Traders Should Consider Taking Down Exposure into Additional Strength

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.

 

Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday October 17, 2018.

Stocks rose sharply on Tuesday as traders cheers a fresh batch of better-than-expected earnings reports. For the day, the Dow Jones Industrial Average jumped 2.17 percent to 25,798.42. The S&P gained 2.1 percent to 2,809.92. The Nasdaq Composite advanced 2.9 percent to 7,645.49.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 17 percent close at 17.62.

CEMNews_trial

One of the more noteworthy developments in recent days has been the move in commodities.  After surging more than 30 percent in 2017, the Invesco DB Base Metals (DBB) up 0.06 percent Tuesday to 16.53 on the day but is down nearly 15 percent YTD, underperformed the S&P by a wide margin.  Now the question is whether recent pullback is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in DBB.

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 – Invesco DB Base Metals (weekly)

Our “U.S. Market Trading Map” painted DBB bars in green (buy) – 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 downward trend since early 2018.  The June downswing tested and respected support at the 4-year moving average, a key technical level.  The late September rally pushed the ETF up against the 20-week moving average.  Over the past few weeks, DBB has been basing sideways as traders digested overbought conditions.  This is a short-term positive development, suggesting that the ETF might take a leg higher as soon as it works off excessive bullishness.  Resistance is just below 17.  A close above that level on a weekly basis has measured move to around 18.

DBB has support near 15.40.  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 shifted to bullish.  Last changed October 16, 2018 from slightly bearish (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 bounced off support at the 2016 rising trend line.  The index moved up to test resistance at the upper boundary of the green band after falling below that level last week. The index trades in broad trading bands that define the trend behavior. The upswing was very rapid with some short-term consolidation near each of the significant support or resistance levels. These support and resistance levels also define the limits and barriers to any future rally and uptrend development.  Momentum has been strengthened following recent rally but do not appeared strong enough to generate widespread breakouts.  Additionally, Money Flow measure still hovers near the lowest level since summer 2017, indicating a negative net demand for stocks.  With this in in mind, we would consider taking down exposure into short-term rallies.

Longer term, the uptrend that began in 2016 is still intact.  2700 is the line in the sand.  A close below that level on a weekly basis will break the long-term uptrend and a retest of the early 2018 lows should be expected.

Short-term trading range: 2767 to 2823.  S&P has support near 2767.  A close below that level has measured move to 2700.  The index has resistance near 2823.  A close above that level has measured move to 2873.

Long-term trading range: 2560 to 2930.  S&P has support near 2650.  A close below that level has measured move to 2560.  The index has resistance near 2750.  A close above that level on a monthly basis has measured move to 2930.

In summary, so far the upswing that started off the October low of 2710 on the S&P has proved nothing as far as its staying power or as a possible major upswing.  Resistance is strong between the 2823-2873 zone and upside momentum does not appear strong enough to generate a decisive breakout.  With this in in mind, we would consider taking down exposure into additional strength.

 

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

© All rights reserved and actively enforced.
Note: This is a free edition of The Market Outlook, a daily CEM News subscriber newsletter. To get this column before market opens together with hundreds of technical trading ideas (including stocks and ETFs) every month, please click here.
Subscribe to CEM News to receive more in-depth research from Capital Essence.