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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday November 30, 2017.

We’ve noted in the previous Market Outlook that: “overbought conditions together with negative divergence on the Money Flow measure spelled a set-up for a quick and painful weak-bull shakeout.”  As anticipated, the S&P closed slightly lower Wednesday, down 0.04 percent to close at 2,626.07, after hit an intraday record as a decline in tech stocks offset a strong performance from the financial sector.  The Nasdaq composite fell 1.3 percent to close at 6,824.34.  The Dow Jones industrial average rose 0.44 percent to close at 23,940.68.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 6.68 percent to close at 10.70.

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One of the more noteworthy developments in recent days has been the move in financials.  The sector soared to record highs following comments by Jerome Powell, incoming Federal Reserve chairman, on potentially lessening regulation on banks.  The SPDR S&P Bank ETF (KBE) surged more than 3 percent Wednesday, bringing its YTD gains to nearly 10 percent, slightly underperformed the S&P.  Now the question is whether recent the rally has more legs?  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 (daily)

Our “U.S. Market Trading Map” painted KBE bars in green (buy) – see area ‘A’ in the chart.  KBE has been on a tear in recent days after last week’s correction found support near the 2-conjoining support, the 20-day and 50-day moving average. Wednesday’s massive rally confirmed Tuesday’s bullish reversal signal and pushed the ETF above the early 2017 high, signify a bullish breakout.  This is a positive development and opened up for a test of the next level of resistance at the 127.2% Fibonacci extension of the 2016-2017 upswing, just above 52.

KBE has support near 46. 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 bullish.  Last changed November 29, 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”]

Wednesday’s rally pushed the S&P above the lower boundary of the red band and into extreme overbought zone.  Technically speaking, a trade into the area indicates an extreme overbought condition – a situation that often precursor to a short-term correction.  Additionally, in accordance to the Japanese candlestick pattern recognition, Monday’s spinning top indicated uncertainty.  Technically speaking, when a spinning top forms after an upswing in the market, it can be an indication of a pending reversal, as the indecision in the market is representative of the buyers losing momentum.  RSI indicator shifted lower from overbought zone, another sign that buying pressure had eased.  These elements increased the probability for some pullbacks consolidations in the coming days.

Short-term trading range: 2600 to 2655.  S&P has minor support near 2626, 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 2626 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, Wednesday’s spinning top candlestick pattern in the S&P together with overbought conditions suggested that the index is at or very close to a significant near-term top. Near-term risk is to the downside.  Traders should consider buying downside protection on winning positions.

 

 

 

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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