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

The major stock indices finished slightly higher Wednesday as strength in consumer staples had helped offset weakness in the financial sector.  For the day, the Dow Jones industrial average rose 0.03 percent to close at 23563.36.  The S&P closed 0.1 percent higher at 2,594.38.  The Nasdaq composite rose 0.3 percent to 6,789.12.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 1.11 percent to close at 9.78.

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One of the more noteworthy developments in recent days has been the move in bank stocks, which fell broadly on Wednesday amid growing concerns that the recent Republican electoral losses could hinder the party’s push to reform the U.S. tax code. They have also been pressured by a flattening yield curve.  The spread between the two and the 10-year U.S. bond yields hovered around 70 basis points, its lowest level in a decade. A flattening yield curve is sometimes the precursor of an inverted curve, which has been a recession warning.

The SPDR S&P Bank ETF (KBE) fell 0.67 percent Wednesday, bringing its YTD gains down to just 1.7 percent, underperformed the S&P by a wide margin.  Now the question is whether recent weakness is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in KBE.

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 – SPDR S&P Bank ETF (weekly)

Our “U.S. Market Trading Map” painted KBE bars in red (sell).  After a strong run of outperformance since late 2016, KBE peaked in March and bounce back and forth within the 40-47 trading range.  This week’s downside follow-though confirmed last week’s bearish signal and set the stage for a test of support around 43.50.  That level is significant when KBE tested and held in September.  A close below that level on a weekly basis has measured move to 40-36.

KBE has resistance near 45. 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 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”]

The big picture is pretty much the same. There is a consolidation within the 2585-2595 narrow range.  While overbought conditions together with negative divergence on RSI are keeping buyers on the sideline, downside momentum does not appear strong enough to generate a decisive breakdown.  Support is strong in the 2585 area.  While more backing and filling would not be a surprise, we think traders should buy the dips in anticipation of a rally to at least 2600 in the days ahead.  Perhaps the positive Money Flow measure is the best illustration of the bulls’ case.

Short-term trading range: 2570 to 2610.  S&P has minor support near 2570.  A close below that level has measured move down 2528, based on the trend channel moving average.  The lower boundary of the red band, around 2610, 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 overbought condition is likely keeping buyers at bay, support is strong near S&P’s 2585 and downside momentum does not appear strong enough to generate a decisive breakdown. The index could see some near-term weakness, but will ultimately push itself higher.  As for strategy, pullback will present a buying opportunity, while selling into strength may not be the best strategy in a market considered likely to bounce back.

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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