S&P Constrained by Short-term Sideways Trend

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

We’ve noted in the previous Market Outlook that: “S&P’s rally attempt failed near formidable resistance, indicating the path with least resistance remains lower.”  As anticipated, S&P finished flat as ongoing uncertainty surrounding global issues kept many buyers on the sidelines.  The Nasdaq Composite lost 0.4 percent, and the Dow Jones Industrial Average gained 0.3 percent.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell nearly 4 percent to 20.65.

Concerns over slowing economic growth, and its adverse effect on corporate earnings, helped contribute to investors assuming some defensive positioning within the stock market.  The Utilities Select Sector SPDR ETF (XLU) rose 0.87 percent on the day and is up more than 8 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 XLU.

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 – Utilities Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLU bars in green (buy) – see area ‘A’ in the chart.  XLU has been on a tear in recent months after the late 2017 correcting found support at the 4-year moving average.  This week’s rally pushed the ETF up against the all-time high set in December 2017, just above 57.  This level is significant in charting terms.  A close above it on a weekly basis signify a bullish breakout with upside target around 65, or the 127.2% Fibonacci extension.

XLU has support near 54.  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 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”]

S&P continues basing sideway near resistance at the upper boundary of the green band.  This level was significant when the S&P fell below it in late November.  Momentum has been strengthened but does not appear strong enough to generate widespread breakouts.  Additionally, Money Flow measure is below the zero line, indicating a negative net demand for stocks.  These elements will continue negatively affect trading sentiment in the coming days.

Right now the most important thing to watch is the rallies and retreats behavior near the important sentiment 2700 mark.  In theory, the longer the index holds below this resistance the stronger it becomes.  Momentum has been deteriorated following recent selloff, suggesting the path with least resistance remains lower.  A close above it is required to neglect the short-term downward trend pressure.  There is a no reason to turn particularly bullish until this area is eclipsed.

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.

Short-term trading range: 2600 to 2736.  S&P has support near 2600.  A close below that level has measured move to 2530, or the early 2018 low.  The index has resistance near 2700.  A close above that level could trigger acceleration toward the 2736-2760 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, trading behavior in the S&P remains constrained by a short-term sideways pattern and shown little evidence of a sustainable change in trend.  Momentum has been strengthened but does not appear strong enough to generate widespread breakouts.  2700 is the line in the sand.  There is a no reason to turn particularly bullish until this area is eclipsed.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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