S&P in Bullish Digestion

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday May 9, 2018.

Stocks closed mixed but off intraday lows on Tuesday after Donald Trump, as expected, announced the U.S. would pull out of a multilateral nuclear deal with Iran. For the day, the Dow Jones industrial average added 0.01 percent to finish at 24,360.21.  The S&P fell 0.03 percent to finish 2,671.92. The Nasdaq composite added 0.02 percent to close at 7,266.90.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 0.27 percent to close at 14.71.


One of the noteworthy developments in recent days has been the move in Chinese tech stocks.  The group got a strong boost Tuesday after Chinese e-commerce giant Alibaba Group Holding Ltd (BABA) reported earnings and revenue, which surpassed expectation and provided an upbeat fiscal revenue guidance. The Guggenheim China Technology ETF (CQQQ) rose 1.73 percent, bringing its MTD gains up to 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 CQQQ.

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 – Guggenheim China Technology ETF (weekly)

Our “U.S. Market Trading Map” painted CQQQ 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 range-bound trading pattern between 66 and 55 since late 2017.  The March correction tested and respected support at the lower boundary of the multi-month sideways trading range.  This week’s massive rally pushed the ETF above the 4-year moving average, clearing an important hurdle and setting the stage for a test of the more important resistance at the 20-week moving average, near 61.50.  A close above that level has measured move to 66-67.

CQQQ has support near 57.  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 May 7, 2018 from neutral (see area ‘A’ in the chart).

[Note: for more details analysis, please take a look at our “US Market ETF Trading Map”]

S&P moved up to test resistance at the trend channel moving average after falling below that level in mid-April.  Money Flow measure trended lower but still above the zero line, indicating a positive net demand for stocks.  This is a bullish development, suggesting that path with least resistance remains to the upside.  The index could signal an upward trajectory, depending on how it closes over the next few days.  The trend channel moving average, currently at 2677, represents key price level.  A close above it has measured move to near 2710.  A close above that level on a weekly basis will trigger a new buy signal.

Short-term trading range: 2590 to 2710.  S&P has a strong band of support between 2590 and 2600. A close below 2590 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 2677 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, trading actions over the past few days represented a bullish digestion in the aftermath of last week’s massive run.  The fact that S&P has retained most of last week’s gains, indicated an internal strength. Our near-term work on price pattern and momentum suggested that the market could take another leg higher as soon as it works off the excessive optimism.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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