Cautiously Optimistic

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

We’ve noted in the previous Market Outlook that: “overbought conditions have returned on a daily basis but momentum remains supportive so downside risk could be limited.”  As anticipated, the S&P closed just below the flat line at 2,857.70 as traders digested the latest U.S.-China trade developments.  The Chinese Ministry of Commerce announced a 25 percent charge on $16 billion worth of U.S. goods.  The Dow Jones Industrial Average slipped 0.18 percent to close at 25,583.75.  The Nasdaq Composite gained less than 0.1 percent to close at 7,888.33.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell less than 1 percent to 10.85.


One of the noteworthy developments in recent days has been the move in energy and energy related stocks.  The group has been under selling pressure in recent days after Donald Trump said gasoline prices are too high and asked Saudi Arabia to increase its oil output.  The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) fell more than 3 percent MTD, bringing its YTD gains down to just above 12 percent.  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 XOP.

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 – SPDR S&P Oil & Gas Exploration & Production ETF (daily)

Our “U.S. Market Trading Map” painted XOP bars in red (sell) – see area ‘A’ in the chart. Over the past few weeks, XOP has been basing sideways using the 50-day moving average as support as traders digested the July massive selloff.  The fact that the ETF consolidated in narrow trading range as it worked off oversold condition rather than bouncing higher indicating an internal weakness.  This is a bearish development, suggested that XOP might have to move to a much lower level to attract new buyers.  XOP has minor support near 40.70.  A close below that level has measured move to 38.

XOP has resistance near 43.  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 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”]

As expected, S&P retreated after a test of resistance at the red band was met with a new wave of selling interest.  Momentum indicator shifted lower from overbought zone, suggesting further short-term weakness likely.  Adding to concerns in the negative divergence on Money Flow measure, which peaked in late July and formed a lower high as prices broke out earlier this week.  Technically speaking, this trading pattern exhibits characteristics of a distribution phase, the period in which smart money sell (distribute) their positions.  The distribution phase is a very emotional time for the markets, as investors are gripped by periods of complete fear interspersed with hope and even greed as the market may at times appear to be taking off again.  Prices can often stay locked in a trading range that can last a few weeks or even months.  With this in mind, we’d look a trim positions into overbought strength.

Short-term trading range: 2800 to 2864.  S&P has support near 2800.  A failure to hold above that level has measured move to around 2779, based on the trend channel moving average.  The index has resistance near 2864, 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, our work on price pattern and momentum suggested that S&P could be in an early stage of a distribution phase.  On balance, we’re cautiously optimistic on stocks over the short-term and look to trim positions into overbought strength.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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