Traders Should Consider Buying into Market Dips Rather Than Chasing Breakouts

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday October 11, 2019.

Stocks rose on Thursday after President Donald Trump said he will meet with Chinese Vice Premier Liu He on Friday, raising hope the two countries could make progress on the trade front.  For the day, the Dow Jones Industrial Average climbed 0.60 percent to 26,496.67. The S&P gained 0.7 percent to 2,938.13. The Nasdaq Composite advanced 0.6 percent to 7,950.78.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 5 percent to 17.60.

Trade bellwether, Chinese large-cap, were the best-performing stocks Thursday after Donald Trump said he plans to meet with Chinese Vice-Premier Liu He Friday, while Liu said China is willing to reach an agreement to prevent further escalation in the trade tension.  As such, the iShares China Large-Cap ETF (FXI) rose 1.24 percent for the day, and is up just a little more than 4 percent year-to-date, underperformed the S&P by a wide margin.  Now the question is whether the rally has more legs?  Below is an update look at a trade in FXI.

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 China Large-Cap ETF (weekly)

Our “U.S. Market Trading Map” painted FXI bars in green (buy) – see area ‘A’ in the chart. Over the past few weeks, FXI has been basing sideways near the 4-year moving average, a key technical level based on moving averages, after the mid-August rally ran out of steam near the 2019 falling trend line.  Thursday’s rally has helped push the ETF above the closely watch 40.50 zone, signify an upside breakout and bullish reversal.  FXI has resistance near 41.70.  A close above that level will confirm the bullish signal and increase the probability for a rapid advance toward the 44 zone.

FXI has support 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 (buy). Last changed October 10, 2019 from bearish (sell) – (see area ‘A’ in the chart).

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

Once again, S&P climbed above the trend channel moving average after recent pullback found support near the upper boundary of the green band.  Market internal has strengthened following recent advance.  Nonetheless, as it was the case lately, follow-through is the key.  We’d turn particular bullish if the index close twice above the trend channel moving average, currently at 2935.

The lower boundary of the green band, around 2850, represents key support.  That level was tested several times over the past months.  It is too big and too important to fall quickly.

Short-term trading range: 2900 to 2962.  S&P has support near 2928.  A close below that level has measured move to 2900.  The index has resistance near 2940.  A close above that level has measured move to 2962.

Long-term trading range: 2820 to 3100.  S&P has support near 2833.  A close below that level has measured move to 2490.  The index has resistance near 3050.  A close above that level has measured move to 3185.

In summary, we wouldn’t look too much into Thursday’s trading action because it keeps the S&P within its short-term range bound trading pattern.  This is a rally and retreat environment. It is not a trending environment. Short-term traders can anticipate continued volatility with rapid up and down moves in the markets. As for strategy, traders should consider buying into market dips rather than chasing breakouts.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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