Cautiously Optimistic

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 Tuesday January 8, 2019.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks rose in choppy trading on Monday as traders monitor the latest U.S.-China trade developments.  For the day, the S&P gained 0.7 percent to close at 2,549.69. The Dow Jones Industrial Average climbed 0.42 percent to 23,531.35.  The Nasdaq Composite advanced 1.26 percent to 6,823.47.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed flat at 21.40.

Energy sector was also among the best performers on Monday as Cabot Oil and Hess both rose more than 4 percent. Energy stocks got a boost from a 1.2 percent surge in U.S. oil prices.  The Energy Select Sector SPDR ETF (XLE) jumped 1.49 percent on the day and is up 6 percent YTD, outperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLE.

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 – Energy Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLE bars in green (buy) – see area ‘A’ in the chart.  The dominant feature on the chart is the sideways trading range between 79 and 50 since early 2016.  Over the past few weeks, XLE has been trending higher after the late 2018 massive selloff pushed the ETF down to the lower boundary of its multi-year trading range.  This week’s upside follow-through confirmed last week’s bullish reversal signal.  Over the next few weeks, traders should monitor trading behavior as the strong band of resistance between 61 and 64 is tested.  A close above 64 has measured move to 79, or the 2016-2018 highs.

XLE has minor support near 57.  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 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”]

Monday’s upside follow-through confirmed last week’s bullish breakout above the important sentiment 2500 mark.  This is a positive development and opened up for a test of the more significant resistance near the 2600-2640 zone, or the October 2018 low and the trend channel moving average.  Momentum has been strengthened but the negative Money Flow measure will put a cap on the upside.  With this in mind, we’d look to reduce exposure into additional strength, which might take the S&P closer to 2600-2640 before a significant pullback unfolds.

Short-term trading range: 2480 to 2640.  S&P has minor support near 2530. A close below that level has measured move to around 2480.  The index has resistance near 2600-2640.  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, Monday’s upside follow-through confirmed last week’s bullish breakout and opened up for a test of the more important resistance near the 2600-2640 zone.  Near-term technical backdrop has been strengthened but does not appeared strong enough to generate sustain breakouts.  With this in in mind, we would consider taking down exposure into additional strength, which we think could take the S&P closer to the trend channel moving average before a significant pullback unfolds.

 

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.