S&P in Confirmed Breakout but Near-term Gains could be Limited

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday February 20, 2019.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, the S&P traded as high as 2787 in early Tuesday session amid optimism about the U.S.-China trade talks and a market-friendly Federal Reserve.  The bench mark gauge however, gave back some the early gains and closed off the intraday high, up 0.15 percent to close at 2,779.76.  The Dow Jones Industrial Average finished flat at 25,891.32.  The Nasdaq Composite closed 0.2 percent higher at 7,486.77.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell less than 1 percent to 14.88.

Equities also got a boost following strong quarterly numbers from Walmart.  An earnings beat and healthy same-store sales growth from the Dow component helped spur gains in the consumer staples sectors.  As such, the Consumer Staples Select Sector SPDR ETF (XLP) rose 0.52 percent on the day and is up more than 7 percent YTD, slightly underperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLP.

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 – Consumer Staples Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLP bars in green (buy) – see area ‘A’ in the chart.  XLP has been on a tear in recent months after the late 2018 selloff found support near the early the 61.8% Fibonacci retracement of the 2015-2018 upswing.  That level roughly corresponds with the early 2018 reaction lows.  Last week’s rally pushed the ETF above the 20-week moving average, a key technical level based on moving averages.  This week’s upside follow-through confirmed the bullish signal and opened up for a test of the 2018 falling trend line, just above 55.  That level is significant in charting terms.  A close above it will break the bearish pattern of lower highs and lower lows and trigger acceleration toward the 2018 highs, around 59.

XLP has support near 53.60.  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”]

Tuesday’s upside follow-through confirmed last week’s bullish breakout above the late 2018 breakdown gap.  That level was significant when the index fell below it in December.  Money Flow measure trended higher from above the zero line, indicating an increase in buying pressure.  This is a bullish development but let’s notice that the rally has created overbought conditions.  Ad that could put a lid on the upside.  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.

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, S&P has confirmed a breakout above key resistance in a reflection of improved momentums.  Market internals remain supportive of further upside follow-through.  So it seems to us that the rally can be sustained for a few days, potentially allowing for a test of 2800 before a significant pullback unfolds.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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