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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday January 8, 2018.

Stocks ended the week higher that saw the Dow Jones industrial average advanced 0.88 percent to close at 25,295.87. The S&P climbed 0.7 percent and finished at 2,743.15. The Nasdaq composite gained 0.8 percent to 7,136.56.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, close unchanged at 9.22.

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One of the more noteworthy developments in recent days has been the move in tech stocks.  The sector started the New Year with a bang that saw the Technology Select Sector SPDR ETF (XLK) surged to all-time highs, outperformed the S&P by a wide margin.  Now the question is whether the rally has more legs?  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 – Cons Technology Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLK bar in green (buy) – see area ‘A’ in the chart.  Over the past few weeks, XLK has been trending lower in a short-term corrective mode as it worked off overbought conditions.  The correction found support near the 127.2% Fibonacci extension of the 2016-2017 upswing.  Last week’s rally pushed XLK above the December, signify a breakout and bullish reversal.  This is a positive development, opened up for a test of 70.  That level roughly corresponds with the 161.8% Fibonacci extension.

XLK has support 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 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”]

S&P continues drifting higher after breaking out above the important sentiment 2700 mark.  Last week’s rally pushed the index above the lower boundary of the red band.  As mentioned, the red zone indicated extreme overbought conditions – a situation that often precursor to a meaningful correction.  Nevertheless, Money Flow measure trended slightly higher from above the zero line, indicating an increase in buying pressure.  This certainly would argue that the path with least resistance remains to the upside.

Short-term trading range: 2725 to 2775.  S&P has minor support near 2725.  Below it, a more significant support lies at 2700.  This creates a strong band of support between 2725 and 2700.  A failure to hold above 2700 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 2775, 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, overbought conditions have returned on a weekly basis but momentum remains supportive so downside risk could be limited. It is possible that S&P could continue to drift higher as trading sentiment remains strong.  As for strategy, buying into short-term dips remains the most profitable strategy.

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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