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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday May 4, 2018.

We’ve noted in the previous Market Outlook that: “there is a distinct possibility that a massive triangle pattern is currently setting up in the daily chart of the S&P.  There is a high probability of a period of consolidation activity between S&P’s 2600 and 2700 that may last several days.  This consolidation band provides a rally and retreat trading environment for traders.”  As anticipated, stocks sold off sharply in early Thursday session that saw the S&P dropped as much as 1.6 percent and traded briefly below the 2600 mark before buyers stepped in and pushed prices off the intraday low.  For the day, the bench mark gauge fell 0.23 percent to close at 2,629.73.  The Dow Jones industrial average edged out a 0.02 percent gain to finish at 23,930.  The Nasdaq composite fell 0.18 percent after dropping more than 1 percent, ending the day at 7,088.15.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 0.44 percent to close at 15.90.

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One of the noteworthy developments in recent days has been the move in energy and energy related stocks.  WTI crude futures ended Thursday’s session up 50 cents at $68.43 per barrel, boosted by OPEC production cuts and the potential for new U.S. sanctions against Iran.  The Energy Select Sector SPDR ETF (XLE) reversed early losses, to close at 73.47, down 0.3 percent.  The ETF fell 0.3 percent MTD after surging more than 9 percent in April.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLE.

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 – Energy Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLE bars in green (buy) – see area ‘A’ in the chart.  XLE has been on a tear in recent weeks after the early 2018 selloff found support at the 2016 rising trend line.  Right now the most important thing to watch is trading behavior as 78, the 2017-2018 highs, is tested as resistance.   A close above that level has measured move to 82-83, based on the 2015 highs and the 61.8% Fibonacci retracement of the 2014-2016 downswing.  A sustain advance above 83 will bring the 2014 highs into view.

XLE has support near 68.  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 slightly bearish.  Last changed May 2, 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”]

As expected, the S&P moved down to test support at the important sentiment 2600 mark after the late April rally attempt ran out of steam near the trend channel moving average.  In accordance to the Japanese candlestick pattern recognition, Thursday’s bullish long tail is a clear indication of demand overwhelming supply.  This bullish development but let’s notice that Money Flow measure and momentum had been deteriorated following recent selloff.  These elements increased the probability for further backings and fillings in the coming days.

Short-term trading range: 2580 to 2700.  S&P has a strong band of support between 2580 and 2600. A close below 2580 signify that the 2018 massive tringle pattern has resolved itself into a new downswing that projects to 2500 at minimum. The index has a strong band of resistance between 2650 and 2710.  A breakout above 2710 would trigger a new buy signal but for now it looks frim.

Long-term trading range: 2480 to 2710.  S&P has key support near 2600.  A close below that level will trigger a major sell signal with downside target near 2480. But it’s not expected this week.  The index has resistance near 2700.  A sustain advance above that level could trigger acceleration toward the March high but for now it looks firm.

In summary, current price structure suggests that market is in a process of establishing a near-term support plateau.  S&P’s 2580 is the line in the sand.  All bets are off should the bulls fail to secure this support.

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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