S&P in Bottoming Process

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday February 7, 2018.

We’ve noted in the previous Market Outlook that: “S&P broke several key supports this week as market worked off extreme overbought conditions.  Monday’s massive selloff had finally generate oversold conditions within the framework of the long-term uptrend.  While there is a low probability of a full blow correction we expect increase in near-term volatility as markets establishing a tradable low.”  As anticipated, S&P opened sharply lower Tuesday then rallied all the way back, ended 1.7 percent higher at 2,695.14.  The bench mark gauge down as much as 55 points at its session low.  The Dow Jones industrial average closed 2.33 percent higher at 24,912.77.  The Nasdaq composite gained 2.1 percent to close at 7,115.88.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 19.67 percent to close at 29.98.


One of the more noteworthy developments in recent days has been the move in copper.  After a strong 2017 that saw the Global X Copper Miners ETF (COPX) soared more than 36 percent, outperformed the S&P by a wide margin, the ETF has been under selling pressure in recent days as traders focused on expectations for higher U.S. interest rates.  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 COPX.

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 – Global X Copper Miners ETF (weekly)

Our “U.S. Market Trading Map” painted COPX bars in green (buy) – see area ‘A’ in the chart.  Over the past few weeks, COPX has been trending lower in a short-term corrective mode after the December rally ran out of steam just below the 30 zone.  The late January correction tested support at the 20-week moving average.  This level was tested several times since the ETF reached an interim low in early 2016.  In accordance to the Japanese candlestick pattern recognition, this week bullish long tail is a clear indication of demand overwhelming supply.  This is a positive development, supporting upside follow-through and a retest of the January high of 29.34.  A close above that level could trigger acceleration toward the 214 high, around 33.60.

COPX has support near 26.47.  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 shifted to slightly bearish.  Last changed February 6, 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 moved down to test support at the lower boundary of the green band after falling below the trend channel moving average on Monday.  Money Flow measure trended higher from above the zero line, indicating a positive net demand for stocks.  Momentum indicator shifted higher from near oversold zone, another sign that downward pressure had eased.  These elements increased the probability for a test of resistance at the trend channel moving average, just above 2700.  This level was significant when the S&P fell below it on Monday.  So it should not be surprising to see some backings and fillings over the next few days.

Short-term trading range: 2593 to 2718.  S&P has support near 2593. This is a line in the sand.  A close below that level would see a massive pick up in volatility and a test of more important support at the bottom of its short-term trading range should be expected.  The trend channel moving average, currently at 2718, represents key resistance.  A close above that level will turn the short-term trend up.

Long-term trading range: 2600 to 2800.  Unless there is a headline that everyone recognizes as extremely positive or negative, expect S&P to swing within this 200 points range.

In summary, current price structure suggests that market is in a process of establishing a near-term support plateau from where a new up-leg will base and climb in the days ahead.  As for strategy, traders should consider buying into intraday dips.  S&P’s 2593 is the line in the sand.  All bets are off should the bulls fail to secure this support.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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