higher as trading sentiment remains strong, several short-term indicators are pointing toward a fading trend.  As for strategy, traders should consider taking partial profits or at least buying downside protections on winning positions.

 

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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