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

We’ve noted in the previous Market Outlook that: “based upon recent trading actions, S&P is in a midst of a multi-week consolidation phase.”  Stocks closed slightly higher Thursday in a thin holiday trading week.  For the day, the Dow Jones industrial average added 0.26 percent to close at 24,837.51.  The S&P rose 0.2 percent to close at 2,687.54.  Nasdaq composite also added 0.2 percent to close at 6,950.16.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 2.77 percent to close at 10.18.

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One of the more noteworthy developments in recent days has been the move in commodities.  Copper briefly rose more than 1 percent to its highest level in nearly four years.  Gold futures for February delivery settled nearly half a percent higher at $1,297.20.  The SPDR S&P Metals and Mining ETF (XME) rose 1.58 percent to 36.40, bringing its YTD gains to nearly 20 percent, slightly underperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XME.

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 Metals and Mining ETF weekly)

Our “U.S. Market Trading Map” painted XME bar in green (buy) – see area ‘A’ in the chart. XME rebounded nicely off support at the 20-week and 50-week moving averages.  This week’s upside follow-through confirmed last week’s breakout above the early 2017high, signify a bullish breakout.  This is a positive development, opening up for a test of the 2014 high near 44.

XME has support near 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 shifted to neutral.  Last changed December 28, 2017 from bearish (see area ‘A’ in the chart).

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

Not much has been changed.  Market is once again overbought. S&P remains confined to a sideways trading pattern, which represented the digestion period in the aftermath of the November-December massive rally.  Money Flow measure is below the zero line, indicating a negative net demand for stocks.  Nevertheless, the fact that the S&P managed to hold on to most of the November’s massive gains in the face of overbought conditions suggested that the bulls are holding an edge for a short-term corrective mode, which is taking place within a context of a medium-term uptrend. With that said, if the index could hold above 2660 this week then a move above 2700 would be easier to achieve.

Short-term trading range: 2660 to 2700.  Support is strong near the 2660 area.  A failure to hold above that level 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, around 2600.  The important sentiment 2700 mark represented key resistance.  A close above that level would trigger acceleration toward the range top, around 2740.

Long-term trading range: 2600 to 2700.  Unless there is a headline that everyone recognizes as extremely positive or negative, expect S&P to swing within this 100 points range.

In summary, S&P remains in a consolidation phase that reflects an indecisive market.  While overbought condition is likely keeping buyers at bay, support is strong near 2660.  As for strategy, pullback will present a buying opportunity, while selling into strength may not be the best strategy in a market considered likely to bounce back.

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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