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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday July 9, 2018.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, the S&P broke above 2750 in early Friday session and climbed as high as 2,764.41 before sellers stepped in and pushed prices off the intraday high.  For the day, the bench mark gauge added 0.8 percent to close at 2,759.82.  The Dow Jones Industrial Average rose 0.41 percent to 24,456.48. The Nasdaq composite climbed 1.3 percent to 7,688.39.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 10 percent to close at 13.37.

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Biotech caught a bid Friday after Biogen announced positive results from a study on a drug aimed at treating early Alzheimer’s disease, its shares rose nearly 20 percent.  The iShares Nasdaq Biotechnology ETF (IBB) surged 3.8 percent, bringing its YTD gains up to nearly 9 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 IBB.

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 Nasdaq Biotechnology ETF (weekly)

Our “U.S. Market Trading Map” painted IBB bars in green (buy) – see area ‘A’ in the chart.  After a strong run of outperformance since early 2016, IBB peaked in early 2018 and rolled over.  The early February correction tested and respected support at the 38.2% Fibonacci retracement.  Last week’s massive rally pushed the ETF above the 61.8% Fibonacci retracement, signified a bullish breakout.  Right now, the most important thing to watch is trading behavior near the early 2018 high of 119.30.  A sustain advance above that level could trigger acceleration toward the 2015 high, just above 133.

IBB has support 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 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 broke above the upper boundary of the one-week trading range, signify the flat flag pattern had resolved itself into a new upswing.  Nevertheless, Money Flow measure remains lagged, suggested that we’re not out of the woods so basically what market could do is range bounce within confines of the February massive triangle pattern.  To think the S&P market is going to rip right through the early 2018 high is a bit too wild-eyed bullish.  For now, 2750 is the line in the sand.  A close below that level will invalidate Friday’s bullish signal and trigger a selloff with initial downside target near 2700.

Short-term trading range: 2750 to 2800.  S&P has support near 2750.  A close below 2750 has measured move to 2700.  The index has resistance near 2800.  A close above that level would trigger acceleration toward the early 2018 high but it’s not expected this week.

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, S&P broke out from the short-term sideways trading range.  The index is ticking ever closer to 2800, a level it has not breached since market broke down in late spring.  But it may have to take a breather before it gets there.  Some aggressive traders might use 2800 like a magnet to sell against, but it doesn’t have much significance outside of just being a nice round number.

 

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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