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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday August 7, 2018.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks closed higher Monday amid strength in large-cap tech stocks.  For the day, the Dow Jones Industrial Average added 0.16 percent to close at 25,502.18. The S&P rose 0.4 percent to 2,850.40.  The Nasdaq Composite advanced 0.6 percent to 7,859.68.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 3 percent to close at 11.27.

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One of the noteworthy developments in recent days has been the move in consumer discretionary. After a strong run of outperformance since early April, the group has seen a sharp reversal in recent weeks as amid growing concerns over the new U.S. tariffs on China sourced goods, and the retaliatory tariffs imposed by the European Union and Canada in response to U.S. tariffs on steel and aluminum imports.  The Consumer Discretionary Select Sector SPDR ETF (XLY) rose 0.67 percent Monday, bringing its YTD gains up to 14.1 percent.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLY.

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 – Consumer Discretionary Select Sector SPDR ETF (daily)

Our “U.S. Market Trading Map” painted XLY bars in green (buy) – see area ‘A’ in the chart. Over the past few days, XLY has been trending lower in a short-term corrective mode after the late June recovery rally ran out of steam near 113.  The July correction found support near the 50-day moving average.  Monday’s upside breakout had helped clear resistance at the July falling trend line, signify a bullish reversal.  Over the next few days, traders should monitor trading behavior as the June-July highs, around 113.50, is tested as resistance.  A close above that level has measured move to 115, based on the 127.2% Fibonacci extension of the 2016-2018 upswing.

XLY has support near 112.  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 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”]

As expected, 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.  That level roughly corresponds with the late January breakdown gap.  Money Flow measure is registering a weak bullish signal.  The indicator peaked in mid-May and formed series of lower highs as prices ascending, suggesting less and less money are chasing the rally.  Adding to concerns is the return of overbought conditions on the daily chart.  These elements will give the bulls more pressures than they have already had.

Short-term trading range: 2800 to 2856.  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 2856, or the lower boundary of the red band.  A close above that level will trigger acceleration toward the range top, near 2900.

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, although overbought condition is keeping buyers at bay, S&P’s 2900 continues to act as price magnet.  Short-term traders can anticipate increase short-term volatility with rapid up and down moves in the market.

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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