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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday December 4, 2017.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, after surged to new high Thursday, the S&P sold off sharply in early Friday session that saw the bench mark gauge fell as much as 1.5 percent before buyers stepped in and pushed prices off the intraday low.  For the day, the S&P declined 0.2 percent to close at 2,642.22.  The Dow Jones industrial average gave up 0.17 percent to close at 24,231.59.  The Nasdaq composite fell 0.4 percent to 6,847.59.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 1.33 percent to close at 11.43.

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One of the more noteworthy developments in recent days has been the move in transport stocks.  Despite a dip Friday, the SPDR S&P Transportation ETF (XTN) was up more than 6 percent for the week, on pace for the best week in more than a year.  Now the question is whether recent the rally has more legs?  Below is an update look at a trade in XTN.

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 Transportation ETF (weekly)

Our “U.S. Market Trading Map” painted XTN bars in green (buy) – see area ‘A’ in the chart.  Over the past couple of weeks, XTN had been trending lower in a short-term corrective mode as it worked off overbought conditions.  The October correction found support near the 20-week moving average.  Last week’s rally pushed XTN above the October high, signify an upside reversal and bullish breakout.  This is a positive development, supporting further upside follow-through and a test of the more significant resistance near the 66 zone, based on the 127.2% Fibonacci extension of the 2011 to 215 upswing.

XTN has support near 61. 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 neutral.  Last changed December 1, 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”]

 

S&P retreated after recent test of resistance at the upper boundary of its short-term trading range was met with a new wave of selling interest.  Friday’s massive intraday selloff tested support at the lower boundary of the pink band.  This level was tested several times in the past months.  In fact, as indicated in the above chart, the S&P trades in broad trading bands that define the trend behavior. The upswing was very rapid with some short-term consolidation near each of the significant support or resistance levels. These support and resistance levels also define the limits and barriers to any future rally and uptrend development.

 

Short-term trading range: 2600 to 2670.  S&P has minor support near 2635, 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 2635 and 2600.  Expect this support to hold, at least on a first test.  The upper boundary of the red band, around 2670, represents key price level.  A close above that level often marked short-term market top.

 

Long-term trading range: 2580 to 2680.  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, over the course of the next few weeks, we expect the index to range bound within the pink and red bands, currently between 2600 and 2660.  This provides a rally and retreat trading environment for traders.  However, market is volatile and tight stops are advisable.

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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