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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday April 5, 2017.
We’ve noted in the previous Market Outlook that: “it seems to us that the upper and lower limit of a short-term trading range has been set between the 2340 and 2375 levels on the S&P.” As anticipated, stocks sold off sharply in early Tuesday that saw the S&P traded as low as 2,350.72 before buyers stepped in and pushed prices off the intraday low. For the day, the bench mark gauge gained 1.3 points, or 0.06 percent, to 2,360. The Dow Jones industrial average rose 39 points, or 0.19 percent, to 20,689. The Nasdaq gained nearly 4 points, or 0.07 percent, to 5,898. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 4.77 percent to 11.79.
Kennametal Inc. (KMT) was a notable winner Tuesday, rose 1.86 percent on strong volume to 39.33 – a fresh 52-week closing high. This is bullish from a technical perspective. In fact, a closer look at the daily chart of KMT suggests that the stock could climb above 48 in the coming days. Just so that you know, initially profiled in our October 17, 2016 “Swing Trader Bulletin” KMT had gained about 38% and remained well position. Below is an update look at a trade in KMT.
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 – Kennametal Inc. (daily)
As indicated in the above chart, our “U.S. Market Trading Map” rates KMT as a Buy. The overall technical outlook remains Bullish. Last changed March 29, 2017 from neutral.
KMT has been on a tear in recent days after the late March correction found support at the 61.8% Fibonacci retracement of the 2014-2016 downswing. That level was tested several times over the past months. Money Flow measure held firmly above the zero line since the stock reached an interim low in late December, indicating there was little selling interest. Tuesday’s upside breakout had helped clear resistance at the range top, signaled resumption of the 2016 upswing. The fact that KMT had retraced more than 61.8% of its prior downswing, suggested that the entire trend will eventually retrace. So, it seems to us that this rally could carry KMT to above 48, based on the 2014 high.
The trend channel moving average (as represents by the white line in the chart), just below 38, represents the logical level to measure risk against. All bets are off should KMT close below that level.
Financial stocks were under selling pressure Tuesday amid growing concerns about the Trump administration’s plans for tax reform, trade and deregulation. The iShares U.S. Broker-Dealers & Securities Exchanges ETF (IAI) fell 0.49 percent to 50.61. Since making 52-week highs in early March, the ETF has underperformed the boarder market. The group could be entering a meaningful downside correction, according to our “U.S. Market Trading Map”. Below is an update look at a trade in IAI.
Chart 1.2 – iShares U.S. Broker-Dealers & Securities Exchanges ETF (daily)
As indicated in the above chart, our “U.S. Market Trading Map” was looking at IAI from a Sell side back in March 31, 2017. Since peaking in early March, the ETF has been in a short-term downtrend reflecting weakness in the sector. In late March, IAI bounced off its multi-month support line and rallied to 51.53, the prior breakdown point. Monday’s downside follow-through confirmed last week’s reversal signal. A break below the weekly pivot low of 50.42 has a measured move to 49-48.50, or the March low and the 38.2% Fibonacci retracement of the November-March upswing. A break below 48.50 has a measured move to 47, based on the 50% Fibonacci retracement.
With respect to key levels, IAI has minor resistance near 51.53. Short-term traders could use that level as the logical level to measure risk against.
Chart 1.3 – S&P 500 index (daily)
Short-term technical outlook remains neutral. Last changed April 3, 2017 from bullish (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 bounced off support at the trend channel moving avenge. Money Flow measure whipsaw around the flat line, indicating a lack of commitment among market participants. This is a short-term negative development, often favors a fading trend.
Right now, the most important thing to look for is trading actions near the 2343 and 2370 areas. These levels represent the upper and lower boundaries of the March triangle. Given the short term time frame of the pattern, the reversal is not significant. A close above the 2370 will break the consolidation pattern and trigger acceleration toward 2400. A break down below 2343 risks a resumption of the recent downtrend towards the 2300 level.
Short-term trading range: 2343 to 2370. S&P has minor support near 2343. A failure to hold above that level suggests shows that most of the potential buyers at this level had already placed their bets. The next batch of buyers typically sits at a much lower level. The result is that the decline has a clear run down to the next support level at 2300. Immediate resistance is around 2370. A sustain breakout above 2370 has a measured move to the March high of 2400.
Long-term trading range: 2290 to 2385. Unless there is a headline that everyone recognizes as extremely positive or negative, expect S&P to swing within the 95 points range.
Bottom line, there is a distinct possibility that a triangle pattern is currently setting up in the daily chart of the S&P. This pattern typically favors a trend continuation, which is up in this case. The index could signal an extended upward trajectory, depending on how it closes over the next few days. We should know for sure by the end of the week as to whether this technical setup will be confirmed and triggered or not.
(By：Michelle Mai for Capital Essence)
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