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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday November 29, 2017.

Stocks finished at record highs on Tuesday as traders’ cheers the Senate Budget Committee’s approval of the GOP’s tax reform bill, which effectively sends the bill to the full upper chamber for a vote.  For the day, the Dow Jones industrial average rose 1.09 percent to close at 23,836.71.  The S&P climbed 0.98 percent to close at 2,627.04. The Nasdaq composite added 0.49 percent to finish the day at 6,912.35.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 1.62 percent to close at 10.03.

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One of the more noteworthy developments in recent days has been the move in tech stocks.  The Social Media Index ETF (SOCL) fell 0.18 percent to 34.17 Tuesday, bringing its YTD gains down to 58 percent, outperformed the S&P by a wide margin.  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 SOCL.

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 – Social Media Index ETF (daily)

Our “U.S. Market Trading Map” painted SOCL bar in red (sell) – see area ‘A’ in the chart. After a strong run of outperforming, the ETF peaked last week at 34.70 and rolled over.  Tuesday’s downside follow-through confirmed Monday’s bearish reversal signal and had measured move down to near 32.50, based on the 50-day moving average.

SOCL has resistance just below 35. 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 November 24, 2017 from bullish (see area ‘A’ in the chart).

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

Tuesday’s rally pushed the S&P above the lower boundary of the red band, clearing an important hurdle.  This is a bullish development but let’s notice that the rally has created overbought conditions.  Technically speaking, a trade into the red band often precursor to a meaningful correction.  Adding to concerns is Money Flow measure.  After peaking in early November, the indicator has been trending lower as prices ascending.  This is a bearish development, suggesting that less money are chasing prices higher.  So, it seems to us that probability of a sustain breakout without a pullback is extremely limited.  With this in mind, we’d look a trim positions into overbought strength.

Short-term trading range: 2600 to 2655.  S&P has minor support near 2623, based on the lower boundary of the red band.  Below it, a more significant support lies at 2600.  This creates a strong band of support between 2623 and 2600.  Expect this support to hold, at least on a first test.  The upper boundary of the red band, around 2655, represents key price level.  A close above that level often marked short-term market top.

Long-term trading range: 2540 to 2650.  Unless there is a headline that everyone recognizes as extremely positive or negative, expect S&P to swing within this 100-ish points range.

In summary, overbought conditions together with negative divergence on the Money Flow measure spelled a set-up for a quick and painful weak-bull shakeout.  S&P’s 2600 is the line in the sand.  All bets are off should the bulls fail to secure that support.

 

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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