Near-term Technical Backdrop Had Been Strengthened

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday June 4, 2018.

A stronger-than-expected jobs report pushed stocks higher on Friday that saw the S&P rose 1.1 percent to finish at 2,734.21.  The Dow Jones industrial average gained 0.90 percent to close at 24,635.21.   The Nasdaq composite advanced 1.5 percent to 7,554.33.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 12.77 percent to close at 13.46.


One of the noteworthy developments in recent days has been the move in consumer discretionary stocks.  The group has been on a tear in recent days following report that confidence level among Americans reached an all-time high in April.  The Consumer Confidence Index rose to 128, surpassing the April estimate of 125.6. As per the Conference board, the confidence level has touched an 18-year high. Americans were optimistic about their finances and felt that cracking jobs has become comparatively easier.  The Consumer Discretionary Select Sector SPDR ETF (XLY) up 8 percent YTD, 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 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. Over the past few weeks, XLY has been trending higher after mid-March selloff retested and respected support at the early February lows.  That level roughly corresponds with the 23.6% Fibonacci retracement and the 1-year moving average.  Last week’s rally pushed the ETF up against the strong band of resistance between 107 and 109, or March and February highs.  A close above 109 on a weekly basis signify an upside breakout and has measured move to 120, or the 127.2% Fibonacci extension.

XLY has support near 104.  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 bullish.  Last changed June 1, 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”]

Once again, S&P rallied toward the upper boundary of the multi-week narrow trading range, or flat flag, after recent pullback found support near 2700, or the lower boundary.  Money Flow measure climbed above the zero line after falling below that level on Thursday.  This is a positive development, supporting further upside probing.  Right now the most important to watch is the rally and retreat behavior as the 2752 is tested as resistance.  A sustain advance above that level signify that the May flat flag had resolved itself into a new upswing that projects to 2800 but has overshoot target near 2900.

Short-term trading range: 2700 to 2752.  S&P has support near 2700.  A close below that level has measured move to 2672, based on the trend channel moving average.  The index has resistance near 2752.  A close above that level will bring the March highs, near 2800, into view.

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 big picture remains the same.  The S&P is trapped within a 50 points tight trading range, which represented the digestion period in the aftermath of the early May massive rally.  Near-term technical backdrop had been strengthened but does not appear strong enough to generate a widespread breakouts.  While more backing and filling would not be a surprise, a close above 2752 on a weekly basis signify a bullish breakout and trigger acceleration toward the early 2018 highs.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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