S&P in Digestion Phase

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday March 9, 2018.

We’ve noted in the previous Market Outlook that: “we wouldn’t look too much into Wednesday’s trading action because it keeps the S&P within its short-term consolidation phase.”  As anticipated, the major indices alternated between gains and losses throughout Thursday session before the late day rally pushed stocks higher.  For the day, the S&P closed 0.45 percent higher at 2,738.97. The Dow Jones industrial average added 0.38 percent to close at 24,895.21. The Nasdaq composite rose 0.4 percent to 7,427.95.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 6.87 percent to close at 16.54.


One of the noteworthy developments in recent days has been the move in raw materials stocks. The group has been under selling pressure after Donald Trump, following through on one of his most controversial campaign promises, slaps a 25 percent levy on steel and 10 percent charge on aluminum. White House officials say the tariffs are an essential matter of domestic and economic security.  The PowerShares DB Base Metals ETF (DBB) fell nearly 5 percent YTD after climbed more than 30 percent in 2017, outperformed the S&P by a wide margin.  Now the question is whether recent pullback is a pause that refreshes or it’s a beginning of something worse?  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 red (sell) – see area ‘A’ in the chart.  Over the past few weeks, DBB has been trending lower in a short-term corrective mode after the late December 2017 rally ran out of steam near the 61.8% Fibonacci retracement of the 2011 to 2016 major downswing.  This week’s selloff pushed DBB below the 30-week moving average, the level that offered support since the ETF broke out in early 2016.  This is a bearish development, suggesting further short-term weakness likely.  DBB has minor support near 18.  We’d turn particularly bearish if the ETF closes twice below that level.

DBB has resistance near 20.  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 March 7, 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”]

The big picture remains the same. There is a consolidation near the trend channel moving average after the last week’s oversold relief rally ran out of steam near 2740.  That level was significant when the index fell below it in early February.  Money Flow measure and momentum had strengthened but does not appear strong enough to generate major breakouts. While more backing and filling would not be a surprise, a close above 2740 on a weekly basis would trigger acceleration toward the lower boundary of the pink band, around 2800.

Short-term trading range: 2670 to 2740.  S&P has minor support near 2670.  A close below that level will bring the early February lows into view. The index has resistance near 2740.  A close above that level could trigger acceleration toward the early 2018 highs.

Long-term trading range: 2540 to 2820.  S&P has major support near 2540.  A close below that level will trigger a major sell signal with initial downside target near 2400.  The index has long-term resistance near 2820.  A trade above that level often marked significant market tops.

In summary, the big picture remains the same. There is a consolidation near the trend channel moving average, which represents digestion period.  S&P’s 2740 is the line in the sand.  A close above that level could trigger acceleration toward 2800.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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