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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday June 7, 2018.

We’ve noted in the previous Market Outlook that: “S&P is in a short-term uptrend and as long as this rising trend remains intact, the path with least resistant is higher.”  As anticipated stocks closed higher Wednesday that saw the S&P rose 0.9 percent to finish at 2,772.35.  The Dow Jones industrial average jumped 1.40 percent to close at 25,146.39.  The Nasdaq composite closed 0.7 percent higher at 7,689.24.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 6.13 percent to close at 11.64.

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The benchmark 10-year Treasury note yield rose to 2.98 percent Wednesday, following yields in Europe after the European Central Bank hinted at winding down its asset-purchasing program.  Shares of J.P. Morgan Chase, Bank of America and Morgan Stanley all rose more than 2 percent.  The widely watched SPDR S&P Bank ETF (KBE) gained 2.1 percent, bringing its YTD gains up to 7 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 KBE.

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 – SPDR S&P Bank ETF (weekly)

Our “U.S. Market Trading Map” painted KBE bars in green (buy) – see area ‘A’ in the chart. Over the past few weeks, KBE had been trending higher after the March correction found support near the 4-year moving average. This week’s rally pushed the ETF above the 20-week moving average.  That level was significant when KBE fell below it in late March.  Right now the most important thing to watch is trading behaviors as the early 2018 highs of 52 is tested as resistance.  A close above that level signify a bullish reversal and upside breakout that has measured move to around 59, based on the 127.2% Fibonacci extension.

KBE has support near 49.  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 Wednesday session was a clear break 2750.  That level is significant in charting terms.  It roughly corresponds with the upper boundary of the May sideways trading range and the March’s breakdown gap.  This is a bullish development but let’s notice that with Wednesday’s massive rally had pushed the S&P up against the lower boundary of the red band.  Technically speaking, a trade above the lower boundary of the red band indicated extreme overbought conditions – a situation that often precursor to a meaningful correction.  Nevertheless, Money Flow measure is above the zero line, indicating a positive net demand for stocks.  This certainly would argue that the near-term risk remains to the upside.

Longer term, momentum indicator is much closer to overbought than oversold zone following recent advance.  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: 2740 to 2800.  S&P has minor support near 2740.  A close below that level has measured move to 2700.  The index has resistance near 2800-2814, based on the upper boundary of its short-term trading range.  The market had historically developed important near-term top around that level.

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, it seemed to us that traders are committed to take the S&P up to the important sentiment 2800 mark.  Over the next few days, we will look for trading behaviors as the index probes the red band.  The market had historically developed key resistance near that level.

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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