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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday May 7, 2018.

We’ve noted in the previous Market Outlook that: “current price structure suggests that market is in a process of establishing a near-term support plateau.”  As anticipated, stocks added on to Thursday’s late day rally to close sharply higher Friday after San Francisco Fed President John Williams said that the FED maybe modestly overshooting our 2 percent inflation target.  For the day, the Dow Jones industrial average rose 1.39 percent to finish at 24,262.51.  The S&P rose 1.2 percent to finish at 2,663.42. The Nasdaq composite rose 1.7 percent to close at 7,209.62.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 7.11 percent to close at 14.77.

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One of the noteworthy developments in recent days has been the move in tech stocks.  The sector got a strong boost Friday after billionaire investor Warren Buffett revealed that he bought 75 million Apple (AAPL) shares during the first quarter, which added to the conglomerate’s already massive stake in the tech giant.  The Technology Select Sector SPDR ETF (XLK) jumped 1.9 percent, bringing its YTD gains to 5.7 percent, outperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLK.

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 – Technology Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLK bars in green (buy) – see area ‘A’ in the chart.  The first dominant feature on the chart is the rising trend line starting in early 2016.  The second dominant feature of the chart is the downward trend since mid-March 2018.  The correction tested and respected support at the 23.6% Fibonacci retracement of the 2016-2018 upswing.  Last week’s massive rally pushed the ETF above the 20-week moving average, clearing an important hurdle and opened up for a retest of the early 2018 highs, just above 71.

XL has support near 65.  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 neutral (with a bearish bias).  Last changed May 4, 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 S&P moved up to test resistance at the trend channel moving average after recent pullback found support at the green band.  That level roughly corresponds with the important sentiment 2600 mark.  Money Flow measure trended higher from above the zero line, indicating an increase in buying pressure.  This is a positive development.  The index could signal an upward trajectory, depending on how it closes over the next few days.  The trend channel moving average, currently at 2681, represents key price level.  A close above it has measured move to 2710.  A sustain advance above that level will trigger a major buy signal.  Nevertheless, momentum had turned negative following the late April selloff so it should not be surprising to see further backings and fillings in the coming days.

Short-term trading range: 2580 to 2710.  S&P has a strong band of support between 2580 and 2600. A close below 2580 signify that the 3-month 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 2680 and 2710.  A breakout above 2710 would trigger a new buy signal but for now it looks frim.

Long-term trading range: 2500 to 2710.  S&P has key support near 2600.  A close below that level will trigger a major sell signal with downside target near 2500. But it’s not expected this week.  The index has resistance just above 2700.  A sustain advance above that level could trigger acceleration toward the March high but for now it looks firm.

In summary, there is a high probability that the upper and lower limit of a short-term trading range has been set between the 2600 and 2700 levels on the S&P.  This is a rally and retreat, or range-bound environment. It is not a trending environment. Short-term traders can anticipate continued volatility with rapid up and down moves in the markets.

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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