S&P in Orderly High Level Consolidation Phase

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

We’ve noted in the previous Market Outlook that: “S&P is trapped within narrow trading range as traders await the Trump’s administration activates tariffs on Chinese goods worth around $34 billion on Friday, which is widely expected to trigger a tit-for-tat response from Beijing.”  As anticipated, stocks closed higher on Thursday, regained most of prior session lost.  For the day, the S&P gained 0.9 percent to close at 2,736.61.  The Dow Jones Industrial Average rose 0.75 percent to close at 24,356.74.  The Nasdaq composite advanced 1.1 percent to 7,586.43.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 7.25 percent to close at 14.97.


One of the noteworthy developments in recent days has been the move in biotech.  The group has been on a tear after the late June selloff was met with a new wave of buying interest.  The SPDR S&P Biotech ETF (XBI) rose 0.49 percent Thursday, bringing its YTD gains up to nearly 15 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 XBI.

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 Biotech ETF (weekly)

Our “U.S. Market Trading Map” painted XBI bars in green (buy) – see area ‘A’ in the chart.  After a strong run of outperformance since early 2016, XBI peaked in late spring and rolled over.  The March correction tested and respected support at the 23.6% Fibonacci retracement.  The April rally pushed the ETF above the February-March highs, signified a bullish breakout.  Last week’s overbought correction found support at the 20-week moving average.  Right now, the most important thing to watch is trading behavior near the June high of 101.55.  A sustain advance above that level could trigger acceleration toward the next level of resistance near 112, based on the 127.2% Fibonacci extension.

XBI has support near 92.  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 neutral.  Last changed July 2, 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”]

As expected, the S&P moved up to test resistance at the upper boundary of the late June sideways trading range after recent pullback found support near 2700.  Money Flow measure trended higher from above the zero line, indicating an increase in buying pressure.  This is a positive development.  The index could signal an upward trajectory, depending on how it closes over the next few days.  For now, 2700 is the line in the sand.  A close below that level will trigger another selloff with initial downside target near 2650. The upper limit of the one week sideways trading range, near 2750, represents key price level.  A close above that level could trigger acceleration toward 2800.

Short-term trading range: 2700 to 2750.  S&P has support near 2700.  A close below 2700 has measured move to 2650.  The index has resistance near 2750.  A close above that level would trigger acceleration toward the 2800 zone.

Long-term trading range: 2640 to 2840.  S&P has support near 2640.  A close below that level will trigger a major sell signal with an initial downside target near 2500.  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, recent trading actions leaving the S&P in what looks to us like an orderly high level back-and-forth consolidation of the May massive rally.   There is a high probability that the upper and lower limit of a short-term trading range has been set between the 2750 and 2700 levels on the S&P.  While the near-term technical backdrops favors a break to the upside it will be important to monitor the retreat and rebound behaviors to determine whether breakouts are decisive.


Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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