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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday January 4, 2018.

We’ve noted in the previous Market Outlook that: “S&P broke out from the late December falling trend but it will be important to monitor the breakout and retreat behaviors over the next few days to determine whether breakouts are decisive.”  Stocks added on to recent winning streak, rose to all-time highs Wednesday as a gain in chip stocks propelled the market higher.  The S&P advanced 0.6 percent to close at 2,713.06.  The Nasdaq composite jumped 0.8 percent to 7,065.53.  The Dow Jones industrial average rose 0.40 percent to 24,922.68.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 6.35 percent to close at 9.15.


One of the more noteworthy developments in recent days has been the move in Korean financial markets.  The iShares MSCI South Korea ETF (EWY) jumped 0.88 percent to 76.54 following report that North Korea and South Korea established contact on a hotline that’s been dormant for almost two years, a major diplomatic breakthrough following a year of escalating hostility and a move that could pave the way for future talks.  Now the question is whether the rally has more legs?  Below is an update look at a trade in EWY.

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 – iShares MSCI South Korea ETF (weekly)

Our “U.S. Market Trading Map” painted EWY bar in green (buy) – see area ‘A’ in the chart. EWY rebounded nicely after the late 2017 pullback found support near the October 2017 breakout point.  That level roughly corresponds with the 20-week moving average.  This is a positive development, opened up for a test of the late November 2017 high of 77.60.  That level is significant in charting terms.  A close above it has measured move to a84, which we’ve determined using the 161.8% Fibonacci extension of the late 2016 to 2017 upswing.

EWY has support near 72.70. 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 bullish.  Last changed January 2, 2018 from bearish (see area ‘A’ in the chart).

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

After correcting just over 20 points from December 18 high of 2694 and meeting anticipated support at the 2670 zone, S&P rebound has taken market to new highs and toward the lower boundary of the red band.  As it was the last of late, a trade above that level marked short-term market tops.  That’s obviously the most important level to keep on the trading radar.

Money Flow measure crossed above the zero line but still well below the November’s peak, indicating a less money is chasing stock higher.  Additionally, after recent gains, S&P is now overbought.  These elements suggested that upside momentum might not sustain without at least a short-term breather.  With this in mind, we’d look to increase exposure on pullbacks rather than chasing breakouts.

Short-term trading range: 2670 to 2714.  Support is strong near the 2670 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 lower boundary of the red band, around 2714, represented key resistance.  A close above that level would trigger acceleration toward the range top, around 2750.

Long-term trading range: 2620 to 2730.  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, the fact that the S&P is overbought as it approached key price level that had been successful in repelling price action in the past suggested that upside gains could be limited.  As for strategy, traders should consider buying into market dips rather than chasing breakouts.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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