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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday November 10, 2017.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated stocks sold off sharply in early Thursday session that saw the S&P traded as low as 2,566.33 before buyers stepped in and pushed the market off the intraday low.  For the day, the bench mark gauge 0.4 percent to 2,584.62.  The Dow Jones industrial average finished 0.48 percent lower at 23,461.94.  The Nasdaq composite lagged, falling 0.6 percent to 6,750.05.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 7.36 percent to close at 10.50.

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One of the more noteworthy developments in recent days has been the move in risky high-yield bonds.  The SPDR Blmbg Barclays High Yield Bond ETF (JNK) fell 0.65 percent Thursday, bringing up its MTD lost to 2 percent, underperformed the S&P by a wide margin. Wall Street looks at high-yield bonds as a leading indicator for stocks.  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 JNK.

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 Blmbg Barclays High Yield Bond ETF (weekly)

Our “U.S. Market Trading Map” painted JNK bars in red (sell).  After a strong run of outperformance since early 2016, JNK peaked in late July and rolled over.  This week’s downside follow-through confirmed last week’s bearish sell signal and pushed the ETF below the 50-period moving average – the level that offered support since the ETF broke above it in early July 2016.  This is a bearish development, suggesting more supplies are coming into the market and set the stage for a test of support around 36, based on the 23.6% Fibonacci retracement of the 2016-2017 upswing.  A close below that level on a weekly basis has measured move to 35, based on the 38.2% Fibonacci retracement.

JNK has resistance near 37. 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 bearish.  Last changed November 9, 2017 from neutral (see area ‘A’ in the chart).

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

S&P moved down to test support at the lower boundary of the pink band after recent rally ran out of steam just below the important sentiment 2600 mark.  RSI shifted lower from overbought zone, suggesting that market had finally reacted to overbought conditions. In accordance to the Japanese candlestick pattern recognition, Thursday’s bullish long tail is a clear indication of demand overwhelming supply.  This could help putting a short-term floor under the market.  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 2533, 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, S&P developed a high volatility with fast up and down moves between 2570 and 2600.  While there is a low probability of a full blow correction we expect increase in near-term volatility as markets digest overbought conditions.

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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