S&P Overbought but Momentum Remains Supportive

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday February 25, 2019.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, S&P climbed 0.6 percent on Friday to 2,792.67 as U.S.-China trade talks showed signs of progress.  The Dow Jones Industrial Average gained 0.7 percent to 26,031.81.  The Nasdaq Composite advanced 0.9 percent to 7,527.54.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 6 percent to 13.51.

Optimism over the chances of U.S.-China securing a deal to end their protracted trade war send commodities prices higher.  As such, the Global X Copper Miners ETF (COPX) jumped 2.91 percent on the day and is up more than 21 percent YTD, outperformed the S&P by a wide margin.  Now the question is whether the rally has more legs?  Below is an update look at a trade in COPX.

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 – Global X Copper Miners ETF (weekly)

Our “U.S. Market Trading Map” painted COPX bars in green (buy) – see area ‘A’ in the chart.  The first dominant feature on the chart is the rising trend line starting in early 2016.  The second dominant feature of the chart is the downward trend since early 2018.   The late 2018 selloff found support near the 50% Fibonacci retracement.  Last week’s rally pushed the ETF up against the 1-year moving average, a key technical level based on moving average.  That level was significant when COPX fell below it in early 2018.  A sustain advance above that level on a weekly basis will trigger acceleration toward the 2018 high, just above 29.

COPX has support just below 20.  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 rebounded nicely after Thursday retreated found support at prior breakout point.  This is a positive development but let’s notice that the rally has created overbought conditions.  Nevertheless, Money Flow measure at the highest level since summer 2018, 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 before a significant pullback unfolds.

As for support, 2750 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, overbought conditions have returned on a daily basis but momentum remains supportive. It is possible that S&P could continue to drift higher as trading sentiment remains strong.  As for strategy, 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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