S&P in Orderly Low Level Consolidation Phase

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.


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

We’ve noted in the previous Market Outlook that: “S&P broke key supports Tuesday, 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.  In a longer term, there is a high probability of a period of consolidation activity between S&P’s 2600 and 2800 that might last several weeks if not months.  This consolidation band provides a rally and retreat trading environment for traders.  However, market is volatile and tight stops are advisable.”  As anticipated, stocks sold off sharply in early Thursday session that saw the S&P down as much as 2.9 percent before buyers stepped in and pushed the index off the intraday low.  For the day, the bench mark gauge lost 0.15 percent lower at 2,695.95. The Dow Jones Industrial Average closed 0.3 percent lower at 24,947.67.  The Nasdaq Composite rose 0.4 percent to close at 7,188.26.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose more than 2 percent to 21.19.

Strong finishes from many of the FAANG stocks helped lift the technology group, which rallied sharply into the close. Facebook (FB), Netflix (NFLX), Alphabet (GOOG), and Amazon (AMZN) all rose between 1.2 percent and 2.7 percent.  The Technology Select Sector SPDR ETF (XLK) rose 0.22 percent on the day but is up nearly 5 percent YTD, outperformed the S&P by a wide margin.  Now the question is whether recent pullback is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in XLK.

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 – Technology Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLK bars in green (buy) – see area ‘A’ in the chart. The first dominant feature on the chart is the rising trend line starting in 2015.  The second dominant feature of the chart is the downward trend since October 2018, which represents the digestion period.  The correction tested support at the 2-year moving average, the level that offered support since the ETF reached an interim low in 2016.  This week’s rally pushed XLK above the October falling trend line, signify a bullish reversal.   A close above 69.50 on a weekly basis will confirm the signal and a retest of the October high, just above 76, should follow shortly.

XLK has support near 63.  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 shifted to bearish (sell).  Last changed December 4, 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 October-November lows following Tuesday’s bearish reversal signal. The late-day rally suggested that 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.  Additionally, despite recent massive selloff, Money Flow measure is at the highest level going back to early October, suggesting that selling pressure had eased.

For now, 2600 is the line in the sand.  So unless there is a serious breach of this important support, we could be range bounce from here into the end of the year. As for resistance, if the October and November recovery highs, near 2815, is taken out on a closing basis, then the door is opened for a retest of September highs but it’s not expected this week.

Short-term trading range: 2600 to 2766.  S&P has support near 2600.  A close below that level has measured move to 2500, but it’s not expected this week.  The index has resistance near 2700.  A close above that level could trigger acceleration toward the 2763-2815 zone.

Long-term trading range: 2350 to 2930.  S&P has support near 2660.  A close below that level on a monthly basis has measured move to 2350.  The index has resistance near 2750-2800.  A close above that level has measured move to 2930.

In summary, recent trading actions leaving the S&P in what looks to us like an orderly low level consolidation of the October massive selloff.  The index is holding firmly above 2600, a level it has not breached since market reached an interim low in October. So unless there is a serious breach of this important support, we could be range bounce from here into the end of the year.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

© All rights reserved and actively enforced.
Note: This is a free edition of The Market Outlook, a daily CEM News subscriber newsletter. To get this column before market opens together with hundreds of technical trading ideas (including stocks and ETFs) every month, please click here.
Subscribe to CEM News to receive more in-depth research from Capital Essence.