S&P Upside to be limited by Overbought Condition

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday May 17, 2018.

Stocks rose Wednesday as investors appeared to shake off fears of rising bond yields.  For the day, the Dow Jones Industrial Average rose 0.3% to 24,768.93. The blue-chip average has risen in nine of the past 10 sessions.  The S&P index was up 0.4%, to 2,722.46. The Nasdaq Composite advanced 0.6% to 7,398.30.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 8.27 percent to close at 13.42.


One of the noteworthy developments in recent days has been the move in retailers.  The group attracted strong buying support Wednesday after Macy’s Inc. (M) reported upbeat sales and outlook.  Shares of Macy’s Inc. jumped over 10 percent.  The SPDR S&P Retail ETF (XRT) rose 1.6%, bringing its MTD gains up to nearly 4 percent.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XRT.

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 Retail ETF (weekly)

Our “U.S. Market Trading Map” painted XRT bars in green (buy) – see area ‘A’ in the chart. XRT has been on a tear in recent days after the early 2018 correction found support near the 4-year moving average.  This week’s upside follow-through confirmed the bullish reversal signal and opened up for a test of the early 2018 high, just above 49.  A close above that level on a weekly basis has measured move to 51, based on the 2015 highs.

XRT has support near 45.  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 15, 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 test resistance at the lower boundary of the pink band after recent pullback found support near the upper boundary of the early 2018 massive triangle pattern.  Momentum indicator shifted high but the indicator is much closer to overbought than oversold zone.  This could put a cap on the upside.  Right now the most obvious level to watch is the trading behavior near 2740. A sustain breakout above that level would trigger acceleration toward the March highs, near 2800.

Short-term trading range: 2700 to 2740.  S&P has support near 2700. A close below that level will bring the trend channel moving average, around 2678, into view.  The index has resistance near 2740.  A close above that level would trigger acceleration toward the March highs.

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, the fact that the S&P is nearly overbought as it moved up to test formidable resistance suggested that upside gains could be limited.  As for strategy, traders should consider buying into market dips rather than chasing breakouts.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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