S&P Oversold Relief Rally Might Have Run Its Course

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.

 

Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday February 20, 2018.

Stocks closed slightly higher on Friday as the major indexes extended their current winning streak.  For the day, the Dow Jones industrial average closed 0.08 percent higher at 25,219.38.  The S&P closed just 0.04 percent higher at 2,732.22.  The Nasdaq composite snapped a five-day winning streak, closing 0.2 percent lower at 7,239.47.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 1.73 percent to close at 19.46.

CEMNews_trial

One of the noteworthy developments in recent days has been the move in energy stocks. The group won support earlier in the week after Saudi Energy Minister Khalid al-Falih said OPEC hopes to keep limiting crude output to leave the market tight.  The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) surged 4.7 percent last week, slightly outperformed the S&P. Now the question is whether the rally has more legs?  Below is an update look at a trade in XOP.

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 – SPDR S&P Oil & Gas Exploration & Production ETF (daily)

Our “U.S. Market Trading Map” painted XOP bar in red (sell) – see area ‘A’ in the chart.  Over the past few days, XOP has been trending higher in a short-term corrective mode after the late January selloff found support near the late October 2017 lows.  Last week’s oversold rebound is testing resistance at the 200-day moving average.  That level was significant when XOP fell below it in early February.  It is now acting as strong resistance.  Friday’s weak close suggested that the resistance would hold.  Right not follow-through is the key.  We’d turn particular bearish if XOP closes below 33.74.  A close below that level would confirm Friday’s bearish signal and a retest of the early February low, just below 31, is inevitable.  A close below 31 has measured move to 29, based on the summer 2017 lows.

XOP has resistance near 34.50.  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 remains bullish.  Last changed February 12, 2018 from bearish (see area ‘A’ in the chart).

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

S&P moved up to test resistance at the trend channel moving average after falling below that level in early February. In accordance to the Japanese candlestick pattern recognition, Friday’s bearish topping tail, or shooting star candlestick, is a clear indication of supply overwhelming demand.  The market is no longer oversold following recent rally, making further advance unlikely.  Right now follow-through is the key.  Over the next few days, we will be looking for a close below 2725 as a confirmation to Friday’s bearish reversal signal.  That, if and when happens, could trigger a torrent of selling that targets the early February lows, around 2540.

Short-term trading range: 2640 to 2755.  S&P has minor support near 2725.  A close below that level will confirm Friday’s bearish reversal signal and a retest of 2540 should be expected.  The index has minor resistance near 2750.  A close above that level could trigger acceleration toward 2800, based on the lower boundary of the pink band.

Long-term trading range: 2540 to 2820.  Unless there is a headline that everyone recognizes as extremely positive or negative, expect S&P to swing within this 280 points range.

In summary, currently rally is testing resistance at the trend channel moving average.  Friday’s bearish shooting star candlestick pattern suggesting that the oversold relief rally might have run its course.  Right now, follow-through is the key.  We’d turn particular bearish if the S&P closes twice below 2725.  A break below that level has a measured move to 2650-2540.

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

© All rights reserved and actively enforced.
Note: This is a free edition of The Market Outlook, a daily CEM News subscriber newsletter. To get this column before market opens together with hundreds of technical trading ideas (including stocks and ETFs) every month, please click here.
Subscribe to CEM News to receive more in-depth research from Capital Essence.