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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday June 6, 2018.

We’ve noted in the previous Market Outlook that: “the fact that Money Flow measure held below the May peak as S&P moved up to test key price level does not favor a sustain break to the upside.  The index could signal an upward trajectory, depending on how it closes over the next few days.  Key resistance is around 2752.”  As anticipated stocks traded higher in early Tuesday session that saw the S&P traded as high as 2,752.61 before sellers stepped in and pushed prices lower.  For the day, the bench mark gauge added 0.1 percent to close at 2,748.79.  The Dow Jones industrial average fell 0.06 percent to close at 24,799.98.  The Nasdaq Composite index rose 0.4 percent to 7,637.86.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 2.67percent to close at 12.40.

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One of the noteworthy developments in recent days has been the move in tech stocks.  The sector got a boost from a string of recent mergers and acquisitions. Most recently, Microsoft (MSFT) bought GitHub for $7.5 billion, at multiples that haven’t seen for many years.  The widely tracked Technology Select Sector SPDR ETF (XLK) hit a new all-time high at $72.03 on Tuesday, bringing its YTD gains up to 12.5 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 XLK.

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 – Technology Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLK bars in green (buy) – see area ‘A’ in the chart. XLK has been on a tear in recent weeks after the early 2018 correction found support near the 23.6% Fibonacci retracement of the 2016-2018 upswing.  The late April rally had helped propel the ETF above the 20-week moving average.  That level was significant when XLK fell below it in late March.  This week’s massive rally pushed XLK above the early 2018 high, signify a bullish reversal and upside breakout that has measured move to around 80, based on the 127.2% Fibonacci extension.

XLK has support near 68.  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 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”]

Key technical development in Tuesday session was a close above the upper boundary of the May sideways trading pattern, indicating that the multi-week flat flag has resolved itself into a new upswing.  This is a positive development but let’s notice that this week’s rally pushed the index is up against the mid-March bearish breakaway gap and the lower boundary of the red band, or extreme overbought zone.

Momentum indicator trended higher but it’s much closer to overbought than oversold zone.  Adding to concerns in the negative divergence on Money Flow measure, which peaked in mid-May and formed series of lower highs as prices ascending.  These elements suggesting that hot money is leaving the bullish bandwagon.  With this in mind, we’d look a trim positions into overbought strength.

Short-term trading range: 2700 to 2752.  S&P has minor support near 2740.  A close below that level has measured move to 2700.  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, S&P is in a short-term uptrend and as long as this rising trend remains intact, the path with least resistant is higher. Nevertheless, the lagging Money Flow measure is the intermediate-term red flag.  It seems to us that the market could be in a final leg of the multi-year rally.  As for strategy, we’d look a trim positions into overbought strength.

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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