S&P Testing Support Turned Resistance

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday November 7, 2018.

Stocks closed higher Tuesday as traders positioned ahead of the U.S. congressional midterm elections.  For the day, the Dow Jones Industrial Average climbed 0.7 percent to 25,635.01.  The S&P gained 0.6 percent to close at 2,755.45. The Nasdaq Composite advanced 0.6 percent to 7,375.96.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell less than 1 percent to 19.91.


The trade-sensitive materials and industrial sectors led the broader market higher Tuesday amid positive trade chatter.  China’s Vice President Wang Qishan reiterating China’s readiness to discuss a trade resolution with the United States.  After surging more than 21 percent in 2017, the Industrial Select Sector SPDR ETF (XLI) is down more than 4 percent YTD, underperformed the S&P by a wide margin.  Now the question is whether recent rally is a beginning of a new trend or it’s merely a dead cat bounce?  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 red (sell) – see area ‘A’ in the chart. The first dominant feature on the chart is the rising line starting in early 2016.  The second dominant feature of the chart is the sideways trend between 81 and 71 since early 2018.  The late September selloff pushed the ETF below the May-June lows, signify a bearish breakout.  The downswing found support near the 38.2% Fibonacci retracement.  This week’s rally pushed XLI above the 2-year moving average, clearing an important hurdle based on moving averages, and opened up for a test of the more significant resistance near the 75-76 zone.  Unless there is a close above that level, rallies are counter-trend and should be sold.

XLI has support near 68.  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 October 31, 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”]

The big picture remains the same, S&P continues drifting higher near resistance at the 2016 rising trend line.  This level was significant when the S&P fell below it in October.  Momentum has been strengthened but does not appear strong enough to generate widespread breakouts. Adding to concerns is the lagging Money Flow measure.   The indicator still hovers near multi-year low, indicating a negative net demand for stocks.  These elements do not favor a sustain break to the upside.  While more backing and filling would not be a surprise, a close above the 2016 rising trend line, around 2765, it is required to neglect the medium-term downward trend pressure.  There is a no reason to turn particularly bullish until this area is eclipsed.

Short-term trading range: 2680 to 2765.  S&P has support near 2730.  A close below that level has measured move to 2680-2700.  The index has a strong band of resistance between 2760 and 2765.  A close above that level could trigger acceleration toward 2820-2840.

Long-term trading range: 2320 to 2813.  S&P has support near 2645.  A close below that level has measured move to 2320.  The index has resistance near 2750.  A close above that level has measured move to 2813.

In summary, the late October’s recovery rally is testing ‘support turned resistance’ near S&P’s 2765.  While the overall technical backdrop remains bullish with the short-term trend pointing upward, momentum has does not appear strong enough to generate widespread breakouts.  The longer the index stays below that level, the more vulnerable it is to lower prices.



Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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