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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday January 9, 2018.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, S&P finished Monday’s session at all-time highs as investors remained optimistic on the U.S. economy.  For the day, the bench mark gauge climbed 0.17 percent to 2,747.71.  The Nasdaq rose 0.3 percent to close at 7,157.39.  The Dow Jones industrial average, meanwhile, closed 0.05 percent lower at 25,283.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 3.25 percent to close at 9.52.


One of the more noteworthy developments in recent days has been the move in biotech.  After an impressive run in 2017 the group tumbled out of gate.  The SPDR S&P Biotech ETF (XBI) fell 2 percent this week, underperformed the S&P by a wide margin.  Now the question is whether recent weakness is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in XBI.

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 Biotech ETF (weekly)

Our “U.S. Market Trading Map” painted XBI bar in green (buy) – see area ‘A’ in the chart.  XBI rolled over after the late 2017 rally ran out of steam near the prior high set up early October 2017.  This week selloff pushed the ETF down to support near the 84 area, or the 20-week moving average.  That level is significant in charting terms.  It was tested several times in 2017.  We’d turn particularly bearish if XBI closes twice below that level.  A close below 84.48 has measured move to 77-78.

XBI has resistance near 89. 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”]

Despite the short-term overbought conditions, S&P continues drifting higher within the confines of the red band – or extreme overbought zone.  While overbought condition is normal during a pro-long uptrend, it’s suggested that upside momentum might not sustain without at least a short-term breather.  Additionally, while Money Flow measure trends higher, the indicator is still well below the November peak.  These elements might negatively affect trading sentiment over the coming days.  With this in mind we’d consider increase exposure into short-term dips rather than chasing breakouts.

Short-term trading range: 2733 to 2784.  S&P has minor support near 2733.  Below it, a more significant support lies at 2700.  This creates a strong band of support between 2733 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 2784, 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, the daily chart of the S&P looks overstretched on the upside following recent rally.  This might negatively affect trading sentiment tomorrow but we’d view resulting weakness as an opportunity to add upside exposure.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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