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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday May 23, 2018.

Stocks dropped on Tuesday after Donald Trump said he was not satisfied with U.S.-China trade talks. He also said a highly anticipated summit with North Korea may not happen after all.  For the day, the Dow Jones industrial average fell 0.72 percent to close at 24,834.41. The S&P declined 0.3 percent to 2,724.44. The Nasdaq composite lost 0.2 percent to close at 7,378.46. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 1.07 percent to close at 13.22.


One of the noteworthy developments in recent days has been the move in consumer discretionary.  The group was under selling pressure Tuesday as retailers sold off following the latest round of earnings, which actually came in better-than-expected.  The Consumer Discretionary Select Sector SPDR ETF (XLY) fell 0.45 percent to 104.98, bringing its MTD gains down to just 1.2 percent, underperformed the S&P.  Now the question is whether recent pullback is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in XLY.

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 – Consumer Discretionary Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLY bars in red (sell) – see area ‘A’ in the chart.  There is a distinct possibility that a massive triangle pattern is currently setting up in the daily chart of XLY.  The April rally pushed the ETF above the 20-week moving average, clearing an important hurdle based on moving averages, and up against the March highs.  This week’s bearish reversal suggested that the resistance would hold and a retest of support at the 20-week moving average, near 104, is possible.  That level was significant when the ETF climbed above it in early April.  A failure to hold above 104 will confirm the bearish reversal signal and XLY might have to move to a much lower level to attract new buyers.  A close below 104 has measured move to 97.

XLY has resistance near 107.  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.  Last changed May 21, 2018 from bearish (see area ‘A’ in the chart).

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

S&P retreated after a test of resistance at the upper boundary of its 2-week flat flag trading pattern was met with a new wave of selling interest.  The big picture remains the same.  There is a consolidation between 2700 and 2750, which represents the digestion period in the aftermath of the early May massive rally.  Momentum has weakened but does not appear strong enough to generate major breakdowns. Perhaps the positive Money Flow measure is the best illustration of the bulls’ case.  While more backing and filling would not be a surprise, a close below 2700 would see a massive pickup in volatility.

Short-term trading range: 2700 to 2750.  S&P has support near 2700. A close below that level will bring the trend channel moving average, around 2675, into view.  The index has resistance near 2740-2750.  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, so far the May’s oversold rally has proved nothing as far as its staying power or as a possible trend reversal.  While there is a high probability that the late-day selloff will momentum but an undercut below S&P’s 2700 is needed before there is any real prospect of a change in the short-term sideways trading pattern.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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