Traders Committed to Take S&P Up to 2800

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday February 19, 2019.

Stocks closed higher Friday as investors were relieved to hear that U.S.-China trade-talks produced some progress and that Congress passed a funding resolution to avoid another government shutdown.  For the day, the S&P gained 1.1 percent to close at 2,775.60. The Dow Jones Industrial Average jumped 1.7 percent to 25,883.25.  The Nasdaq Composite advanced 0.6 percent to end the day at 7,472.41.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, tumbled more than 8 percent to 14.91.

Energy stocks were boosted by higher oil prices. West Texas Intermediate futures rose 2.2 percent to $55.59 per barrel.  As such, the Energy Select Sector SPDR ETF (XLE) jumped 1.61 percent on the day and is up more than 15 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.  XLE has been on a tear in recent months after the late 2018 selloff found support near the early 2016 reaction lows.  Last week’s rally pushed the ETF above the 20-week moving average, a key technical level based on moving averages.  This is a positive development, opened up for a test of the 38.2% Fibonacci retracement of the 2016-2018 trading range, near 67.50.  A close above that level has measured move to 79.

XLE has support near 64.  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”]

Key technical development in Friday session was a clear break above the late 2018 breakdown gap, near 2760.  This level was significant when the index fell below it in December.  This is a bullish development but let’s notice that the rally has created overbought conditions.  Momentum indicator is at the level that has been successfully in repelling price actions over the past months.  Nevertheless, Money Flow measure is at the highest level since last fall, indicating a strong net demand for stocks.  With this in mind, we’d look to reduce exposure into overbought strength, which might take the S&P closer to 2800, or the 2018 highs and the lower boundary of the pink band, before a significant pullback unfolds.

As for support, 2740 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 support near 2740 while psychological support is at 2700.  The index has resistance near 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, while the overall technical backdrop remains bullish, recent rally has created overbought conditions.  With this in mind, we’d look to reduce exposure into overbought strength, which might take the S&P closer to 2800 before a significant pullback unfolds.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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