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

Stocks closed higher Friday as traders looked past the newly proposed tariffs on U.S. goods by China.  For the day, the Dow Jones Industrial Average gained 0.54 percent to close at 25,462.58.  The S&P gained 0.5 percent to 2,840.35. The Nasdaq Composite advanced 0.1 percent to 7,812.01.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 4 percent to close at 11.64.

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One of the noteworthy developments in recent days has been the move in emerging markets. The group, one of the strongest of 2017, has seen a dramatic reversal this year amid growing global political uncertainty and currency headwinds.  After a strong run of outperformance that saw the iShares MSCI Emerging Markets ETF (EEM) soared more than 34 percent in 2017, the ETF fell 1.1 percent last week, down 6.2 percent YTD.  Now the question is whether the recent selloff is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in EEM.

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 MSCI Emerging Markets ETF (weekly)

Our “U.S. Market Trading Map” painted EEM bars in red (sell) – see area ‘A’ in the chart.  The first dominant feature on the chart is the rising trend line starting in early 2016.  The second dominant feature of the chart is the downtrend starting in early 2018, which represents the digestion period.  The early June selloff found support at the 38.2% Fibonacci retracement.  Over the past few weeks, EEM has been trending higher in a short-term corrective mode.  The late July rally tested resistance at the mid-June bearish breakaway gap.  Last week’s bearish reversal suggested that the resistance would hold and EEM might have to move to a much lower level to attract new buyers.  Right now follow-through is the key.  A close below 42 will confirm this and a test of the more important support in the 40-39.50 zone should be expected.

EEM has resistance near 46.  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 neutral.  Last changed August 3, 2018 from bullish (see area ‘A’ in the chart).

[Note: for more details analysis, please take a look at our “US Market ETF Trading Map”]

Once again, the S&P moved up to test resistance at the lower boundary of the red band after recent pullback found support near the important sentiment 2800 mark.  Money Flow measure trended higher from above the zero line, suggesting that the bulls were much more aggressive as price rallied than bears were as it declined and that net demand was very strong.  This is a positive development but let’s notice the return of overbought conditions on the daily chart, which will give the bulls more pressure than they have already had.

Short-term trading range: 2800 to 2850.  S&P has support near 2800.  A failure to hold above that level has measured move to around 2770, based on the trend channel moving average.  The index has resistance near 2845.  A close above that level will trigger acceleration toward the January highs.

Long-term trading range: 2690 to 2880.  S&P has long-term support near 2690.  A close below that level will trigger a major sell signal with a downside target near 2580.  The index has resistance near 2880.

In summary, S&P secured key support last week.  While there seems to be room to go higher, traders must be mindful that the return of overbought conditions on the daily chart.  While overbought condition is normal during a pro-long uptrend, it’s suggested that upside momentum might not sustain without at least a short-term breather.  With this in mind we’d consider increase exposure into short-term dips rather than chasing breakouts.

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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