S&P Breakouts Will Not Sustain

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday October 17, 2017.

Stocks closed higher Monday as financials bounce back following last week’s post-earnings sell off.  For the day, the Dow Jones industrial average gained 0.37 percent to close at 22,956.96.  The S&P finished 0.2 percent higher at 2,557.64.  The Nasdaq advanced 0.3 percent to 6,624.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 3.12% to close at 9.91.


One of the more noteworthy developments in recent days has been the move in real estate.  The Vanguard REIT ETF (VNQ) fell 0.5 percent Monday.  The ETF is up just a little more than 2 percent, YTD, trailing the S&P by 14 percent.  Now the question is whether Monday selloff is a pause that refreshes or it’s a beginning of something worse?  In fact, according to our “U.S. Market Trading Map”, Monday’s decline indicated an impending bearish trend reversal.  Below is an update look at a trade in the VNQ.

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 – Vanguard REIT ETF (daily)

Our “U.S. Market Trading Map” painted VNQ bar in red (sell). VNQ sold off sharply Monday after the late September recovery rally ran out of steam just below the 2017 falling trend line resistance.  There is a distinct characteristic that a rising wedge is formed in the daily chart of VNQ.  Monday’s bearish reversal suggested that the September rally ran its course and VNQ is setting up for a retest of support at the lower boundary of the massive 10-month rising wedge, around 83. That level is significant in charting terms.  A close below it has measured move down to 80, or the early 2017 lows.

VNQ has resistance near 85.  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 neutral (with bearish bias).  Last changed October 16, 2017 from bearish (strong sell) – see area ‘A’ in the chart.

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

The big picture pretty much the same. S&P continues drifting near the lower boundary of the red band.  From a momentum perspective a negative divergence exists on RSI, which peaked in early October and trending lower as prices ascending.  This is a bearish development, suggested that risk is greater to the downside in the medium term.  With this in mind, we’d look a trim positions into overbought strength.

Short-term trading range: 2528 to 2567.  S&P has support near 2528.  A close below that level signals a short-term correction with downside target near 2500.  The lower boundary of the red band, currently at 2567, represents key price level.  Technically speaking, a trade above that level is unsustainable.  Traders should put it on the trading radar.

Long-term trading range: 2500 to 2600.  Unless there is a headline that everyone recognizes as extremely positive or negative, expect S&P to swing within this 100 points range.

In summary, while the overall technical backdrop remains bullish with the long-term trend pointing upward, daily chart of the S&P 500 index has now shown significant signs that momentum is waning.  Over the near to intermediate term the technical suggested that breakouts will not sustain.

Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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