Cautiously Optimistic

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday July 19, 2013.

We’ve noted in the previous Market Outlook that: “the fact that the S&P 500 index had managed to hold on to most of the June massive gain in the face of such extreme overbought condition, suggested that near-term risk is to the upside.”  As anticipated, stocks finished higher Thursday, with the Dow and S&P 500 setting fresh highs, boosted by a batch of upbeat economic reports.  For the day, the Dow Jones Industrial Average rallied 78.02 points to finish at 15,548.54.  The S&P 500 index rose 8.46 points to close at 1,689.37.  The NASDAQ eked out a gain of 1.28 points to end at 3,611.28.  The CBOE Volatility Index, the widely considered the best gauge of fear in the market, fell 0.07% to close at 13.77.

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Financial stocks attracted strong buying support in Thursday session after Morgan Stanley (MS) topped quarterly expectations as revenue grew in all of its major businesses, particularly trading and underwriting.  As such, the SPDR KBW Bank ETF (KBE) jumped 2.09% to new multi-year high.  Below is an updated look at a trade in KBE. The ETF had been on a tear so far this year and is at an interesting spot.

The graphics below are from our “U.S. Market ETF Trading Map”, which show the near-term technical bias and trading ranges for KBE and the S&P 500 index.  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 KBW Bank ETF (daily)

As indicated in the above chart, our “U.S. Market ETF Trading Map” rates KBE as a Buy.  Over the past few days, KBE had been basing sideways near its range top resistance as traders digest the June massive rally.  Thursday bullish breakout had helped clear resistance at the early July high, suggesting that KBE might have switched to a new uptrend.  Momentum indicator shifted higher from near overbought zone, indicating an internal strength.  Money Flow measure trended higher from above the zero line, suggesting an increase in buying pressure.  So, it seems to us that this rally could carry KBE up to the next level of resistance at the 161.8% Fibonacci extension of the November 2012 to May 2013 uptrend, just below 33. That level roughly corresponds with the early 2008 lows.

Immediate support is at the weekly pivot low of 29.65.  A close below that level will jeopardize Thursday bullish signal and a test of the trend channel moving average (as represents by the white line in the chart) will follow shortly.

Chart 1.2 – S&P 500 index (daily)

As indicated in the above chart, our “U.S. Market ETF Trading Map” rates the S&P as a Hold.  Key technical development in Thursday trading session was a clear break above the strong band of resistance between the 1685 and 1687 levels, or the upper limit of this week trading range and the bull market high set in early May 2013.  This is bullish and suggesting that the one-week sideways correction might have ended and the index is in a new upswing that targeted the important sentiment 1700 mark.  The short-term oversold condition is another near-term plus for the bulls.

Traders however, must be mindful that Money Flow measure did not expand rapidly as prices climbed to new high, suggesting that less and less money are anticipating this rally.  With that said, unless Money Flow measure surged above the May high, a secondary correction could be in the wings, so a general cautions strategy should be applied.

Additionally, with Thursday gains, the S&P had poked its head into the red band, or extreme overbought zone.  While overbought condition is normal during long-term uptrend, it suggests that upside momentum might not sustain without at least a short-term breather so we’d be cautious against taking large position at this stage of a rally.

As for support, there is a strong band of support between the 1674 and 1664 levels, or the June rising trend line and the lower edge of the pink band.  Unless there is a close below that level, buying into market dips should be rewarding.

In summary, based upon recent trading actions, traders are determined to take the S&P up to the important sentiment 1700 mark.  However, the fact that the index is poked its head into the level that had been successful in repelling price action in the past suggesting that at any point, the market could take a short-term breather.  So, a general cautious strategy should be applied.

(By:Michelle Mai for Capital Essence)
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