Return of Overbought Conditions Might Put a Cap on Upside

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday January 11, 2019.

We’ve noted in the previous Market Outlook that: “given the looming resistance near S&P’s 2615-2630, there is no big commitment to accumulate stocks aggressively at this point. What this means is that as the S&P inches into the area of key overhead resistance, aggressive sellers will most likely dips in their toes to see how the market reacts. So, we’d be cautious against taking large position at this stage.”  As anticipated, S&P fell as much as 0.9 percent in early Thursday session as disappointing holiday sales from Macy’s and a revenue guidance cut from American Airlines triggered some profit taking efforts.  The market however, managed to overcome the early weakness and closed higher.  For the day, the bench mark gauge climbed 0.4 percent to 2,596.64.  The Dow Jones Industrial Average climbed 0.5 percent to 24,001.92.  The Nasdaq Composite added 0.4 percent to 6,986.07.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 2 percent to 19.50

Earnings warnings from department store Macy’s (M) drag on the SPDR S&P Retail ETF (XRT), tumbling 1.6 percent on the day but is up more than 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 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.  Over the past few weeks, XRT has been trending higher in a short-term corrective mode after the late 2018 massive selloff found support near the 2016-2017 lows, just above the 38.2% Fibonacci retracement of the 2008-2018 upswing.  The rally pushed the ETF up against the 2-year moving average, near 44.50.  That level was significant when the XRT fell below it in late December. A close above that level will trigger acceleration toward the 1-year moving average, just below 47.  A sustain advance above it will bring the 2018 high back into view.

XRT has support near 39.  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”]

The S&P trades in broad trading bands that define the trend behavior. The upswing was very rapid with some short-term consolidation near each of the significant support or resistance levels. These support and resistance levels also define the limits and barriers to any future rally and uptrend development.

S&P moved up to test the strong band of resistance between 2615 and 2635 after breaking out above the 38.2% Fibonacci retracement.  Money Flow measure trended higher from above the zero line, indicating a positive net demand for stocks.  This is a bullish development but let’s notice that momentum indicator is much closer to overbought than oversold zone following recent advance.  This could put a cap on the upside.

Short-term trading range: 2520 to 2635.  S&P has minor support near 2520. A close below that level has measured move to around 2480.  The index has a strong band of resistance between 2615 and 2635.  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, while it is possible that S&P could continue to drift higher as trading sentiment remains strong, return of overbought conditions on an intraday basis might put a cap on the upside.  As for strategy, we’d look to reduce upside exposure into short-term rallies as we believe market vulnerable to some downside retracement over the medium-term.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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