S&P Held Support but Follow-through is the Key

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 Monday January 7, 2019.

Stocks traded sharply higher Friday after Fed Chairman Jerome Powell signaled patience and flexibility on rates in light of stronger-than-expected jobs data.  For the day, the S&P surged 3.4 percent to 2,531.94. The Dow Jones Industrial Average rose surged 3.3 percent to 23,433.16.  The Nasdaq Composite climbed 4.26 percent to 6,738.86.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 16 percent to 21.38.

After tumbling more than 31 percent in 2018 amid concerns that customers hesitated to make purchase because of rising home costs, the iShares U.S. Home Construction ETF (ITB) surged more than 4 percent Friday, outperformed the S&P, after Powell hinted the central bank could pause its rate hikes.  Now the question is whether the rally has more legs?  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 U.S. Home Construction ETF (weekly)

Our “U.S. Market Trading Map” painted ITB bars in green (buy) – see area ‘A’ in the chart.  The first dominant feature on the chart is the rising trend line starting in 2009.  The second dominant feature of the chart is the downward trend starting in early 2018, which represents the digestion period.  The September massive selloff pushed the ETF below the 4-year moving average and the 38.2% Fibonacci retracement.  Last week’s upside follow-through confirmed the late December bullish reversal signal.  A close above 31.76 on a weekly basis has measured move to around 36.

ITB has support near 29.  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 bullish (buy).  Last changed January 4, 2019 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 rebounded nicely off support at the lower boundary of the green band.  Key technical development in Friday session was a close above the 38.2% Fibonacci retracement.  This level was significant when the index fell below it in December.  Momentum has been strengthened but Money Flow measure is still below the zero line.  This will put a cap on the upside. Right now, the most important thing to watch is trading behavior as the upper boundary of the green band, around 2540.  A close above that level will open up for a test of the more important resistance near the 2645 zone.

Short-term trading range: 2470 to 26450.  S&P has support near 2470. A close below that level will bring the December low, near 2350, back into view.  The index has resistance near 2540.  A close above 2530 could trigger acceleration toward the 2645 zone. Given the damages done over the past weeks, there is a no reason to turn particularly bullish until this zone is eclipsed.

Long-term trading range: 2340 to 2750.  S&P has support near 2340.  A close below that level on a monthly basis has measured move to 1940.  The index has resistance near 2660.  A close above that level has measured move to 2750.

In summary, S&P tested and held support at the lower boundary of the green band.  While Friday’s rally had improved the posture of our short-term indicators, which supportive of further upside probing, follow-through is the key.  S&P has 2540 to trade against.  If that were to break, we could see 2645 next.


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.