Downside Risk Could be Limited as Momentum Remains Supportive

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday June 13, 2018.

We’ve noted in the previous Market Outlook that: “although short-term overbought condition is keeping buyers at bay, S&P’s 2800 continues to act as price magnet.”  As anticipated, stocks traded higher in early Tuesday session that saw the S&P traded as high as 2,789.80 before sellers stepped in and pushed prices off the intraday high.  For the day, the bench mark gauge rose 0.17 percent to 2,786.85.  The Dow Jones industrial average gave up 0.01 percent to 25,320.73.  The Nasdaq composite closed 0.57 percent higher at 7,703.79.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, down 0.08 percent to close at 12.34.

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A stronger dollar and rising U.S. Treasury yields have put emerging markets debts in free fall mode.  The iShares Emerging Markets Bond ETF (EMB) fell 0.4 percent Tuesday, down 7.8 percent YTD, as investors are turning their attention to the U.S. Federal Reserve meeting.  Now the question is whether the Federal Reserve could have a surprise in store for investors, even if everyone already knows the central bank is raising interest rates?  Below is an update look at a trade in EMB.

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 – iShares Emerging Markets Bond ETF (weekly)

Our “U.S. Market Trading Map” painted EMB bars in red (sell) – see area ‘A’ in the chart. EMB is in free fall mode after the April massive selloff took out the February-March lows.  Tuesday’s selloff pushed the ETF down to the May low.  This level is significant in charting terms.  A failure to hold above key support means that long-term buying pressure has already been exhausted.  The next batch of buyers typically sits at a much lower level.   EMB has support just below 107.  A close below that level has measured move to the 2016 low, just above 103.

EMB has resistance near 108.  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”]

S&P continues drifting higher after breaking out above the May highs.  This week’s rally pushed the index up against the lower boundary of the red band.  As mentioned, the red zone 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 path with least resistance remains to the upside.

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 late February and early March highs and 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, overbought conditions have returned on a daily basis but momentum remains supportive so downside risk could be limited. It is possible that S&P could continue to drift higher as trading sentiment remains strong.  As for strategy, buying into short-term dips remains the most profitable strategy.

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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