S&P Broke Key Resistance But return of Overbought Conditions Will Keep the Lid of the Upside

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday September 14, 2018.

Stocks rose on Thursday as strength in the large-cap tech stocks boost traders sentiments.  The Dow Jones Industrial Average rose 0.57 percent to 26,145.99. The S&P climbed 0.5 percent to 2,904.18. The Nasdaq Composite advanced 0.8 percent to 8,013.71.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market fell nearly 6 percent to close at 12.37.


Industrial stocks traded up on Thursday following headlines that suggested senior officials from the U.S. and China appear headed for new discussions on trade matters.  After surging nearly 22 percent in 2017, the Industrial Select Sector SPDR ETF (XLI) rose merely 4 percent YTD while the S&P gained over 8 percent over the same period.  Now the question is whether recent pullback is a pause that refreshes or it’s a beginning of a something worse?  Below is an update look at a trade in XLI.

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 – Industrial Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLI bars in green (buy) – see area ‘A’ in the chart.  The first dominant feature on the chart is the rising trend line starting in early 2016.  The second dominant feature of the chart is the sideways trend since early 2018.   The June selloff held support at the prior low set in May 2018.  That level roughly corresponds with the 23.6% Fibonacci retracement and the 1-year moving average.  The early July rally pushed the ETF up against the strong band of resistance between 78.50 and 81, the early 2018 highs.  A sustain advance above that level on a weekly basis will trigger a new buy signal with upside target near 90, or the 127.2% Fibonacci extension.

XLI has support near 75.  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 September 11, 2018 from slightly bearish (see area ‘A’ in the chart).

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

Key technical development in Thursday session was a close above 2890, a key technical level.  This is a positive development, suggesting that the one-week sideways trading pattern has resolved itself into a new upswing.  Money Flow measure trended higher from above the zero line, indicating an increase in buying pressure.  Momentum has been strengthened but the return of overbought conditions on an intraday basis will put a cap on the upside.  With this in mind, we’d look to reduce exposure into overbought strength, which might take the S&P closer to 2916-2922, based on the late August high and the lower boundary of the red band, before a significant pullback unfolds.

Short-term trading range: 2800 to 2922.  S&P has support near 2890-2880.  A close below that level will trigger a new sell signal with downside target near 2840-2800, based on the trend channel moving average and the important sentiment 2800 mark.  That level was tested several times over the past months.  Some aggressive traders might use this level like a magnet to buy.  The index has resistance near 2922, or the lower boundary of the red band.

Long-term trading range: 2700 to 3000.  S&P has support near 2800.  A close below that level will trigger a major sell signal with a downside target near 2700.  The index has resistance near 3000.

In summary, S&P broke key resistance Thursday, signified the one-week sideways trading pattern had resolved itself into a new upswing.  Nevertheless, overbought conditions on an intraday basis will put a cap on the upside.


Thanks and happy trading.


(By:Michelle Mai for Capital Essence)

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