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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday April 18, 2018.

Stocks rose on Tuesday as traders cheers a fresh batch of better-than-expected earnings reports.  For the day, the Dow Jones industrial average rose 0.87 percent to 24,786.63.   The S&P gained 1.1 percent to 2,706.38. The Nasdaq composite advanced 1.7 percent to 7,281.10.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 7.91 percent to close at 15.25.

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One of the noteworthy developments in recent days has been the move in biotech. After an impressive ran that saw the SPDR S&P Biotech ETF (XBI) surged more than 43 percent in 2017, the ETF extended the winning streak, up more than 7 percent YTD, 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 XBI.

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 Biotech ETF (weekly)

Our “U.S. Market Trading Map” painted XBI 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 range bound trading pattern between 82.40 and 97.90 since early January 2018, which represented the digestion period.  The mid-March correction tested and held support at the 4-year moving average.  This week’s upside follow-through confirmed last week’s bullish reversal signal and opened up for a retest of the January-March high, just below 98.  A close above 98 on a weekly basis has measured move to 112, based on the 127.2% Fibonacci extension of the 2009-2015 major upswing.

XBI has support near 83.  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”]

Key technical development in Tuesday session was a clear break above the trend channel moving average.  This is a bullish development but let’s notice that with Tuesday’s gain, the index is up against the mid-March breakaway gap.  Technically speaking, while the gap filling process was normal, the lagging Money Flow measure suggested a cautious approach in the medium-term.  Right now, follow-through is the key.  Resistance is strong near the 2710-2720 zone.  A failure to clear this resistance zone by the end of the week indicated that most of the potential buyers at this level had already placed their bets.  The next batch of buyers typically sits at a much lower level.

Short-term trading range: 2685 to 2720.  S&P has support near 2685.  A close below that level has measured move to 2645.  The index has a strong band of resistance between 2710 and 2720.  A close above 2720 could trigger acceleration toward the March high but for now it looks firm.

Long-term trading range: 2590 to 2850.  S&P has key support near 2590.  A close below that level will trigger a major sell signal with downside target near 2460.  The index has resistance near 2700.

In summary, our near-term work on price structure and momentum suggested strongly that the S&P might take a breather from its recent thrust to multi-week highs.  As for strategy, traders should consider purchase stocks during declines in the market rather than chasing breakouts.

 

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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