S&P Shifted to Overbought Consolidation Mode

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday February 22, 2019.

Stocks fell on Thursday following the release of lackluster U.S. economic data.  For the day, the Dow Jones Industrial Average fell 0.4 percent to 25,850.63. The S&P dipped 0.35 percent to 2,774.88. The Nasdaq Composite fell 0.4 percent to 7,459.71.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose more than 3 percent to 14.46.

Weaker-than-expected economic data triggered a flight to safe heaven assets.  As such, the Utilities Select Sector SPDR ETF (XLU) rose 0.73 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 XLU.

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 – Utilities Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLU bars in green (buy) – see area ‘A’ in the chart.  XLU has been on a tear in recent months after the late 2018 selloff found support near the 215 rising trend line.  This week’s rally pushed the ETF up against the 2017-2018 highs, just above 57.  This level is significant in charting terms.   A close above that level will trigger acceleration toward the 127.2% Fibonacci extension, just above 61.

XLU has support just below 55.  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”]

S&P retreated after the early February rally ran out of steam just below the important sentiment 2800 mark.  Momentum indicator shifted lower from overbought zone, suggesting further short-term weakness likely.  Money Flow measure also trended lower but still at the highest level since summer 2018, indicating a positive net demand for stocks.  This could help putting a short-term floor under the market.

As for support, 2740 is the line in the sand.  The path with least resistance remains higher as long as S&P holds above 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, an overbought pullback consolidation interrupted the early February rally in the S&P.  Although seemingly vulnerable to further short-term weakness, the overall technical backdrop remains positive so sell-off could be shallow because the sideline money will try to fight its way back into the market.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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