Expect Continued Near-term Volatility as Bottoming Process Unfolds

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.

 

Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday June 25, 2018.

Stocks closed mix Friday as traders tried to shake off jitters concerning trade tensions between the U.S. and China. For the day, the Dow Jones Industrial Average rose 0.49 percent to close at 24,580.89.  The S&P gained 0.2 percent to close at 2,754.88. The Nasdaq composite, meanwhile, closed 0.3 percent lower at 7,692.82.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 5.94 percent to close at 13.77.

CEMNews_trial

WTI crude oil futures soared 4.6 percent to settle at 68.58, its biggest one-day percentage and net dollar increase since November 2016, after OPEC members agreed to only a moderate supply increase.  Energy stocks Chevron and Exxon Mobil both rose more than 2 percent, while the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) surged 3.22 percent to 42.59 bringing its YTD gains up to more than 14 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 XOP.

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 Oil & Gas Exploration & Production ETF (weekly)

Our “U.S. Market Trading Map” painted XOP bars in green (buy) – see area ‘A’ in the chart. After a strong run of outperformance since early February, XOP peaked in late May and whipsaw within the 39.60-44 narrow range.  Trading actions over the past few weeks represented an orderly high-level consolidation period.  This is a bullish development, suggesting that XOP could climb up to test the 2015 high as soon as it works off overbought conditions. Resistance is strong near 44, based on the 38.2% Fibonacci retracement and the 2016 peak.  A close above 44 has measured move to 53-56, based on the 50% Fibonacci retracement and the 2015 highs.

Support is strong near the 39.60 zone, based on the 4-year moving average.  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 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”]

Looking at the daily chart of the S&P, we can see that there is currently a test of support at the 2750 zone. That level was tested several times over the past months.  Friday’s inside bar suggested a short-term oversold bounce is brewing in the not too distant future.  While trading sentiment remains strong, the lagging Money Flow measure indicated a lack of commitment among the bulls.  This could put a cap on the upside. 2750 is the line in the sand. A close below that level would see an unwelcome pickup in volatility.

Short-term trading range: 2750 to 2800.  S&P has support near 2750.  A close below that level has measured move to the low 2700s, based the trend channel moving average.  The index has resistance near 2800.  A close 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, it seems to us that S&P found some solid footing near 2750.  This is a positive development that could allow for at least another rally attempt.  However, resistance is somewhat formidable on an intraday basis, so we expect continued near-term volatility as the bottoming process unfolds.

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

© All rights reserved and actively enforced.
Note: This is a free edition of The Market Outlook, a daily CEM News subscriber newsletter. To get this column before market opens together with hundreds of technical trading ideas (including stocks and ETFs) every month, please click here.
Subscribe to CEM News to receive more in-depth research from Capital Essence.