Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday December 28, 2018.
We’ve noted in the previous Market Outlook that: “based upon recent trading action, an important near-term low had been established and the S&P index is in an early stage of a snap back bounce. Our near-term work on momentum and price structure suggested that the relief rally can be sustained for a few days, potentially allowing for a test of 2600 before a significant pullback unfolds.” As anticipated, stocks closed higher Thursday with the S&P rose 0.9 percent to 2,488.83. The Dow Jones Industrial Average jumped 1.1 percent to 23,138.82 and the Nasdaq Composite climbed 0.4 percent to 6,579.49. CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 1.5 percent to 29.96.
Cyclical groups underperformed in early Thursday session amid ongoing concerns about a slower global growth in 2019. Nonetheless, broad-based retreat gives way to broad-based advance that saw the Materials Select Sector SPDR ETF (XLB) led the market advance, up 1.84 percent on the day but is down nearly 17 percent YTD, underperformed 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 XLB.
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 – Materials Select Sector SPDR ETF (weekly)
Our “U.S. Market Trading Map” painted XLB bars in green (buy) – see area ‘A’ in the chart. The first dominant feature on the chart is the rising trend line starting in 2016. The second dominant feature of the chart is the downward trend starting in early 2018. The December massive selloff pushed the ETF below the 4-year moving average and down to the 61.8% Fibonacci retracement. This week’s bullish reversal suggested that the support would hold. Over the next few weeks, traders should monitor trading behavior as the 4-year moving average, just above 51, is tested as resistance. A close above that level would open up for a test of the more important resistance near eh 56 zone, or the 2-year moving average.
XLB has support near 47. 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 bullish (buy). Last changed December 26, 2018 from bearish (sell) (see area ‘A’ in the chart).
[Note: for more details analysis, please take a look at our “US Market ETF Trading Map”]
Thursday’s late day reversal suggested that Wednesday’s recovery rally is more than a dead-cat bounce. This is a positive development and would be confirmed on a close above 2500 this week, which would support upside follow-through and a test of more important resistance in the 2600 area in the coming weeks. While the near-term technical outlook remains supportive of further upside follow-through, given the damages done over the past weeks, there is a no reason to turn particularly bullish until the 2600 zone is eclipsed.
On the downside, support is strong near the 2340-2320 zone. Although not expected this week, a close below 2320 on a monthly basis will break the multi-year bull trend and a much deeper decline should be expected.
Short-term trading range: 2340 to 2530. S&P has a strong band of support near 2340. The index has resistance near 2500-2530. A close above 2530 could trigger acceleration toward the 2600 zone.
Long-term trading range: 2320 to 2730. S&P has support near 2330. A close below that level on a monthly basis has measured move to 1920. The index has resistance near 2650. A close above that level has measured move to 2730.
In summary, the big picture remains the same, the S&P index is in an early stage of an oversold relief rally. Nevertheless, the bulls must hurdle and sustain above 2500 or market will work off oversold conditions and fall under its own weight.
Thanks and happy trading.
(By：Michelle Mai for Capital Essence)
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