Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday May 10, 2018.
We’ve noted in the previous Market Outlook that: “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.” As anticipated, stocks rose on Wednesday as energy shares jumped on the back of a strong rally in oil prices, which followed Donald Trump’s decision to pull the U.S. out of the Iran nuclear deal. For the day, the S&P rose 0.9 percent to close at 2,697.79. The Dow Jones industrial average rose 0.75 percent to close at 24,542.54. The Nasdaq composite advanced 1 percent to close at 7,339.91. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 8.77 percent to close at 13.42.
One of the noteworthy developments in recent days has been the move in defensive stocks. Defensive sectors, which still offer a higher yield than the overall market, although the gap between their yields and the 10-year’s has narrowed significantly, if not completely. Yield on the 10-year Treasury note closed higher at 3 percent, a key psychological level the benchmark for the first time since late April. While the Utilities Select Sector SPDR ETF (XLU) has yield of 3.48%. XLU fell 0.7 percent Wednesday, bringing its MTD lost up to 3.8 percent, underperformed the S&P by a wide margin. Now the question is whether recent selloff is a beginning of an end or there’re more pains ahead? Below is an update look at a trade in XLU.
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 – Utilities Select Sector SPDR ETF (weekly)
Our “U.S. Market Trading Map” painted XLU bars in red (sell) – see area ‘A’ in the chart. The first dominant feature on the chart is the rising trend line starting in 2009. The second dominant feature of the chart is the downward trend since late 2017. The early May selloff pushed the ETF below the early 2018 rising trend lines, signify that the 3-month bearish flag had resolved itself into a new downswing that projects to 44, based on the 38.2% Fibonacci retracement of the 2009-2017 major upswing. A close below 49 will confirm this.
XLU has resistance near 51. 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”]
Key technical development in Wednesday session was a clear break above the trend channel moving average. This is a bullish development but let’s notice that after recent gain, the index is up against the upper boundary of the January massive triangle pattern. That level was tested several times over the past months. Technically speaking, while the trend line testing process was normal, the lagging Money Flow measure suggested a cautious approach in the medium-term. The indicator printed series of bearish lower highs going back to November 2017 as the S&P ascending. Momentum has been strengthened but does not appeared strong enough to generate sustain breakouts.
Right now, follow-through is the key. Resistance is strong near the 2700-2710 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: 2660 to 2710. S&P has a strong band of support between 2660 and 2680. A close below 2660 will bring the early May low, around 2600, into view. And a close below 2600 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 2700 and 2710. A close above 2710 on a weekly basis would trigger a new buy signal but for now it looks frim.
Long-term trading range: 2500 to 2870. 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 early 2018 highs but for now it looks firm.
In summary, Money Flow measure and momentum had been strengthened as S&P moved up to test formidable resistance but do not appear strong enough to generate sustain breakouts. 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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