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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday January 5, 2018.

Stocks added on to recent winning streak, rose to all-time highs Thursday.  The S&P gained 0.4 percent to close at 2,723.99.  The Nasdaq composite advanced 0.2 percent to finish at 7,077.91.  The Dow Jones industrial average rose 0.61 percent to 25,075.13.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 0.76 percent to close at 9.22.

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One of the more noteworthy developments in recent days has been the move in consumer staples.  After a strong run of outperformance, the Consumer Staples Select Sector SPDR ETF (XLP) fell 0.4 percent this week to 56.68, underperformed the S&P.  Now the question is whether this is a pause that refresh or it’s a beginning of something worse?  Below is an update look at a trade in XLP.

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 – Consumer Staples Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLP bar in red (sell) – see area ‘A’ in the chart. XLP sold off after the early November 2017 rally ran out of steam near the prior high set in spring 2017.  Right now the most important thing to watch is follow-through.  We’d turn particular bearish if the ETF closes twice below 56.70.  Medium-term downside target is near the 55-54 zone.

XLP has resistance near 57.30. 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”]

This week rally pushed S&P above the important sentiment 2700 mark, signify a bullish breakout.  This is a bullish development but let’s notice that the rally has created overbought conditions.  With Thursday’s gains, the S&P is about 4 points above the lower boundary of the red band.  Technically speaking, a trade above that level often precursor to a meaningful correction.

Adding to concerns is the lagging Money Flow measure.  While the indicator is above the zero line, it is well below the November’s peak, indicating a less money is chasing stock higher.  These elements suggested that upside momentum might not sustain.  With this in mind, we’d look to increase exposure on pullbacks rather than chasing breakouts.

Short-term trading range: 2700 to 2765.  Support is strong near the 2700 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 upper boundary of the red band, around 2765, represented key resistance.  A close above that level often marked significant short-term market tops.

Long-term trading range: 2630 to 2750.  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, while the market could continue to drift higher as trading sentiment remains strong, the fact that the S&P is overbought as it’s pushing up against the level that had been successful in repelling price action in the past does not favor a sustain breakout.  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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