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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday December 5, 2017.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, the S&P was up sharply in early Monday session then tumbled and closed near the lows of the day.  For the day, the bench mark gauge closed 0.1 percent lower at 2,639.44.  The Dow Jones industrial average added 0.24 percent to close at 24,290.05.  The Nasdaq composite fell 1.1 percent to 6,775.37.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 2.19 percent to close at 11.68.


One of the more noteworthy developments in recent days has been the move in tech stocks.  Recent tax-fueled rotation sent tech shares down Monday.  The Technology Select Sector SPDR ETF (XLK) fell 1.61 percent to 62.49, bringing its YTD gains down to just above 29 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 XLK.

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 – Technology Select Sector SPDR ETF (daily)

Our “U.S. Market Trading Map” painted XLK bars in red (sell) – see area ‘A’ in the chart.  After a strong run of outperformance since summer 2017, XLK peaked last week and rolled over.  Monday’s downside follow-thorough confirmed last week’s bearish breakdown below the 20-day moving average.  This is a bearish development, bringing the 50-day moving average, around 61.80, into view.  A close below that level on a weekly basis has measured move down to 51.

XLK has resistance near 64. 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 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”]

Once again, S&P moved up to test resistance at the upper boundary of its short-term trading range after recent pullback found support near the lower boundary of the pink band. In accordance to the Japanese candlestick pattern recognition, Monday’s massive bearish engulfing bar is a clear indication of supply overwhelming demand.  Momentum indicator shifted lower from overbought zone, another sign that the November rally has come to an end.  These elements increased the probability for a retest of support near 2600.

While seemingly vulnerable to further short-term weakness, Money Flow measure still above the zero line, indicating a positive net demand for stocks. So, after a small dip, expect a year end rip.  With that said, once the S&P falls to 2600, traders should buy it in anticipation of a substantial year-end rally.

Short-term trading range: 2600 to 2670.  S&P has minor support near 2640, 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 2640 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, Monday’s bearish engulfing bar candlestick suggested that the November rally might have come to an end.  There is a better than average odds that the selloff will momentum, but the overall technical backdrop remains positive so after a small dip, expect a year end rip.


Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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