S&P Bullish Doji Pattern Signals Trend Reversal

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.


Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday February 28, 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 and quick because the sideline money will try to fight its way back into the market.”  As anticipated, the S&P was down as much as 0.7 percent in early Wednesday but climbed back to its flat line in the afternoon as investors weighed a handful of headlines on the political, monetary, and geopolitical fronts, as well as the latest batch of earnings reports.  For the day, the bench mark gauge slipped less than 0.1 percent to 2,792.38.  The Dow Jones Industrial Average lost 0.3 percent to 25,985.16.  The Nasdaq Composite eked out a small gain, closing nearly 0.1 percent higher at 7,554.51.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 3 percent to 14.70.

Retail stocks attracted strong buying support Wednesday amid a fresh batch of better-than-expected results from Lowe’s (LOW), TJX (TJX) and Best Buy (BBY).  As such, the SPDR S&P Retail ETF (XRT) rose 1.01 percent on the day but is up more than 12 percent YTD, slightly outperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XRT.

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 – SPDR S&P Retail ETF (weekly)

Our “U.S. Market Trading Map” painted XRT bars in green (buy) – see area ‘A’ in the chart. XRT has been on a tear in recent days after the December selloff found support near the 2016-2017 lows.  This week’s upside follow-through confirmed the mid-February bullish breakout above the 2-year moving average, a key technical level based on moving average.  That level was significant when XRT fell below it in December.  Over the next few weeks, traders should monitor trading behavior as the 1-year moving average, just below 47, is tested as resistance.  A close above that level has measured move to around 53, or the 2018 high.

XRT has support just below 45.  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 moved down to test support at recent breakout point after the February rally ran out of steam near the important sentiment 2800 mark.  In accordance to the Japanese candlestick pattern recognition, Wednesday’s bullish long tail candlestick is a clear indication of demand overwhelming supply.  If the textbook stands true then the S&P is at or very close to key turning point.

Momentum indicator trended lower overbought zone, suggesting further short-term weakness likely.  Nevertheless, Money Flow measure still hovers near the highest level since summer 2018, indicating a strong net demand for stocks.  This could help putting a short-term floor under the market.

Over the next few days, traders should monitor trading behavior near 2790.  A failure to hold above that level will trigger a short-term sell signal with downside target near 2750.

For now, 2817 is the line in the sand.  A close above that level will trigger acceleration toward the 2018 highs, around 2940.

Short-term trading range: 2750 to 2817.  S&P has minor support near 2790 while key support is at 2750.  The index has resistance near 2817.  A close above that level will bring the 2018 high, near 2940, into view.

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, the bullish reversal doji candlestick pattern in the S& together with the sold technical backdrop suggested strongly that the market is at or very close to a near-term low.  So it wouldn’t surprise us to see at least an attempt to rally over the next couple of days.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

© All rights reserved and actively enforced.
Note: This is a free edition of The Market Outlook, a daily CEM News subscriber newsletter. To get this column before market opens together with hundreds of technical trading ideas (including stocks and ETFs) every month, please click here.
Subscribe to CEM News to receive more in-depth research from Capital Essence.