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 Thursday January 3, 2019.

Stocks posted slight gains on Wednesday after a volatile session kicked off 2019.  The Dow Jones Industrial Average and S&P added 0.1 percent to close at 23,346.24 and 2,510.03 respectively while the Nasdaq Composite climbed 0.46 percent to 6,665.94.  CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell nearly 9 percent to 23.22.

Within the S&P, energy, communication services and consumer discretionary outperformed while the defensive-oriented real estate, utilities, health care and consumer staples sectors dragged on the broader market.  Retail was another group that outperformed and helped lift the consumer discretionary sector. The SPDR S&P Retail ETF (XRT) jumped 1.4 percent on the day but is down more than 9 percent in 2018, slightly underperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XRT.

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 – SPDR S&P Retail ETF (weekly)

Our “U.S. Market Trading Map” painted XRT bars in green (buy) – see area ‘A’ in the chart.  The first dominant feature on the chart is the rising trend line starting in late 2008.  The second dominant feature of the chart is the downward trend starting in August 2018, which represents the digestion period.  The December massive selloff pushed the ETF down to major support near the 38 zone.  That level was tested several times over the past years.  This week’s upside follow-through confirmed last week’s bullish reversal signal and opened up for a test of 44-45 zone, or the 2-year moving average.  A sustain advance above that level has measured move to 47.

XRT has support near 38.  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”]

S&P continues basing sideway, just below resistance at the 38.2% Fibonacci retracement.  This level was significant when the S&P fell below it in late December.  Momentum has been strengthened but does not appear strong enough to generate widespread breakouts.  Additionally, Money Flow measure still 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 as the 2500-2530 zone is tested as resistance.  A close above 2530 on a weekly basis would support upside follow-through and a test of more important resistance in the 2600-2650 area in the coming days.

Short-term trading range: 2460 to 2570.  S&P has minor support near 2460.  The index has a strong band of resistance near 2500-2530.  A close above 2530 could trigger acceleration toward the 2600 zone. 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.

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, trading behavior in the S&P remains constrained by a short-term sideways pattern and shown little evidence of a sustainable change in trend. Although, we would reclassify it as something stronger if we see a more constructive pattern on the S&P chart.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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