S&P in Short-term Oversold Bounce

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday November 16, 2018.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks closed higher Thursday with the S&P gained 1.1%, snap a five-session losing streak.  The Dow Jones Industrial Average gained 0.8%, the Nasdaq Composite gained 1.7%.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 6 percent to 19.98.

Homebuilders had a rough day after KB Home (KBH) lowered its fourth quarter guidance and reported quarter-to-date orders to be down 14%.  After surging more than 59 percent in 2017, the iShares Dow Jones US Home Construction ETF (ITB) fell more than 2 percent on the day and is down more than 30 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 ITB.

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 – iShares Dow Jones US Home Construction ETF (weekly)

Our “U.S. Market Trading Map” painted ITB bars in red (sell) – see area ‘A’ in the chart. The first dominant feature on the chart is the rising trend starting in early 2016.  The second dominant feature of the chart is the downward trend since early 2018, which represents the digestion period.  The late September downswing found some solid footing near the massive 2-conjoining support, the 4-year moving average and the 61.8% Fibonacci retracement.  Over the past few weeks, ITB has been basing sideways as it works off oversold conditions. This is a short-term negative development, suggesting that the ETF might have to move to a much lower level to attract new buyers.  The early November low, around 29.40, represents key support.  A close below that level has measured move to 27, or the 78.6% Fibonacci retracement.

ITB has resistance just above 33.  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”]

As expected, 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.  Thursday’s massive reversal suggested that the support would hold, at least for the time being.  Momentum has been strengthened, allowing additional short-term upside probing.  Nevertheless, Money Flow measure hovers near multi-year lows, indicating a negative net demand for stocks.  This will put a cap on the upside.  Right now, the most important to watch is trading behavior near 2760, or the 2016 rising trend line.  There is no reason to turn particular bullish until this zone is eclipsed.

Short-term trading range: 2680 to 2815.  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 2815.

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, our near-term work on price structure and momentum suggested that the S&P is in an early stage of a short-term oversold bounce. The index has 2760 to trade against.  A close above that level will turn the short-term trend up and trigger acceleration toward 2815.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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