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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday May 24, 2018.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks traded lower in early Wednesday session that saw the S&P traded as low as 2,709.54 before buyers stepped in and pushed prices higher.  Contributed to the late day optimism was release of the FOMC minutes from the May meeting, which came in more dovish than expected.  For the day, the bench mark gauge rose 0.3 percent to finish at 2,733.29. The Nasdaq composite added 0.6 percent to finish at 7,425.96.  The Dow Jones industrial average added 0.21 percent to close at 24,886.81.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 4.84 percent to close at 12.58.


One of the noteworthy developments in recent days has been the move in car makers.  The group has been under some selling pressure in recent days after Donald Trump withdrew from the Obama-era 2015 nuclear deal reached between Iran and six major powers.  The move sent gas prices higher, hurting auto sales and consumer spending.  The First Trust NASDAQ Global Auto ETF (CARZ) fell 1.4 percent Wednesday to 40.83, down 3.3 percent YTD, underperformed the S&P by a wide margin.  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 CARZ.

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 – First Trust NASDAQ Global Auto ETF (weekly)

Our “U.S. Market Trading Map” painted CARZ bars in red (sell) – 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 downward trend since early 2018.  The late March oversold relief bounce found resistance at the 20-week moving average.  Trading actions over the past few weeks represented an orderly low-level consolidation period.  Right now the most important thing to watch is trading behaviors near 40.60, or the 4-year moving average.  We’d turn particular bearish if the ETF closes twice below that level.  With that said, if that support gives way, the next leg is likely lower, and we’re looking at 39, based on the 38.2% Fibonacci retracement.

CARZ has resistance near 42.  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”]

As expected, the S&P moved down to test support at the lower boundary of its 2-week sideways trading range near 2710 after last week’s rally attempt found resistance near  the upper boundary, just below 2750.  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. Money Flow measure trended higher from above the zero line, indicating an increase in buying pressure. Momentum indicator shifted higher but it’s much closer to overbought than oversold zone.  This could put a cap on the upside.  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 2674, 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, S&P retested and respected support at the lower boundary of its 2-week sideways trading range.  Nevertheless, Wednesday’s rally attempt did not improve the posture of our short-term indicators, which remain supportive of further backings and fillings.  S&P has 2750 to trade against.  If that were to break, we could see 2800 next.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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