S&P Setup for Snapback Bounce

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday November 15, 2018.

Stocks closed lower in another volatile session on Wednesday amid continued tech weakness. The S&P fell 0.8 percent to 2,701.72.  The Dow Jones Industrial Average lost 0.8 percent to 25,080.50.  The Nasdaq Composite fell 0.9 percent to 7,136.60.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped more than 6 percent to 21.25.

Bank stocks were under selling pressure Wednesday following a regulatory reminder from Congresswoman Maxine Waters, said the Trump administration’s efforts to curb banking regulations “will come to an end.” Waters is expected to take over as chair of the House Financial Services Committee.  After surging 20 percent in 2017, the Financial Select Sector SPDR ETF (XLF) fell 1.35 percent on the day and is down more than 5 percent YTD, underperformed the S&P by a wide margin.  Now the question is whether recent selloff is a pause the refreshes or it’s a beginning of something worse?  Below is an update look at a trade in XLF.

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 – Financial Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLF bars in green (buy) – see area ‘A’ in the chart. The first dominant feature on the chart is the falling trend starting in 2015.  The second dominant feature of the chart is the downward trend since early 2018, which represents the digestion period.  The late September downswing found support near the 38.2% Fibonacci retracement.  Over the past few weeks, XLF has been trending lower in a short-term corrective mode after the early November rally ran into resistance at the 1-year moving average.  That level was significant when the ETF fell below it in early October.  Nevertheless, support is strong near 25.  Unless there is a close below that level, the path with least resistance remains higher.  XLF has resistance near 28.  A close above that level has measured move to just above 30, or the early 2018 high.

XLF has support near 25.  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”]

S&P moved down to test support at the late October bullish breakaway gap after the oversold relief bounce ran out of steam near the trend channel moving average.  That level was significant when the index fell below it in early October.  Money Flow measure hovers near multi-year lows, indicating a negative net demand for stocks.  Momentum has been weakened but does not appear strong enough to generate a widespread breakdown.  So it should not be surprised to see at least a rally attempt in the coming days.  S&P has 2680 to trade against. If that were to break, we would see 2600 next.

Short-term trading range: 2680 to 2818.  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 2818.

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, while several indicators remain supportive of further pullback, return of oversold conditions on an intraday basis will put a floor under the market.  Like a rubber band, stocks tend to snap back to the mean if they have dropped too far from the “fair” value. With that said, if lower stock prices create some values for investors, then, given everything being equal, the market should be able to find some buyers.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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