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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday February 19, 2013.
We’ve noted in the previous Market Outlook that: “the fact that the S&P refused to move lower in the face of such overbought condition suggested that the bulls are holding an edge for a short-term corrective mode, which is taking place within a context of a medium-term uptrend.” As anticipated, stocks recovered from their lows Friday to close narrowly mixed but the S&P 500 managed to pull off its seventh-straight week higher.
For the day, the Dow Jones Industrial Average eked out a gain of 8.37 points, to close at 13,981.76. The S&P 500 slipped 1.59 points, to end at 1,519.79. The NASDAQ dipped 6.63 points, to finish at 3,192.03. The CBOE Volatility Index, the widely considered the best gauge of fear in the market, fell 1.58 percent to 12.46.
Forestar Group Inc. (FOR) was a notable standout in Friday trading session as the stock soared to new 52-week high, up 3.09% to 20, following its February 13 upbeat earning report. This is bullish from a technical perspective. In fact, as the chart below indicated, FOR could climb up to test key technical resistance 23.50 as it extends recent winning streak. Just so that you know, initially profiled in our February 8, 2013 “Swing Trader Bulletin” FOR had gained about 10% and remained well position.
The graphics below are from our “U.S. Market ETF Trading Map”, which show the near-term technical bias and trading ranges for FOR 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 – Forestar Group Inc. (daily)
As indicated in the above chart, our “U.S. Market ETF Trading Map” rates FOR as a Buy. Friday upside follow-through served as a confirmation and extension to Thursday bullish breakout above the January falling trend line. Money Flow measure surged to new high, indicating that traders are getting more aggressive in the expectation of higher prices. So, it seems to us that this rally could carry FOR up to the next level of resistance at 2010 high, just above 23.50. Resistance stands in the way of continue rally is at early 2011 high near 20.77.
Traders however, must be mindful that FOR had traded outside its short-term trading range and into extreme overbought zone following recent advance so we’d be cautious against taking large position at this stage of a rally.
Support is at recent breakout point, near 18.77. At this juncture, only a close below that level can wreck the near-term bullish outlook.
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 Buy. Not much had changed since last update. The S&P continues drifting sideways near support at the upper limit of the January lateral trend channel of 1515. Momentum indicator still points lower but is much closer to oversold zone. Money Flow measure trended lower from above the zero line, suggesting that while traders are hesitated to buy at current price level, there was little selling interest. This could help putting a short-term floor under the market.
Right now, it seems 1525 is the point of resistance. That level is significant in charting terms. it roughly corresponds with the December 2007 high. Over the past couple of days, rallies have run out of gas at the index approached this level. With Money Flow measure above the zero line, the near-term technical bias is skewed toward greater strength than weaknesses. Over the next few days, trader should monitor trading actions as the 1525 level is tested as resistance. A sustain breakout above it suggested that the one-week lateral trend channel pattern, which represents the digestion period in the aftermath of the early February rally, had resolved itself into a new upswing. That, if happens, will trigger a new buy signal with an upside target of 1542, which we’ve determined using the lower edge of the red band. As mentioned, a move into the red band indicated an extreme overbought situation – a condition that often preceded a meaningful market correction so traders need to keep this on the trading radar.
While 1525 is acting as resistance, 1515 is currently the main level of support. As shown above, buyers stepped in every time the index traded down to the low 1510’s area. So, we should expect this level to act as support going forward. Below it, a more significant support lies at the lower edge of the red band, currently at 1505.
In summary, technical pressures are building up as the market dances its way into an increasingly tight trading range. However, like all volatility contraction period, the relief valve will eventually have to open. While technical background seems favorable a break to the upside, the manic nature of the market recently suggests that 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 S&P 500 index.
(By：Michelle Mai for Capital Essence)
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