S&P Overbought and Due to Consolidate

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

We’ve noted in the previous Market Outlook that: “S&P cleared key resistance Tuesday, signified the one-week congestion pattern had resolved itself into a new upswing.  Nevertheless, it will be important to monitor the retreat and rebound behaviors over the next few days to determine whether breakouts are decisive.”  As anticipated, S&P increased as much as 0.6 percent on Wednesday, as continued optimism that U.S.-China trade talks were progressing favorably underpinned another broad-based rally.  However, a wave of selling activity in the final 30 minutes knocked the bench mark down.  The S&P ended the session up 0.3 percent to close at 2,753.03.  The Dow Jones Industrial Average climbed 0.5 percent to 25,543.27.  The Nasdaq Composite advanced 0.08 percent to 7,420.38.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, added more than 1 percent to 15.65.

Nine of the 11 S&P sectors finished higher with energy and industrials leading the advance.  Energy stocks got a boost from higher oil prices while optimism that Chinese and U.S. trade authorities would reach an agreement before a deadline in early March sent industrial stocks higher.  As such, the Industrial Select Sector SPDR ETF (XLI) rose 0.59 percent on the day and is up more than 16 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 XLI.

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 – Industrial Select Sector SPDR ETF (XLI) (weekly)

Our “U.S. Market Trading Map” painted XLI bars in green (buy) – see area ‘A’ in the chart.  XLI has been on a tear in recent months after the late 2018 selloff found support near the 61.8% Fibonacci retracement of the 2016-2018 upswing. The January massive rally pushed the ETF above the 2-year moving average, a key technical level based on moving averages.  This week’s upside follow-through propelled XLI above the December reaction high, clearing an important hurdle and opened up for a test of the 2018 highs, just below 81.

XLI has support near 72.  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 February 12, 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”]

Wednesday’s upside follow-through confirmed Tuesday’s bullish breakout signal.  The rally pushed the S&P up against the late 2018 breakdown gap.  This level was significant when the index fell below it in December.  It’s also worth noticing that the rally has created overbought conditions.  Momentum indicator had reached the level that’d trigger a short-term pullback consolidation in the past months.  With this in mind, we’d look to reduce upside exposure into intraday rallies.

As for support, 2700 is the line in the sand.  The path with least resistance remains higher unless there is a close below that level.

Short-term trading range: 2700 to 2800.  S&P has psychological support at 2700 while key support is at 2685.  The index has resistance near 2760.  A sustain advance above that level has measured move to 2800.

Long-term trading range: 2500 to 2940.  S&P has support near 2620.  A close below that level has measured move to 2500.  The index has resistance near 2730.  A close above that level has measured move to 2940.

In summary, S&P is overbought and due to consolidate.  Nevertheless, the overall technical backdrop remains positive so pullback should be shallow and quick.  With that said, while some backing and filling would not be a surprise, if the S&P could pause and hold above 2730 then a move above 2800 would be easier to be sustained.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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