Oversold Conditions likely to Expand

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday June 21, 2018.

Stocks closed mixed Wednesday amid ongoing trade spat between the U.S. and China.  For the day, the Dow Jones industrial average fell 0.17 percent to end at 24,657.80.  The tech-heavy Nasdaq rose 0.7 percent to 7,781.51, an all-time high. The S&P gained 0.2 percent to end at 2,767.32.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 4.19 percent to close at 12.79.


One of the noteworthy developments in recent days has been the move in casino and hotel operators with large revenue exposure to China amid increased US China trade tensions.  Wynn Resorts draws 69 percent of its revenue from China, the greatest exposure among U.S. companies larger than $3 billion, while Las Vegas Sands ranks third, with 65 percent revenue exposure, according to Morgan Stanley.  Those stocks down 11 and 0.7 percent MTD respectively.  As such, the VanEck Vectors Gaming ETF (BJK) fell 4.3 percent MTD.  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 BJK.

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 – VanEck Vectors Gaming ETF (weekly)

Our “U.S. Market Trading Map” painted BJK bars in red (sell) – see area ‘A’ in the chart. After a strong run of outperformance since early 2016, BJK peaked in early 2018.  The February correction found support near the 23.6% Fibonacci retracement of the 2016-2018 upswing.  The April recovery rally ran out of steam near the January high.  The early June selloff pushed the ETF down to the 20-week moving average.  This level was tested several times over the past months.  A close below 47 has measured move to 45, based on the early 2018 lows and 23.6% Fibonacci retracement.

BJK has resistance 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 shifted to slightly bearish.  Last changed June 20, 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 rebounded nicely after recent selloff found support at the lower boundary of the pink band.  That level was significant when the index climbed above it in early June. This is a positive development. Money Flow measure flashed a weak bullish signal as it turned positive after fell below the zero line on Tuesday.  Momentum however, has been deteriorated following recent selloff.  These elements indicated further backing and fillings likely.  2750 is the line in the sand.  A close below that level signify a bearish trend shift and a test of the trend channel moving average, near 2700, should be expected.

Short-term trading range: 2750 to 2800.  S&P has minor support near 2750.  A close below that level has measured move to around 2700, based the trend channel moving average.  The index has resistance near 2800.  A sustain breakout above that level will trigger acceleration toward the early 2018 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, intraday oversold conditions returned with yesterday’s selloff, supporting resumption of a short-term rally.  The ability of the S&P to hold up above 2750 is impressive.  Nevertheless, we would not rule out a brief dip below this level as momentum remains weak and oversold conditions appear likely to expand before a tradable low is established.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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