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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday December 6, 2017.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, the S&P closed lower Tuesday, fell 0.37 to close at 2,629.57.  The Dow Jones industrial average gave up 0.45 percent to close at 24,180.64.  The Nasdaq composite fell 0.19 percent to 6,762.21.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 3 percent to close at 11.33.

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One of the more noteworthy developments in recent days has been the move in telecoms. After a strong run of outperformance since mid-November, the iShares Dow Jones US Telecom ETF (IYZ) rolled over Tuesday, fell 2.16 percent to 29.49, bringing its YTD lost to more than 14 percent, underperformed 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 IYZ.

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 – the iShares Dow Jones US Telecom ETF (daily)

Our “U.S. Market Trading Map” painted IYZ bar in red (sell) – see area ‘A’ in the chart. Tuesday’s massive selloff pushed the ETF below the 50-day moving average.  That level was significant when the ETF climbed above it last week.  This is a bearish development, signify a bearish reversal.  Right now the most important thing to watch is trading action near the 20-day moving average, currently at 28.79.  A close below that level has measured move to 27.24, or the November low.

IYZ has resistance near 30.50. 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 December 5, 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 fell below the lower boundary of the red band after climbed above that level last week, signify a breakdown and bearish reversal.  Looking at the 6-month daily chart of the S&P we can see that there is currently a test of support at last week’s breakaway gap.  Technically speaking, while the gap filling process was normal, overbought conditions are widespread enough to suggest a cautious approach in the medium-term.  Right now, follow-through is the key.  Support is strong near the 2626-2600 area.  A failure to hold above 2600 suggests that most of the potential buyers at this level had already placed their bets.  The next batch of buyers typically sits at a much lower level.

Short-term trading range: 2600 to 2670.  S&P has minor support near 2626.  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 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, current price structure suggested strongly that the market is taking a breather from its recent thrust to new highs. As the S&P approaches critical tipping point, we’re watching the next major sell signal.  The index could signal an extended downward trajectory, depending on how it closes over the next few days.   If the market is going to find a bottom in the near term, we want to see the S&P rebounds off 2600.

 

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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