Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday April 5, 2018.
We’ve noted in the previous Market Outlook that: “based upon recent trading action, an important near-term low had been established and the S&P index is in an early stage of a snap back bounce. Our near-term work on momentum and price structure suggested that the relief rally can be sustained for a few days, potentially allowing for a test of 2700 before a significant pullback unfolds.” As expected, stocks closed sharply higher Wednesday as investors shake off trade war fears. For the day, the S&P gained 1.2 percent to close at 2,644.69. The Dow Jones industrial average rose 0.96 percent to close at 24,264.30. The Nasdaq composite added 1.5 percent to close at 7,042.11. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, dropped 4.93 percent to close at 20.06.
One of the noteworthy developments in recent days has been the move in retailers. The group attracted some buying support after Donald Trump tweeted his “concerns” that e-commerce giant Amazon.com Inc. isn’t paying its fair share of taxes, hurting the U.S. Postal Service and putting many thousands of retailers out of business. The SPDR S&P Retail ETF (XRT) surged 2.77 percent Wednesday, bringing its MTD gain up to 1.4 percent, outperformed the S&P by a wide margin. Now the question is whether the rally has more legs? Below is an update look at a trade in XRT.
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 – SPDR S&P Retail ETF (weekly)
Our “U.S. Market Trading Map” painted XRT bars in green (buy) – see area ‘A’ in the chart. Over the past few months, XRT has been trending lower in a medium-term corrective mode as it worked off overbought conditions. The February downswing tested and held support at the 4-year moving average. This week’s massive bullish engulfing bar is a clear indication of demand overwhelming supply. Right now follow-through is the key. We’d turn particular bullish if XRT closes above the February falling trend line. That’ said, a close 45.50 above on a weekly basis has measured move to 49-51.
XRT has support near 42.50. 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 April 4, 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”]
Wednesday’s upside follow-through confirmed Tuesday’s bullish reversal signal. Today’s rally pushed the S&P above the upper boundary of the green band, clearing an important hurdle. This is a bullish development but let’s notice that Money Flow measure is still below the zero line, indicating a negative net demand for stocks. So, traders should consider taking down exposure into additional strength, which we think could take S&P closer to 2700 before the big reversal kicks in.
Short-term trading range: 2565 to 2700. S&P has support near 2565. A close below 2565 will open the flood gate toward 2500. The index has resistance near 2700. A close above that level could trigger acceleration toward the trend channel moving average but for now it looks firm.
Long-term trading range: 2560 to 2820. S&P has key support near 2560. A close below that level will trigger a major sell signal with downside target near 2400. The index has long-term resistance near 2820. A trade above that level often marked significant market tops.
In summary, S&P cleared key technical resistance, breaking out from the two-week downward trend. However, given the damages done over the past months, there is no big commitment to accumulate until the 2700 resistance zone is eclipsed. As for strategy, traders should consider taking down exposure into additional strength, which we think could take S&P closer to 2700 before the big reversal kicks in.
Thanks and happy trading.
(By：Michelle Mai for Capital Essence)
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