Overbought Conditions Returned on Daily Basis But Momentum Remains Supportive

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday August 8, 2018.

We’ve noted in the previous Market Outlook that: “although overbought condition is keeping buyers at bay, S&P’s 2900 continues to act as price magnet.”  As anticipated, stocks closed higher Tuesday as the S&P moved closer to a record high set earlier this year, up 0.3 percent to 2,858.45.  The Dow Jones Industrial Average gained 0.50 percent to 25,628.91. The Nasdaq Composite advanced 0.3 percent to 7,883.66.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 3 percent to 10.93.


One of the noteworthy developments in recent days has been the move in the automotive sector.  The group has been under selling pressure in recent days after China said it was ready to retaliate with tariffs on around $60 billion of U.S. goods, just days after the U.S. administration revealed that Trump had spoken with U.S. Trade Representative Robert Lighthizer and asked him to consider increasing the proposed levies on $200 billion of Chinese goods up to 25 percent, from 10 percent.  After a strong run of outperformance in 2017, the First Trust NASDAQ Global Auto Index Fund (CARZ) saw a sharp reversal in recent months, tumbled more than 10 percent YTD.  Now the question is whether recent selloff is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in CARZ.

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 – First Trust NASDAQ Global Auto Index Fund (daily)

Our “U.S. Market Trading Map” painted CARZ bars in red (sell) – see area ‘A’ in the chart. Over the past few days, CARZ has been basing sideways using the 50% Fibonacci retracement of the 2016-2018 upswing as support.  In fact, recent trading actions represent an orderly low-level consolidation period in the aftermath of the late June’s massive reversal.  This is a bearish development, suggesting that the ETF might have to move to a much lower level to attract new buyers.  CARZ has support near 37.  A close below that level has measured move to 35, based on the 61.8% Fibonacci retracement.

CARZ has resistance near 39.  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 August 7, 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”]

Key technical development in Tuesday session was a close above the late January’s bearish breakaway gap.  This is a positive development but let’s notice that recent rally has created overbought conditions.  With Tuesday’s gains, the S&P is up against the lower boundary of the red band.  Technically speaking, a trade above that level often precursor to a meaningful correction. Nevertheless, Money Flow measure is above the zero line, indicating a positive net demand for stocks.   This could help putting a short-term floor under the market.

Short-term trading range: 2800 to 2861.  S&P has support near 2800.  A failure to hold above that level has measured move to around 2776, based on the trend channel moving average.  The index has resistance near 2861, 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, overbought conditions have returned on a daily basis but momentum remains supportive so downside risk could be limited. It is possible that S&P could continue to drift higher as trading sentiment remains strong.  As for strategy, buying into short-term dips remains the most profitable strategy.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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