S&P Rally Attempt Failed at Formidable Resistance

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

We’ve noted in the previous Market Outlook that: “S&P broke key supports Monday, signify a bearish trend reversal.  While the near-term technical backdrops favors further short-term weakness, it will be important to monitor the retreat and rebound behaviors to determine whether breakouts are decisive.”  As anticipated, stocks closed lower in volatile trading on Tuesday, failing to regain their footing after suffering steep losses in the previous session.  The S&P climbed as high as 1 percent in morning session amid U.S.-China trade optimism, but energy stocks eventually led the broader market lower as oil prices tanked.  For the day, the bench mark gauge dipped 0.2 percent to 2,722.18.  The Dow Jones Industrial Average lost 0.4 percent to 25,286.49.  The Nasdaq Composite closed just along the flatline at 7,200.87.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 2 percent to 20.02

Energy was the worst-performing sector as crude prices fell to their lowest levels in a year, tumbled more than 7 percent Tuesday to extend their losing streak to 12 straight sessions.  Crude’s sharp decline pushed energy stocks down by more than 2 percent.  The Energy Select Sector SPDR ETF (XLE) fell 2.30 percent on the day, and is down more than 9 percent YTD, underperformed the S&P by a wide margin.  Now the question is whether recent selloff is a beginning of an end or there’re more pains ahead?  Below is an update look at a trade in XLE.

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 – Energy Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLE bars in red (sell) – see area ‘A’ in the chart. The first dominant feature on the chart is the falling trend starting in mid-2014.  The second dominant feature of the chart is the range bound trading pattern between 78 and 62 since early 2017. Over the past few weeks, XLE has been basing sideways near the early 2018 low, just above the lower boundary of its 2-year trading range.  The fact that the November rally attempt failed to take the ETF back to the 78 zone, or the upper boundary of its short-term trading range, signify a major trend shift is underway.  Nevertheless, support is strong between 64-62.  There is no reason to turn particular bearish until this zone is taking out.  A close below 62 has measured move to 50, or the 2016 low.

XLE has resistance near 71.  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 bearish (sell).  Last changed November 12, 2018 from bullish (buy) (see area ‘A’ in the chart).

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

Once again, S&P sold off sharply after the early rally attempt ran out of steam near the 2016 rising trend line.  That level was significant when the index fell below it in October and again on Monday.  Technically speaking, the longer the index holds below this resistance the stronger it becomes.  Adding to concerns is Money Flow measure, which hover near multi-year lows since market broke down in October, indicating a negative net demand for stocks.  Momentum has been weakened but does not appear strong enough to generate a widespread breakdown.  Right now, the most important thing to watch is the retreat and rebound behavior near 2730.  A close below that level on a weekly basis will bring the October low into view.

Short-term trading range: 2680 to 2822.  S&P has support near 2680.  A close below that level has measured move to 2600.  The index has a strong band of resistance between 2730 and 2760.  A close above 2760 could trigger acceleration toward 2822.

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, S&P rally attempt failed at formidable resistance.  If the index fails to hold above 2730 this week, then the next stop will be 2600 with the possibility of a brief breakdown below that level.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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