Return of Overbought Conditions Will Keep the Lid of the Upside

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday July 10, 2018.

We’ve noted in the previous Market Outlook that: “S&P broke out from the short-term sideways trading range.  The index is ticking ever closer to 2800.”  As anticipated, stocks closed sharply higher Monday with the S&P 500 gained 0.7 percent to close at 2,784.17.  The Dow Jones Industrial Average rose 1.31 percent to 24,776.59.  The Nasdaq composite also advanced 0.9 percent to 7,756.20.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 5 percent to close at 12.69.


Bank stocks rose at least 2.5 percent, led by Bank of America, Citigroup, Goldman Sachs and J.P. Morgan Chase. The Financial Select Sector SPDR ETF (XLF) jumped 2.29 percent to 27.28, down 2.2 percent YTD.  Now the question is whether recent rally is a beginning of a new upswing or it’s merely a dead cat bounce?  Below is an update look at a trade in XLF.

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 – Financial Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLF bars in red (sell) – see area ‘A’ in the chart.  After a strong run of outperformance since early 2016, XLF peaked in early 2018 and rolled over.  The early February correction found support at the 23.6% Fibonacci retracement. However, the late June selloff pushed the ETF below the 23.6% Fibonacci retracement and the 1-year moving average.  That level was significant when XLF climbed above it in mid-2016.  Monday’s massive rally pushed XLF up against the strong band of resistance between the 27.20 and 27.70 zone.  A close above 27.70 on a weekly basis will break the series of bearish lower highs and lows.  This if and when it happens will turn the medium-term trend up and trigger acceleration toward the early 2018 highs.

XLF has support near 26.  A close below that level has measured move to 24.80, or the lower boundary of the early 2018 falling trend channel and the 38.2% Fibonacci retracement.  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 bullish.  Last changed July 9, 2018 from neutral (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 climbed up to test resistance near the important sentiment 2800 zone after recent pullback found support near the trend channel moving average.  That level was tested several times over the past months.  Technically speaking, while the trend line testing process was normal, the lagging Money Flow measure suggested a cautious approach in the medium-term.  The indicator printed series of bearish lower highs going back to early 2018 as the S&P ascending to new highs.  Momentum has been strengthened but the return of overbought conditions on an intraday basis suggested that upside momentum might not sustain without at least a short-term breather.  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, momentum has been strengthened as S&P climbed up to test resistance at the 2800 zone. Not only that this area is too big and too important to fall quickly, the return of overbought conditions on intraday basis will keep the lid of the upside.


Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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