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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday January 11, 2018.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks fell on Wednesday as investors fretted over the possibility of China halting its Treasury bond purchases.  For the day, the S&P declined 0.1 percent to close at 2,748.23. The Dow Jones industrial average gave up 0.07 percent to 25,369.13.  The Nasdaq composite finished 0.1 percent lower at 7,153.57.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 2.58 percent to close at 9.82.

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One of the more noteworthy developments in recent days has been the move in emerging markets.  The group has been under selling pressure amid concerns over the possibility of the U.S. pulling out of NAFTA.  Reuters reported, citing two Canadian government sources, that Canada is increasingly convinced that Trump will pull the U.S. out of the trade agreement. The iShares MSCI Emerging Markets ETF (EEM) fell 0.8 percent so far 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 EEM.

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 Emerging Markets ETF (weekly)

Our “U.S. Market Trading Map” painted EEM bar in red (sell) – see area ‘A’ in the chart.  After an impressive run in late 2017, the ETF rolled over this week.  Wednesday’s downside follow-through confirmed Tuesday’s bearish reversal signal.  Right now the most important thing to watch is the retreat and rebound behavior as last week’s breakout, just below 48, is tested as support.  A failure to hold above that level signify a breakdown and bearish reversal.  A close below 48 has measured move around 47.

EEM has resistance just above 49. 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 shifted to neutral.  Last changed January 10, 2018 from bullish (see area ‘A’ in the chart).

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

Wednesday’s downside follow-through confirmed Tuesday’s bearish reversal signal.  S&P fell below the lower boundary of the red band after climbed above that level last week. RSI shifted lower from overbought zone, suggesting that market had finally reacted to overbought conditions.  Nevertheless, in accordance to the Japanese candlestick pattern recognition, Wednesday’s bullish long tail is a clear indication of demand overwhelming supply.  This could help putting a short-term floor under the market.

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 2800, 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, S&P developed a high volatility with fast up and down moves between 2740 and 2760.  While there is a low probability of a full blow correction we expect increase in near-term volatility as markets digest overbought conditions.

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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