S&P in Bullish Consolidation Prior to New Upswing

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday March 1, 2019.

Stocks closed lower Thursday in another tight-ranged session as investors digested the better-than-expected GDP data and some geopolitical drama.  For the day, the S&P dropped nearly 0.3 percent to finish the session at 2,784.49.  The Nasdaq Composite and the Dow Jones Industrial Average also lost about 0.3 percent to close at 7,532.53 and 25,916 respectively.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose less than 1 percent to 14.78.

Report that Donald Trump abruptly ending a two-day summit with North Korean leader Kim Jong-un together with weak data from China’s manufacturing sector triggered a fight to safe heaven assets that saw the utilities, consumer staples, and real estate sectors outperformed.  As such, the Utilities Select Sector SPDR ETF (XLU) rose 0.58 percent on the day and is up nearly 8 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 days after the December selloff found support near the 2-year moving average and the 2015 rising trend line.  This week’s rally pushed the ETF up against the prior highs set in late 2017 and 2018.  This level is significant in charting terms.  A close above that level will trigger a major buy signal with upside target near 61, or the 127.2% Fibonacci extension.

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 shifted to bearish (sell).  Last changed February 28, 2019 from bullish (buy) (see area ‘A’ in the chart).

[Note: for more details analysis, please take a look at our “US Market ETF Trading Map”]

The big picture remains the same.  There is a consolidation near the important sentiment 2800 mark.  That level was significant when the S&P tested and rolled over in October, November and December 2018.  Market internal has been weakened but downside momentum does not appear strong enough to generate a widespread breakdown.

Traders however, must be mindful that while seemingly vulnerable to short-term price weakness, Money Flow measure remains above the zero line, indicating a positive net demand for stocks.  This suggested that selling into strength might not be the best strategy in a market that is likely to bounce back.

Over the next few days, traders should monitor trading behavior near 2776.  A failure to hold above that level will bring the lower boundary of the pink band, near 2750, into view.  As for resistance, 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 2776 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, recent trading actions leaving the S&P in what looks to us like an orderly high level consolidation of the February rally.  The index is holding firmly above 2750, a level it has not breached since market broke down in late 2018.  This is a positive development, increased the probability that the S&P will break out to new highs as soon as the market shakes off excessive bullishness.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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