Look to Reduce Exposure into Short-term Strength

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday April 17, 2018.

Stocks rose on Monday as fears of an escalating conflict in Syria dissipated.  For the day, the Dow Jones industrial average gained 0.87 percent to close at 24,573.04. The S&P climbed 0.8 percent to 2,677.84. The Nasdaq composite advanced 0.7 percent to 7,156.28.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 4.88 percent to close at 16.56.


One of the noteworthy developments in recent days has been the move in materials stocks. After an impressive ran that saw the Materials Select Sector SPDR ETF (XLB) surged more than 21 percent in 2017, the ETF had been under selling pressure in recent months, down 2.7 percent YTD, as alarm bells rang over a potential trade war with China.  Now the question is whether recent selloff is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in XLB.

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 – Materials Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLB bars in green (sell) – see area ‘A’ in the chart. The first dominant feature on the chart is the rising trend started in early 2016.  The second dominant feature of the chart is the downward trend started in late January 2018.   XLB briefly broke below the 4-year moving average before buyers stepped in and pushed the ETF above key technical level, based on moving averages.  This week’s upside follow-through confirmed last week’s bullish reversal signal and opened up for a test of resistance near 60.  That level is significant in charting terms. A close above it will trigger a major buy signal and trigger acceleration toward the early 2018 highs, just above 64.

XLB has resistance near 55.  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 April 10, 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”]

As expected, the index moved up to test resistance at the trend channel moving average after falling below that level in early March. The index trades in broad trading bands that define the trend behavior. The upswing was very rapid with some short-term consolidation near each of the significant support or resistance levels. These support and resistance levels also define the limits and barriers to any future rally and uptrend development.  Money Flow measure and momentum had been strengthened following recent rally but do not appeared strong enough to generate widespread breakouts.  With this in in mind, we would consider taking down exposure into short-term rallies.

Short-term trading range: 2645 to 2700.  S&P has minor support near 2645.  A close below that level has measured move to 2600.  The index has a strong band of resistance between 2690 and 2710.  A close above 2710 could trigger acceleration toward the March high but for now it looks firm.

Long-term trading range: 2450 to 2700.  S&P has key support near 2580.  A close below that level will trigger a major sell signal with downside target near 2450.  The index has resistance near 2700.


In summary, we wouldn’t look too much into recent trading action as because it keeps the S&P within its short-term consolidation phase. Resistance is strong in the 2700 zone and upside momentum does not appear strong enough to generate a decisive breakout.  With this in in mind, we would consider taking down exposure into additional strength, which we think could take the S&P closer to 2700 before a significant pullback unfolds.


Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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