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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday May 18, 2018.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks closed lower Thursday as traders monitored trade talks between the U.S. and China.  For the day, the S&P declined 0.1 percent to 2,720.13.  The Dow Jones industrial average 0.22 percent to 24,713.98. The Nasdaq composite slipped 0.2 percent to 7,382.47.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 0.07 percent to close at 13.43.

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One of the noteworthy developments in recent days has been the move in materials.  The Materials Select Sector SPDR ETF (XLB) attracted strong buying support Thursday, rose 0.2 percent to 59.76, bringing its MTD gains up to nearly 5 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 XLB.

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 – Materials Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLB bars in green (buy) – see area ‘A’ in the chart. XLB 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 pushed the ETF above the 20-week moving average, clearing an important hurdle based on moving average.  This is a bullish development, opened up for a test of the March highs, just above 61.  A sustain advance above that level has measured move around 64, or the early 2018 highs.

XLB has support near 58.  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 shifted to slightly bearish.  Last changed May 17, 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”]

S&P continues basing sideways after the early May rally ran out of steam near the lower boundary of the pink band. Thursday’s spinning bar indicated uncertainty.  Technically speaking, when a spinning top forms after a run up in the market, it can be an indication of a pending reversal, as the indecision in the market is representative of the buyers losing momentum.  Money Flow measure is above the zero line, indicating a positive net demand for stocks.  This could help putting a short-term floor under the market.  Right now the most obvious level to watch is the trading behavior near 2700. A failure to hold above that level will trigger a new sell signal and a much deeper pullback should be expected.

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, market is in holding pattern as traders are watching to see whether or not the S&P can close the week above 2700.  A failure to hold above key price level means that long-term buying pressure has finally been exhausted.  On balance, we remain near term neutral/negative for S&P as we believe market vulnerable to some downside retracement over the short-to-intermediate term.

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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