S&P Broke out from Sideways Trend

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday February 27, 2018.

Stocks rallied on Monday amid a stabilization in interest rates. The Dow Jones industrial average closed 1.58 higher percent at 25,709.27. The S&P gained 1.18 percent to end at 2,779.60.  The Nasdaq composite advanced 1.15 percent to 7,421.46.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 4.18 percent to close at 15.80.

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One of the noteworthy developments in recent days has been the move in tech stocks.  After posting an impressive gains of more than 32 percent in 2017, outperformed the S&P, the Technology Select Sector SPDR ETF (XLK) rose more than 8 percent YTD amid strength in large-cap tech stocks.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLK.

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 – Technology Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLK bars in green (buy) – see area ‘A’ in the chart.  XLK has been on a tear in recent weeks after the early February correction found support near the 20-week moving average.  That level is significant in charting terms.  It was tested several times since the ETF reached an important low in late 2015.  This week’s rally pushed XLK slightly above the early 2018 high.  This is a positive development and opened up for a test of the more important resistance in the 80 zone, based on the 127.2% Fibonacci extension.

XLK has support near 67.  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 February 23, 2018 from slightly bearish (see area ‘A’ in the chart).

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

Key technical development in Monday session was a close above 2755, the mid-February high.  This is a positive development, suggesting that the one-week sideways trading pattern has resolved itself into a new upswing.  Money Flow measure trended higher from above the zero line, indicating an increase in buying pressure. These elements increased the probability for a test of resistance near 2800-2820, based on the lower boundary of the pink band and the late January breakdown gap.

Short-term trading range: 2740 to 2820.  S&P has minor support near 2740.  A close below that level will turn the short-term trend down and increase the probability for a retest of the early February lows. The index has resistance near 2800-2820.  A close above that level could trigger acceleration toward the January highs.

Long-term trading range: 2540 to 2840.  Unless there is a headline that everyone recognizes as extremely positive or negative, expect S&P to swing within this 300 points range.

In summary, S&P broke key resistance Monday, signified the one-week sideways trading pattern had resolved itself into a new upswing.  Nevertheless, it will be important to monitor the retreat and rebound behaviors over the next few days to determine whether breakouts are decisive.

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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