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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday February 14, 2018.

We’ve noted in the previous Market Outlook that: “S&P tested and held support at the dark-green band, or extreme oversold zone.  Our near-term work on price structure and momentum suggested that the index is in a reflexive bounce.  Traders will be looking for the index to close above the trend channel moving average before getting aggressively long again.”  As anticipated, stocks closed higher Monday with the S&P rose 0.3 percent to 2,662.94. Dow Jones industrial average closed 0.16 percent higher at 24,640.45.  The Nasdaq composite climbed 0.5 percent to close at 7,013.51.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 2.50 percent to close at 24.97.


One of the more noteworthy developments in recent days has been the move in metals stocks. The group seemed to be immune to market selloff partly owing to renewed interest in Donald Trump’s infrastructure spending.  After a strong 2017 that saw the PowerShares DB Base Metals ETF (DBB) surged more than 30 percent, outperformed the S&P by a wide margin, the group has been trending slightly lower with the boarder market as traders digested the overbought conditions.  Now the question is whether this is a pause that refreshes or it’s a beginning of the end?  Below is an update look at a trade in DBB.

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 – PowerShares DB Base Metals ETF (weekly)

Our “U.S. Market Trading Map” painted DBB bars in green (buy) – see area ‘A’ in the chart.  Over the past few weeks, DBB has been trending lower in a short-term corrective mode.  The early February correction found support near the 50% Fibonacci retracement of the 2011 to 2015 downtrend.  That level roughly corresponds with the 20-week moving average.  This level was tested several time over the past years.  This history indicated an important role in terms of support.  This week upside follow-through confirmed last week’s bullish reversal signal.  Over the next few weeks, traders should monitor trading behavior as the early 2018 high, near 19.70, is tested as resistance.  A close above that level has measured move to 20.40, or the 61.8% Fibonacci retracement.

DBB has support near 19.  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 bullish.  Last changed February 12, 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 climbed above the upper boundary of the green band after falling below that level last week.  Money Flow measure trended higher above the zero line, indicating an increase in buying pressure.  Momentum indicator has been trending higher after falling into oversold zone last week, another sign that downward pressure had eased.  These elements increased the probability for a retest of resistance at the trend channel moving average, currently at 2720.  This level is significant in charting terms.  A close above that level will complete the bullish W-shape bottom and trigger acceleration toward the range top.

Short-term trading range: 2540 to 2720.  S&P has support near 2640.  Below it, a more significant support lies at 2532.  This creates a strong band of support between 2640 and 2532.  A close below 2532 would see a massive pick up in volatility and a test of more important support near the 2350 zone should be expected but for now it looks firm.  The trend channel moving average, currently at 2720, represents key resistance.  A close above that level will turn the short-term trend up.

Long-term trading range: 2540 to 2800.  Unless there is a headline that everyone recognizes as extremely positive or negative, expect S&P to swing within this 260 points range.

In summary, S&P continues drifting higher following last Friday’s oversold buy signal.  Given looming resistance near 2720, there is no reason to turn particular bullish until this zone is eclipsed.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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