Not Time to Accumulate Stocks Aggressively

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday November 12, 2018.

Stocks closed lower Friday, halting a four-session rally, after a selloff in oil prices and a hotter-than-expected reading on producer prices sparked fears of a global economic slowdown.  For the day, the Dow Jones Industrial Average lost 0.8 percent to 25,989.30. The S&P fell 0.9 percent to 2,781.01. The Nasdaq Composite dropped 1.7 percent to 7,406.90.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose nearly 4 percent to 17.36.

One of the noteworthy developments in recent days has been the move in health care.  The group has surpassed the information technology and consumer discretionary sectors for the top spot in the yearly sector standings.  After surging about 20 percent in 2017, the Health Care Select Sector SPDR ETF (XLV) jumped 4.1 percent last week, and is up 12.4 percent YTD, outperformed the S&P by a wide margin.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLV.

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 – Health Care Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted EEM bars in red (sell) – see area ‘A’ in the chart. The first dominant feature on the chart is the rising line starting in 2015.  The second dominant feature of the chart is the downward trend since early October 2018, which represented the digestion period. Over the past few weeks, XLV has been trending higher after the correction found support near the 1-year moving average, a key technical level.  Last week’s upside follow-through confirmed the bullish reversal signal and opened up for a test of the more important resistance at the October high, just above 96.  A close above that level on a weekly basis has measured move to 101, based on the 127.2% Fibonacci extension.

XLV has support near 86.50.  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 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”]

After surging more than 170 points from the late October low of 2603 and meeting anticipated resistance near the trend channel moving average, S&P pullback has taken the index down to the 2016 rising trend line.   That level was significant when the index climbed above it on Wednesday.  Friday’s late day rebound indicated the support would hold, at least for the time being.

Market internal has been weakened but downside momentum does not appear strong enough to generate a widespread breakdown.  Money Flow measure flashes bearish signal as it trended lower from below the zero, indicating a negative net demand for stocks.  These elements will negatively affect trading sentiment in the coming days.  For now, 2760 is the line in the sand.  We’d turn particular bearish if S&P closes twice below that level.

Short-term trading range: 2760 to 2831.  S&P has support near 2760.  A close below that level has measured move to 2740-2730.  The index has a strong band of resistance between 2820 and 2830.  A close above 2830 could trigger acceleration toward 2940 but for now it looks firm.

Long-term trading range: 2580 to 2930.  S&P has support near 2660.  A close below that level has measured move to 2580.  The index has resistance near 2840.  A close above that level has measured move to 2930.

In summary, there is currently a test of support at last week’s breakout point.  Momentum and Money Flow measure are not favorable over the near to intermediate term, suggesting that this is not a time to accumulate stocks aggressively.  What the bulls want to see is S&P stabilizes and climbs above 2830.  The longer the index stays below that level, the more vulnerable it is to lower prices.  This is the real danger in the current market.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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