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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday January 10, 2018.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks rose to record highs on Tuesday as traders remained optimistic about the market heading into earnings season.  The S&P hit a fresh all-time high, rising 0.1 percent to close at 2,751.29.  The Dow Jones industrial average added 0.41 percent to close at 25,385.80. The Nasdaq composite climbed 0.1 percent and closed at 7,163.58.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 5.88 percent to close at 10.08.


One of the more noteworthy developments in recent days has been the move in retails.  After an impressive run in late 2017 the group sold off this week following reports of lackluster store traffic and weak sales outlook. The SPDR S&P Retail ETF (XRT) fell 0.7 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 XRT.

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 Retail ETF (weekly)

Our “U.S. Market Trading Map” painted XRT bar in red (sell) – see area ‘A’ in the chart.  The first dominant feature on the chart is the rising trend line starting in late 2008.  The second dominant feature of the chart is the sideways trading range between 47 and 38 since early 2016, which represents the digestion period.  The late 2016 upswing broke above 48 but quickly fell below it, signified a failure breakout.  The late 2017 pushed the ETF up against the upper boundary of the 2-year sideways trading range.  This week’s selloff signify a breakdown and bearish reversal.  This is a negative development, increased the probability for a test of immediate support near 44.  A close below that level has measured move to 38.

XRT has resistance 47. 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”]

As it was the case of late, S&P continues drifting higher using the lower boundary of the red band as support. In accordance to the Japanese candlestick pattern recognition, Tuesday’s spinning top indicated uncertainty.  Technically speaking, when a spinning top forms after an upswing in the market, it can be an indication of a pending reversal, as the indecision in the market is representative of the buyers losing momentum.  Perhaps the negative divergence exists on Money Flow measure, which peaked in November and trending lower as prices ascending, is the best illustration of the bears’ case.  Adding to concerns is overbought conditions. These elements suggested that risk is greater to the downside in the medium term.  With this in mind, we’d look a trim positions into overbought strength.

Short-term trading range: 2740 to 2800.  S&P has minor support near 2740.  Below it, a more significant support lies at 2700.  This creates a strong band of support between 2740 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 2760.  Unless there is a headline that everyone recognizes as extremely positive or negative, expect S&P to swing within this 130 points range.

In summary, the spinning top candlestick pattern in the S&P together with overbought conditions suggested that market is at or very close to a significant near-term top. Near-term risk is to the downside.  Traders should consider buying downside protection on winning positions.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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