S&P in Holding Pattern Prior to New Upthrust

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday January 14, 2019.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, S&P finished just a hair below its flat line at 2,596.26 on Friday.  The Dow Jones Industrial Average slipped 5.97 points to 23,995.95.  The Nasdaq Composite dipped 0.2 percent to 6,971.48.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 6 percent to 18.19.

Report that Democrat lawmakers have introduced a bill aimed at reining in drug prices pressured health care stocks.  The SPDR S&P Biotech ETF (XBI) fell 0.19 percent on the day but is up more than 14 percent YTD, outperformed the S&P by a wide margin.  Now the question is whether recent pullback is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in XBI.

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 Biotech ETF (weekly)

Our “U.S. Market Trading Map” painted XBI bars in green (buy) – see area ‘A’ in the chart.  Over the past few weeks, XBI has been trending higher in a short-term corrective mode after the December 2018 massive selloff found support near the 61.8% Fibonacci retracement of the 2016-2018 upswing.  The rally pushed the ETF above the 4-year moving average and up against the 2-year moving average, just below 84.  That level was significant in charting terms. A close above it will trigger acceleration toward the 1-year moving average, just above 89.

XBI has support near 74.50.  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 continues basing sideways near the important sentiment 2600 mark after breakout above the 38.2% Fibonacci retracement in early January 2019.  Momentum is much closer to overbought zone following recent advance but the fact that the S&P has retained all of recent gains indicated an internal strength. This is bullish and could provide the needed boost for another leg higher.  Perhaps, the positive Money Flow measure is the best illustration of the bulls’ case.

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, the S&P stuck in a holding pattern as traders digested the early January massive run.  The fact that the index has retained all of recent gains despite short-term overbought conditions suggested that the market could take another leg higher as soon as it works off the excessive optimism.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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